Private ruling: Capital gains tax
Published: July 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the Commissioner satisfied that at all times between 19 September 1985 until a certain date, the majority underlying interest in the pre-capital gains tax (CGT) assets of the company remained unchanged such that section 149-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997) will cause subsection 149-30(1) and (1A) of the ITAA 1997 to apply? | A1: Yes. | Q2: If the answer to question 1 is yes, will the pre-CGT assets be treated as having a cost base equal to their market value as at a certain date? | A2: Yes. | Q3: If the answer to question 1 is yes, can any capital gain (or loss) in relation to the assets that were originally purchased prior to 20 September 1985 be applied to reduce any capital gain (or loss) made in relation to the post CGT assets? | A3: Yes.

Relevant facts and circumstances: The company has had receivers and managers appointed. The receivers and managers have sold several properties. The properties were formerly occupied by a related entity of the company for the purposes of carrying on a business. Some of the properties, or constituent elements of those properties, were acquired by the company prior to 20 September 1985 while others were acquired after 20 September 1985. There is evidence to show that the majority underlying interests in the company were unchanged until a certain date. Prior to 20 September 1985, individuals A and B together held more than 50% of the shares in the company. Up until a certain date, they continued to hold more than 50% of the shares. Several documents were lodged with ASIC in relation to a share transfer on a certain date. Documentation suggests the transfer did occur and individuals A and B ceased to hold 50% of the shares.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-15 | Income Tax Assessment Act 1997 Division 149 | Income Tax Assessment Act 1997 subsection 149-15(1) | Income Tax Assessment Act 1997 subsection 149-30(1) | Income Tax Assessment Act 1997 subsection 149-30(1A) | Income Tax Assessment Act 1997 subsection 149-30(2) | Income Tax Assessment Act 1997 section 149-35

Reasons for decision: Summary: Division 149 of the ITAA 1997 outlines the rules which govern when an asset acquired by a taxpayer before 20 September 1985 is treated as being acquired after that date for CGT purposes. Under subsection 149-30(1) of the ITAA 1997, a pre-CGT asset of a non-public entity stops being a pre-CGT asset at the earliest time when the majority underlying interest in the asset were not had by the ultimate owners who had the majority underlying interests in the asset immediately before 20 September 1985. The CGT provisions will apply to the asset as if the entity had acquired it at that earlier time. Subsection 149-15(1) of the ITAA 1997 provides that majority underlying interests in a CGT asset consists of: • more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and • more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset. Subsection 149-30(2) of the ITAA 1997 states the following: If the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985 and before a particular time majority underlying interests in the asset were had by ultimate owners who had majority underlying interests in the asset immediately before that day, subsection (1) and (1A) apply as if that were in fact the case. | Detailed Reasoning - Application to your circumstances: In this case we accept that the majority underlying interest in the pre-CGT assets of the company remained unchanged until a certain date. On this date we consider a transfer of shares occurred and the majority underlying interest in the company changed. Therefore, the assets will stop being considered pre-CGT at this point in time and the CGT provisions will apply as if the company had acquired the asset on this date. | Detailed Reasoning - Question 2: Section 149-35 of the ITAA 1997 deals with the cost base of an asset that is no longer considered a pre CGT asset. Under subsection 149-35(2) of the ITAA 1997, the first element of the cost base is the asset's market value at the time referred to in subsection 149-30(1) of the ITAA 1997. As discussed, this is the earliest time when the majority underlying interest in the asset were not had by the ultimate owners who had the majority underlying interests in the asset immediately before 20 September 1985. As discussed, we consider that there was a change in the majority underlying interest in the company. Therefore, the first element of the cost base of assets acquired by the company prior to 20 September 1985 will be the market value on this date. | Detailed Reasoning - Question 3: Under section 102-15 of the ITAA 1997, in working out if you have a net capital gain, your net capital losses are applied in the order in which you made them. A net capital loss can only be applied to the extent that it has not already been utilised. You cannot deduct a net capital loss directly from your income, but you can carry it forward and deduct it from capital gains in later income years. In this case, there is nothing to prevent the company from offsetting a capital loss made from the assets that were originally acquired pre-CGT against capital gains made on post-CGT assets sold by the company.