Private ruling: Capital Gains Tax
Published: May 2013
Ruling period: 1 July 2011 to 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Does the asset acquired by the company retain its pre capital gains tax acquisition status after the share restructure? | A1: Yes.

Relevant facts and circumstances: The company was incorporated prior to 20 September 1985. Its original shareholding structure consisted of two V class shares held by shareholders 1 and 2 respectively and W, X, Y and Z classes of shares held by shareholders 3, 4, 5 and 6 respectively: The company acquired an asset prior to 20 September 1985. The asset was disposed of after 20 September 1985. Prior to the disposal of the asset the following events occurred (prior to 30 June 1996): (i) W class shares were transferred from shareholder 3 to shareholder 1 (ii) Y class shares were transferred from shareholder 5 to shareholder 1 (iii) V class shares were reclassified as ordinary shares, whereby shareholder 1 holds 1 ordinary share and shareholder 2 holds 1 ordinary share (iv) An allotment of ordinary shares was made to Shareholders 1, 2, 3 and 4 Upon the above change in the share structure, the shareholders are as follows: Shareholder Type of share Shareholder 1 Ordinary Shareholder 2 Ordinary Shareholder 4 Ordinary Shareholder 6 Ordinary Shareholder 1 W class shares Shareholder 2 X class shares Shareholder 4 Y class shares Shareholder 6 Z class shares The Y class shares and Z class shares remain with shareholder 4 and shareholder 6, respectively. The memorandum and articles of association of the company do not expressly state the rights of each shareholder apart from the V class shares and ordinary shareholders. The articles of association, states that the holder of V class share No.1 is the only person with the power to vote at all, and upon their death this right is conferred to V class share number 2. The articles of association are silent on the rights and privileges attaching to share classes W, X, Y and Z. The articles of association express that the ordinary shareholders have the right to payment of dividends, return of capital and voting rights. The directors and shareholders of the company have advised that W, X, Y and Z class shareholders of the company have rights to capital on redemption of their shares, in the event of winding up or any other time, up to the amount of capital contributed by W, X, Y and Z class shareholders. The directors and shareholders of the company have advised that W, X, Y and Z class shareholders of the company have no voting rights. The history of the company indicates only ordinary shareholders participated in voting rights. The directors and shareholders of the company have advised that all ordinary shareholders have equal rights to capital, income and voting rights. The directors and shareholders of the company have advised that the V class shares have rights to capital and were initially intended to be governing shares for control purposes prior to being converted to ordinary shares. The directors and shareholders of the company have advised that the V class shares had rights to dividends prior to their conversion to ordinary shares. The directors and shareholders of the company have advised that V class shares have rights to dividends in priority to W, X, Y and Z class shareholders. The directors and shareholders of the company have advised that the ordinary shares have rights to dividends in priority to W, X, Y and Z class shareholders. The directors and shareholders of the company have advised that W, X, Y and Z class shares have discretionary rights to dividends (subject to discretion by the board of directors).

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 82KZC(1) | Income Tax Assessment Act 1936 Section 160ZZS. | Income Tax Assessment Act 1936 Subsection 160ZZS(1). | Income Tax Assessment Act 1936 Subsection 160ZZS.(2) | Income Tax Assessment Act 1997 Subsection 149-10

Reasons for decision: Summary: Prior to 30 June 1996, there were events that occurred that lead to changes in the type of shareholdings held. Therefore, the previous section 160ZZS of the Income Tax Assessment Act 1936 (ITAA 1936) is the relevant provision. Section 160ZZS of the ITAA 1936 applied where a taxpayer has acquired assets prior to 20 September 1985 and on or after that date there is a change of 50 per cent or more in the underlying ownership of the assets (in the case of a company, a change of 50 per cent or more in the beneficial ownership of the company's shares). Where such a change occurs, the provision operates to deem the assets to have been acquired after 19 September 1985 so that any subsequent real capital gain on the assets will fall within the tax base. The terms 'underlying interest' and 'majority underlying interests', on the basis of which the provision operates, have the same meanings as they have in the previous subsection 82KZC(1) of the ITAA 1936. Underlying interests in relation to the assets concerned mean beneficial interests held by natural persons, whether directly or through one or more interposed companies, partnerships or trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be 'looked through' in order to determine whether there has been a change in the effective interests of natural persons in the assets. Where an asset is deemed by previous section 160ZZS of the ITAA 1936 to have been acquired after 19 September 1985, the asset will be taken to have been acquired on the date on which the continuity of beneficial ownership in the asset of more than 50% ceases to be maintained. The cost base for the purposes of determining future capital gains and losses on realisation of such an asset will be the market value of the asset on the date on which the asset is taken to have been acquired by the application of section 160ZZS of the ITAA 1936. The Commissioner has to be satisfied that the majority underlying interests in the asset has not changed. Otherwise, the asset is deemed to have been acquired at the time that the change in the majority underlying interest in the asset happened. It is immaterial if there is a change in the proportions in which ultimate owners hold underlying interests in an asset (Taxation Ruling IT 2530). In this case, immediately before 20 September 1985, underlying interests in the asset of the company were owned by six natural persons directly as follows: | Detailed Reasoning - Type of share: Shareholder 1 50% V class share Shareholder 2 50% V class share Shareholder 3 100% W class shares Shareholder 4 100% X class shares Shareholder 5 100% Y class shares Shareholder 6 100% Z class shares Following a change in the shareholding of the company, the underlying interests in the asset were owned by four natural persons in the following proportions after disposal of W and Y class shares by Shareholder 3 and Shareholder 5 respectively: | Detailed Reasoning - Type of share: Shareholder 1 30% Ordinary Shareholder 2 30% Ordinary Shareholder 4 30% Ordinary Shareholder 6 10% Ordinary Shareholder 1 100% W class shares Shareholder 2 100% Y class shares Shareholder 4 100% X class shares Shareholder 6 100% Z class shares Immediately before 20 September 1985 shareholders 1, 2, 4 and 6 between them owned more than one half of the underlying interests. After the change shareholders 1, 2, 4 and 6 between them still owned more than one half of the underlying interests (that is, 100%). Accordingly, more than one half of the underlying interests in the company's asset continued to be held by the same persons. 160ZZS of the ITAA 1936 would therefore not apply to deem the asset acquired by the company before 20 September 1985 to have been acquired on or after that date.