Private ruling: Group restructure
Date of advice: 4 December 2018
Published: April 2019
Ruling period: 1 July 2017 to 30 June 2018
Date scheme commenced: The first quarter of the 2017 income year.

Ruling: Q1: Are the majority underlying interests in the pre-CGT assets of Company A still held by the ultimate owners who held them before 20 September 1985 in accordance with Division 149 of the Income Tax Assessment Act 1997 (‘ITAA 1997’): a. before the appointment of shares? b. at the time of appointment? c. at the time that Company A disposed of its shares in Company B? | A1: Yes. | Q2: If the majority underlying interests in the pre-CGT assets of Company A are not still held by the ultimate owners who held them before 20 September 1985, will the following shares in Company A receive market value cost base in accordance with section 149-35 of the ITAA 1997? | A2: Not applicable. | Q3: Did CGT event A1 under section 104-10 of the ITAA 1997 happen for Company A when it disposed of its shares in Company B? | A3: Yes. | Q4: Did CGT event K6 under section 104-230 of the ITAA 1997 happen for Company A on the basis that more than 75% of the underlying assets of each entity are considered to be acquired after 19 September 1985 when it disposed of its shares in Company B? | A4: No. | Q5: Will any capital gain arising under CGT event A1 for Company A when it disposed of its shares in Company B be disregarded? | A5: Yes.

Relevant facts and circumstances: Group history Company A was the head entity of a tax consolidated group (‘the Group’). The Group’s operations and activities were controlled by an individual from the incorporation of the individual companies until a number of years ago. Beneficiary One has been involved in the businesses of the Group for more many decades, and was the manager of the businesses who conducted and oversaw the operations and activities of the Group in accordance with the direction set by the controlling individual. Trust A Trust A was settled multiple decades ago under the terms set out in the deed of settlement between the settlor and the trustee. Trust A is a discretionary trust, and must exercise its discretion to make a beneficiary presently entitled to capital or income. Trust A has multiple default beneficiaries that would receive a proportion of the trust’s capital upon vesting of the trust. Intentions of the trustee Trust A was settled for the purpose of benefiting the default beneficiaries. One sole individual was the controlling mind of Trust A, either directly or indirectly. On many occasions this individual expressed how they intended the assets and income of the trust to be split between the default beneficiaries. The individual’s intention was for Beneficiary One to receive more than 50% of the assets of Trust A, and more than 50% of the income derived from those assets. Distributions to beneficiaries Since its settlement, out of all the default beneficiaries, Trust A has only made Beneficiary One presently entitled to income of the trust. Dispute settlement Some years prior to the 2017 income year, the default beneficiaries entered into a settlement deed to settle a dispute between them about how the assets of the trust should be administered. The settlement deed resulted in the trustee exercising its discretion and appointing an amount of capital to all default beneficiaries other than Beneficiary One. Group restructure Following execution of the settlement deed, a restructure was undertaken. The restructure undertaken moved the entities carrying on the businesses of the Group from being owned by Trust A, to being owned by a new structure that is ultimately controlled by Beneficiary One. The restructure was effected by appointing all assets of Trust A to Beneficiary One (being the shares it held in Company A) and transferring shares in Company B to a new trust. Transfer of assets In the 2017 income year, Trust A appointed the shares it held in Company A to Beneficiary One. Some months later, Company A disposed of the shares it held in Company B to an entity ultimately owned by the new trust. Financial information Company B Immediately prior to Company A disposing of its shares in Company B, the market value of post-CGT property owned by Company B was equal to approximately 60% of the net value of Company B. The market value of Company B’s post-CGT property, and the market value of interests Company B owned in post-CGT property through interposed companies, was at no time 75% or more of the net value of Company B during the period from Company B’s incorporation to immediately prior to Company A’s disposal of its shares in Company B.

Relevant legislative provisions: Section 104-10 of the Income Tax Assessment Act 1997 | Section 104-230 of the Income Tax Assessment Act 1997 | Section 108-5 of the Income Tax Assessment Act 1997 | Division 149 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Division 149 of the ITAA 1997 contains the provisions under which an asset acquired before 20 September 1985 is treated as having been acquired after that date, that is, the asset stops being a pre-CGT asset. Subdivision 149-B provides for when the asset of an entity stops being a pre-CGT asset for entities that are not covered by section 149-50. Effectively, Subdivision 149-B deals with non-public entities. A factual test is used to determine when an asset of a non-public entity stops being a pre-CGT asset. Under the test, an asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985 (‘the factual test’). | Detailed Reasoning - What are the majority underlying interests?: The ‘majority underlying interests’ in a CGT asset consist of more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset and any ordinary income that may be derived from the asset. Therefore, in considering whether the majority underlying interests in the pre-CGT assets of Company A have changed, the Commissioner must determine who the ultimate owners are. | Detailed Reasoning - Who are the ultimate owners?: An ultimate owner is: (a) an individual; or (b) a company whose constitution prevents it from making any distribution, whether in money, property or otherwise, to its members; or (c) the Commonwealth, a State or a Territory; or (d) a municipal corporation; or (e) a local governing body; or (f) the government of a foreign country, or of part of a foreign country. All shares in Company A were held by Trust A. During the 2017 income year, Trust A exercised its discretion and appointed all of the shares it held in Company A to Beneficiary One. | Detailed Reasoning - Is the factual test passed prior to the appointment of shares?: There is no way to determine with certainty who all the ultimate owners of Trust A’s pre-CGT assets are prior to the appointment because no beneficiary of Trust A holds an interest in any asset of the trust or in the ordinary income derived from the assets until the trustee’s discretion is exercised. Consequently it is inherently impossible for the pre-CGT assets of Company A to pass the factual test whilst Trust A is the sole shareholder. It cannot be said that the majority underlying interests in the asset were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985 because the identity of all the ultimate owners cannot be determined. However, where it is not possible to identify with certainty the majority underlying interests in an asset, the Commissioner can exercise his discretion and the asset will continue to be a pre-CGT asset. The Commissioner can only exercise this discretion where he is satisfied, or thinks it reasonable to assume, that majority underlying interests have not changed. | Detailed Reasoning - Is the Commissioner satisfied, or thinks it reasonable to assume, that majority underlying interests have not changed?: Taxation Ruling IT 2340 Income tax: capital gain: deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date sets out the Commissioner’s views in respect of discretionary trusts and the application of section 160ZZS of the Income Tax Assessment Act 1936 . Section 160ZZS has been repealed, but was an anti-avoidance provision aimed at preventing circumvention of the limitation of the tax on capital gains on assets acquired on or after 20 September 1985. Although IT 2340 does not set out the Commissioner’s views on the application of Division 149 to discretionary trusts, it provides some principles that may be relevant when the Commissioner is considering when deciding whether to exercise the discretion in the context of beneficiary trusts. Similarly to Division 149 of the ITAA 1997, section 160ZZS applied to treat an asset as having been acquired on or after 20 September 1985 where there was a change of 50% or more in the underlying ownership of an asset. IT 2340 provides that it is important to consider the way in which the trustee exercises its powers. Where a trustee administered a discretionary trust for the benefit of members of a particular family, even if the amounts distributed and the recipient beneficiaries varied from time to time, the Commissioner would find it reasonable to assume there has been no change in the underlying interests in the assets of the trust and would not seek to apply section 160ZZS. However, if by way of change to beneficiaries there is in practical effect a change of 50% or more in the underlying interests in the trust assets, section 160ZZS would have its intended application. Whilst IT 2340 may provide some guidance, before the Commissioner can exercise his discretion, he must have regard to the totality of the circumstances. The Commissioner must be satisfied, or think it reasonable to assume, that majority underlying interests in the assets have not changed before he can exercise his discretion so that the assets can continue to be pre-CGT assets. Trust A was settled for the purpose of benefiting a family group, and had multiple default beneficiaries, which were entitled to entitled them to income and capital at the trustee’s discretion, as well as an equal share of the Trust A’s capital upon its vesting. However, in 2016, some of the default beneficiaries disclaimed any interest they had in the capital or income of Trust A. This