Private ruling: Capital gains tax
Date of advice: 16 October 2025
Published: 8 December 2025
Date scheme commenced: When the testamentary trust created in the Will described in this Ruling came into effect.

Ruling: Q1: Are the bonus shares issued in the Company to the Trustees of the Testamentary Trust treated as if they were acquired when the ordinary shares in the Company were acquired prior to 20 September 1985, pursuant to section 130-20 of the Income Tax Assessment Act 1997 (ITAA 1997) and section 130-20 of the Income Tax ( Transitional Provisions) Act 1997 (the ITTPA 1997)? | A1: Yes Question 2a Will the bonus ordinary shares and original ordinary shares in the Company, and the pre-CGT shares held by the Company, remain pre-CGT assets within the meaning of section 149-10 of the ITAA 1997 after 31 January 20XX and will they remain pre-CGT assets when the Remainder Beneficiaries request the capital of the Testamentary Trusts to be distributed to them? Answer 2a Yes Question 2b Are the Remainder Beneficiaries' interests in the Testamentary Trust pre-CGT assets within the meaning of section 149-10 of the ITAA 1997? Answer 2b The Commissioner declined to rule on this Question. | Q2: Are the Company's bonus shares and shares arising from converting convertible notes in respect of the Public Company treated as if they were acquired prior to 20 September 1985 pursuant to section 130-20 and section 130-60 of the ITTPA 1997? | A2: Yes | Q3: Does CGT Event E5 happen after proposed date and after the Remainder Beneficiaries call for the capital of the Testamentary Trusts in accordance with the rule in Saunders v Vautier ? | A3: No | Q4: Are the Remainder Beneficiaries able to claim franking tax offsets under Division 207 in respect of the franked distributions that are made by the Company to the Trustees of the Testamentary Trust and then distributed to the Remainder Beneficiaries after proposed date and after the Remainder Beneficiaries call for the capital of the Testamentary Trusts in accordance with the rule in Saunders v Vautier ? | A4: Yes | Q5: Will liquidators distributions from the Company to shareholders that are derived from gains on sale of pre-CGT shares of the Company and from share capital amounts be deemed to be assessable dividends under section 47 of the Income Tax Assessment Act 1936 (ITAA 1936) or otherwise assessable to the shareholders of the Company as ordinary income or under section 6-10 of the ITAA 1997? | A5: No | Q6: Will Liquidator's distributions from the Company to shareholders be frankable to the extent that they are deemed to be assessable dividends under section 47 of the ITAA 1936? | A6: Yes | Q7: Will CGT Event G1 apply to that part of the Liquidator's distributions from the Company to shareholders to the extent that it is not assessable under section 47 of the ITAA 1936? | A7: No Question 9a Will CGT Event C2 happen on deregistration of the Company? Answer 9a Yes Question 9b Will any capital gains arise from the deregistration of the Company under CGT Event C2 for preference shareholders? Answer 9b No Question 9c Will any Liquidator's distributions in respect of the Company to the Trustees form part of the capital proceeds of any capital gain of the Trustees in respect of CGT Event C2 on deregistration of the Company? Answer 9c Yes Question 9d Will any capital gains from deregistration of the Company arising under CGT Event C2 be disregarded for the Trustees of the Testamentary Trust? Answer 9d Yes | Q8: Will CGT Event K6 happen to the Trustees of the Testamentary Trust at the time when the Company is deregistered? | A8: No | Q9: Will CGT Events E4, E6, E7 or E8 happen when the Trustee of the Testamentary Trusts makes distributions to the Remainder Beneficiaries under the terms of the Will that are sourced in the Liquidator's distributions? | A9: No | Q10: Will Division 7A of Part III of the ITAA 1936 apply to payments made by the Liquidator of the Company to the Trustees of the Testamentary Trust and the preference shareholders? | A10: No | Q11: Will section 99B of the ITAA 1936 apply to any payments made by the Trustees of the Testamentary Trust to the Remainder Beneficiaries that are sourced in the Liquidator's distributions paid by the liquidator of the Company to the Trustees? | A11: No | Q12: Will the Commissioner apply sections 45A or 45B and 45C of the ITAA 1936 on liquidation of the Company in respect of capital payments by the liquidator to the Trustees of the Testamentary Trust and preference shareholders and in respect of any dividends paid prior to liquidation as proposed? | A12: No The scheme commenced: When the testamentary trust created in the Will described in this Ruling came into effect.

Relevant facts and circumstances: The Will 1. Individual A died before 20 September 1985 and probate of A's will (the Will) was granted before 20 September 1985. 2. The Will named the executors and trustees. 3. The Will, relevantly, provided that the residuary of A's estate would be held upon the following trusts: (a) To pay the income thereof to their spouse during their life. (b) After their life, as to both capital and income, for A's children living at their death, for a sons or sons that attain the age of 25 years and for a daughter or daughters that attain the age of 25 years or previously marry, and if more than one in equal shares as tenants in common. (c) Provided nevertheless, and subject to a power of advancement in clause 7(i) of the Will, the share of the residuary estate for every daughter would not absolutely vest but would be retained by the trustee and invested and held on the following trusts (Testamentary Trust): (i) The income would be held on protective trusts to be paid to each daughter during her life and she shall have the power by will or codicil to appoint to any husband that may survive her a life or lesser interest in such income. (ii) After the daughter's death, and subject to any appointment to the daughter's husband, her share of capital and the income thereof would be held upon trust for such one or more of the daughter's issue (immediate or remote) born before the expiration of 21 years after the daughter's death as she may by deed with or without power of revocation and new appointment or by will or codicil appoint. (iii) In default of appointment referred to in (ii), such share would be held upon trust for all the children or any child of such daughter, who being male attains the age of 21 years or who being female attains that age or previously marries, and if more than one equally as tenants in common. (iv) If the share, or part of a share, of such daughter did not vest absolutely in some person under the preceding trusts then, after the death of the daughter, her share would be held in trust for such person or persons as the daughter shall by will or codicil appoint and in default of such appointment by the daughter's next of kin according to the Statutes of Distribution as if she had died a spinster and intestate and such shares had formed part of her estate. 4. Under subclause 7(i) of the Will, the trustees could raise any part or parts not exceeding altogether 2/5th of the share of a daughter and pay or apply the same for the advancement or benefit of such daughter provided that it was not during the lifetime of A's spouse or without their spouses' consent, and the only deduction from the share of the daughter's income would be the sum which would reflect at the time of the reckoning of the annual income account, the ruling bank rate of interest payable during the current year on the sum or sum advanced. 5. Under clause 7 of the Will, the trustees also have the following powers which may be exercised by them from time to time in their uncontrolled discretion: • To sell any part or parts of the residuary estate (clause 7(a)). • To invest any moneys as authorised by law and to vary such investments from time to time and/or to retain in their existing form investments or shares held at A's death (clause 7(b)). The beneficiaries under the Will 6. A was survived by their spouse and 2 daughters, Individuals B and C, both daughters attaining the age of 25 years. 7. A's spouse died before 20 September 1985. 8. B died after 20 September 1985. 9. C died after 20 September 1985. 10. The power of appointment in clause 6(i) of the Will was not exercised by B or C in favour of a surviving spouse. 11. The power of appointment in clause 6(ii) was not exercised by B or C. 12. B had three children who attained the age of 21 years. 13. C had four children who attained the age of 21 years. 14. Consequently, clause 6(iii) of the Will applied and: • upon the death of B, the trustees under the Will held B's share of the residuary estate for her children as tenants in common in equal shares. • upon the death of C, the trustees under the Will held C's share of the residuary estate for her children as tenants in common in equal shares. 15. B and C's children are collectively referred to in this ruling as the Remainder Beneficiaries. The Remainder Beneficiaries are Australian tax residents. Changes to the trustees under the Will 16. A number of changes have occurred to the trustees of the Testamentary Trust as a result of the death the individual trustees. 17. The trustees of the Testamentary Trust as changed from time to time are referred to in this ruling in that capacity as 'the Trustees'. Assets of the Testamentary Trusts 18. The main assets of the Testamentary Trust are: • all of the ordinary shares in the Company; • shares in listed companies that were acquired on or after 20 September 1985 (post- CGT shares). 19. The liabilities of the Testamentary Trust were negligible as at 30 June 2024. The Company 20. The Company was incorporated in before 20 September 1985 while A was alive. 21. The current directors of the Company are some of the Remainder Beneficiaries and a family accountant. Shareholding structure 22. On 20 September 1985, the shares on issue in the Company were as follows: • X ordinary shares held by the Trustees of the Testamentary Trusts, and • Y preference shares. 23. The Y preference shares were held by A's spouse before they died. When they died, they were transferred from the trustees of their estate to B and C in equal shares and were so held on 20 September 1985. 24. In 19XX and before 30 June 19XX, the directors of the Company resolved to revalue the portfolio of investments that it held and create an asset revaluation reserve. 25. In 19XX and before 30 June 19XX, in an extraordinary meeting of the members of the Company, the provisions of its memorandum of association were altered to increase the share capital of the company. 26. In 19XX and before 30 June 19XX, the directors of the Company resolved to make a bonus issue. The resolution stated that $X representing a portion of the Company's asset realisation reserve and $Y representing the Company's asset revaluation reserve be distributed by way of fully paid up ordinary shares amongst the holders of ordinary shares registered as at 1 July 19XX. A table in the resolution set out that the shareholdings that would increase and share certificates evidencing the bonus issue were tabled and signed. 27. The remaining authorised share capital created and approved were never issued. 28. The current shares on issue in the Company are: • Y preference shares with a total paid up amount of $X. • ordinary shares with a paid up amount of $Y. 29. All of the ordinary shares continue to be held by the Trustees of the Testamentary Trust. 30. On B's death, her preference shares were transferred pursuant to her will to her children as beneficiaries as follows (and they are the current shareholders of these shares). 31. C's preference shares currently form part of the assets in her estate. The Executors' of C's estate are Australian tax residents. 32. The residue of C's estate (including preference shares in the Company) is to be distributed to C's children in equal shares. The Company's constitution 33. Relevantly, and among its other powers and objects under its constituent documents, the Company has the following powers: • To redeem, cancel and accept surrender of shares and to deal with any reserve for any purpose that the company may think fit; • To distribute any of the property of the Company in specie; • To do all things as are incidental or conducive to the attainment of the other objects or any of them or such other things as the company may determine from time to time. 34. The Memorandum and Articles of Association set out the original share capital of the company. 35. The Articles of Association included the following clauses regarding preference shares: The Holders of the Preference shares shall be entitled to a fixed preferential dividend at the rate of Six pounds ... per centum per annum on the capital for the time being paid up or credited as paid up on the shares and shall rank as regards capital but not as to dividends in priority to all other shares in the capital for the time being of the Company but shall not have any further right save as hereinafter provided to participate in profits or assets. In addition to the fixed preferential dividend to which preference shareholders are entitled, the Directors with the sanction of a General Meeting of Shareholders may in any year pay a further or additional bonus or dividend to such shareholders. 36. In accordance with the Articles, the preference shareholders are entitled to receive their capital back on liquidation of the Company but are not entitled to any further distribution of assets beyond the return of their capital. 37. Under the Articles of Association, the capital of the company may from time to time be increased by a resolution of the company in general meeting with the written consent of the governing director or directors. 38. Under the Articles of Association, the governing director or board of directors have the power to declare and pay such dividends as they think fit out of the profits of the company. 39. The Governing Director (without the sanction of the company in general meeting) and the Board of Directors (with the sanction of the company in general meeting) can distribute in specie among the members by way of dividend or bonus, any of the assets of the company. That can include issuing fully paid shares or partly paid up shares. Whenever there are sufficient profits instead of dividing the same in cash, the profits can be applied in paying up the shares issued. 40. On winding up of the company, the liquidator can, with the consent of the company in general meeting, divide among the members any assets of the company in specie and, in particular, any shares, stocks or securities to which the company may be entitled. Assets of the Company 41. The Company's main assets are units in listed trusts and shares held as investments that were acquired before 20 September 1985 (pre-CGT shares) and after 20 September 1985 (post-CGT shares). 42. A schedule of shareholdings which lists the Company's shareholdings as at 30 June 20XX has been provided and forms part of the facts. The schedule includes details of the pre-CGT shares and the bonus issues of shares issued in respect of those pre CGT shares. Bonus shares and convertible note shares in Public Company 43. As at 19 September 1985, the Company held shares in Public Company. 44. On or before 30 June 1987, a bonus share issued occurred and the Company was issued with bonus shares. 45. As at 19 September 1985, the Company held convertible notes in Public Company which it had acquired for consideration. 46. On or before 30 June 1987, the convertible notes were converted into ordinary shares. The Company was not required to pay anything to convert the convertible notes to shares. Capital asset revaluation reserve and other equity accounts of the Company and franking accounts 47. The financial accounts of the company as at 30 June 20XX show: • a capital asset realisation reserve. • authorised share capital; • retained earnings. 48. The Company has a carry forward franking account balance. Proposed transactions 49. The following transactions are proposed to take place before the end of the Ruling Period: • The Remainder Beneficiaries of the Testamentary Trust will call for their entitlements to capital and income of the trusts to be paid out to them within a reasonable timeframe that is practical for the Trustees. • The Trustees will sell all of their shareholdings in listed companies. The Trustees will make resolutions to distribute the capital gains from the disposal of those shares to the Remainder Beneficiaries in accordance with their entitlements. • The Company will sell all of its pre-CGT shares and post-CGT shares. The Company will pay any income tax payable on the disposal of their shares and additional franking credits will be generated in their franking account as a consequence of the payment of that income tax. • The Company will keep records of the profits made on the sale of its pre-CGT shares and will retain funds equivalent to those profits until it is liquidated. • The Company will pay out most of the other cash held by it, as franked and unfranked dividends to its shareholders prior to liquidation. • Any franked or unfranked dividends received by the Trustees of the Testamentary Trust will be distributed to the Remainder Beneficiaries in accordance with their entitlements under the Will. • A liquidator will be appointed to wind up the Company. At this stage it is intended that the Company will only hold cash at bank or cash investment accounts. • The liquidator will pay (Liquidator's distribution): o To the preference shareholders, their paid up share capital; o To the ordinary shareholder, the Trustees of the Testamentary Trust: - remaining share capital from ordinary shares; - pre-CGT profits from the sale of pre-CGT shares; - any remaining profits. • The Trustees of the Testamentary Trust will distribute any Liquidator's distribution received by them as the holder of all of the ordinary shares in the Company, to the Remainder Beneficiaries in accordance with their entitlements under the Testamentary Trust. • Trust resolutions and appropriate records will be made by the Trustees to give effect to the distributions it will make under the proposed orderly winding up the Testamentary Trust. • The Company will be deregistered and the ordinary and preferences shares will be cancelled. Assumptions 50. The Company will keep records of the gains made on the sale of the pre-CGT shares so that those profits can be specifically identified by the liquidator when making the Liquidator's distributions. 51. The liquidator will, in the accounts of the Company and in the statement of distribution to the shareholders, appropriate specific funds from the gains of the sale of the pre-CGT shares and the share capital. 52. The Company's share capital account is not tainted for the purposes of Division 197 of the ITAA 1997. 53. The Company will meet the benchmark franking rule in Division 203 of the ITAA 1997 in respect of all distributions that are made as part of the Proposed Transactions. 54. The Company will be deregistered with the Australian Securities and Investment Commission within 18 months of the earliest liquidator's payments being made to the shareholders. 55. The Company will have no assets when deregistered.


Reasons for decision: Detailed Reasoning - Question 1: Are the bonus shares issued in the Company to the Trustees of the Testamentary Trust treated as if they were acquired when the ordinary shares in the Company were acquired prior to 20 September 1985, pursuant to section 130-20 of the Income Tax Assessment Act 1997 (ITAA 1997) and section 130-20 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997)? | Summary: Yes, the bonus shares in the Company are treated as having been acquired by the Trustees of the Testamentary Trust prior to 20 September 1985 when they acquired the original ordinary shares. | Detailed Reasoning - Detailed reasoning: 1. Division 130 of the ITAA 1997 sets out the rules for working out the cost base and reduced cost base of certain CGT assets, including bonus shares. 2. Subdivision 130-A is entitled 'Bonus shares and units' and contains the rules for working out the acquisition time and cost base of 'bonus equities'. 3. Subsection 130-20(1) of the ITAA 1997 as originally enacted, applies to bonus shares issued up to 1 July 1998. 4. As originally enacted, subsection 130-20(1) of the ITAA 1997 states: (1) This section sets out what happens if: (a) you own *shares in a company or units in a unit trust (the original equities); and (b) the company issues other shares, or the trustee issues other units, (the bonus equities) to you because it owes an amount to you in relation to the original equities. (2) The first element of your *cost base and *reduced cost base for the bonus equities includes: (a) for *shares--any part of the amount that is a *dividend; and (b) for units--any part of the amount that is or will be included in your assessable income. You are taken to have *acquired the bonus equities when they were issued. .... Note 3: There is a special rule for shares issued on or before 30 June 1987: see subsection 130-20(2) of the Income Tax (Transitional Provisions) Act 1997. (3) This table sets out what happens if: (a) none of the amount owed to you by the company is a *dividend; or (b) none of the amount owed to you by the trustee is or will be included in your assessable income. The amount paid or payable can include giving property: see section 103-5. 5. As stated in note 3 in section 130-20, there is a special rule for shares issued on or before 30 June 1987 in subsection 130-20(2) of the ITTPA 1997. 6. Section 130-20 of the ITTPA 1997 states: (1) This section modifies some of the rules in section 130-20 of the Income Tax Assessment Act 1997 if: (a) you own shares in a company or units in a unit trust (the original equities); and (b) on or before the day specified in subsection (2) or (3), the company issues other shares, or the trustee issues other units, (the bonus equities) to you because it owes an amount to you in relation to the original equities. (2) If the bonus equities are shares and they were issued on or before 30 June 1987: (a) subsection 130-20(2) of the Income Tax Assessment Act 1997 does not apply to you; and (b) you work out the cost base and reduced cost base of the bonus equities under subsection 130-20(3) of that Act regardless of whether any part of the amount owed to you by the company is a dividend. (3) The rule in item 2 of the table in subsection 130-20(3) of the Income Tax Assessment Act 1997 does not apply if the bonus equities were issued on or before 1 pm, by legal time in the Australian Capital Territory, on 10 December 1986 and you were required to pay or give something for them. Instead, you are taken to have acquired the bonus equities when you acquired the original equities. 7. Therefore, for bonus shares issued on or before 30 June 1987, subsection 130-20(2) of the ITTPA 1997 may apply to modify the rule in section 130-20 of the ITAA 1997, such that subsection 130-20(3) of the ITAA 1997 applies. 8. Paragraph 130-20(1)(b) of the ITTPA 1997 will be satisfied in relation to an issue of bonus shares if the company issues share to the original shareholder because it owes an amount in relation to the original shares. 9. Taxation Ruling IT 2603 Income tax: scrip dividends (IT 2603) gives the following guidance on whether shareholders are owed money where a dividend is satisfied through the issue of bonus shares fully paid through the capitalization of profits: 13. In scrip dividend cases the shareholder has no entitlement to the money amount of the dividend. As Brennan J said in John's Case at 89 ATC 4116; 20 ATR 18, "It is only upon and by reason of the company's capitalizing of assets therefore available for distribution that a shareholder acquires any entitlement to a benefit from the company and that benefit is not a right in respect of the assets capitalized but a right to the allotment of shares representing the increase in capital. The only dividend to which a shareholder thus becomes entitled is a dividend to be satisfied by the issue of shares." 14. The ordinary meaning of a dividend is an entitlement to receive an aliquot portion of the company's profits (Re Chelsea Water Works Co. and Metropolitan Water Board 73 LJKB 532 at 535 per Sir E. Fry). That entitlement becomes, upon the declaration of the dividend, a debt owed by the company for which the shareholder may sue (Norman v. FCT (1962-63) 109 CLR 9 per Windeyer J at p. 40). However, where a dividend is declared and immediately satisfied by the issuing of shares, the profits remain in the company, as capital, and cannot be sued for (Inland Revenue Commissioner v. Blott [1921] 2 AC 171 per Viscount Finlay at p. 194 and Lord Cave at p. 200). The shareholder never has a right to sue for the money amount of the dividend; at best he could sue for a share with a par value of, say, $1. 15. It follows that, to the extent that shareholders could not sue for the money amount of the dividend, no debt is created. [Emphasis added] 10. Further, as stated by Mason C.J., Wilson, Dawson, Toohey and Gaudron JJ. In John's Case: A person who acquires shares in a company ordinarily thereby acquires a right to participate in any distribution which may thereafter be made to shareholders of the surplus assets of the company. To the extent that those surplus assets are distributed in one manner, distribution in any other manner is precluded. But that simply means that the shareholder's right, acquired by virtue of and at the time of acquisition of his original shares, has been realised in one manner rather than another. 11. The excerpts from John's Case make clear that as a result of a company capitalising profits and applying those profits towards bonus shares to be issued to shareholders, a shareholder becomes entitled to the issue of shares. We are of the view that as a result of a decision by directors to issue bonus shares by capitalising profits, a shareholder is owed bonus shares in relation to their original shares, and this will satisfy paragraph 130-20(1)(b) of the ITTPA 1997. Application to your circumstances 12. In this case, in accordance with the Memorandum and Articles of Association of the Company, in an extraordinary meeting of the members of the Company in 1987 and before 30 June 1987, the members resolved to increase the share capital of the Company. 13. In 1987 and before 30 June 1987, in accordance with the powers given under the Articles of Association of the Company, the directors resolved to make a bonus issue of shares by capitalising profits following a revaluation of the Company's investment portfolio. The directors resolved to distribute those profits by way of the issue of ordinary shares to the holders of ordinary shares registered at that time. 14. At that time, the Trustees of the Testamentary Trust held all of the ordinary shares in the Company, and therefore, were entitled to an allotment of bonus shares. The Trustees were not required to pay or give anything for the bonus shares. 15. Therefore, the requirements in subsection 130-20(1) of the ITTPA 1997 are met, and subsection 130-20(2) of the ITTPA 1997 applies, because: • The Trustees of the Testamentary Trust owned shares in the Company. • On or before 30 June 1987, the Company issued other shares to the Trustees because it owed an amount to the Trustees in relation to the original shares. • The bonus shares were not issued on or before 10 December 1986 and the Trustees were not required to pay or give something for them, and therefore, subsection 130-30(3) of the ITTPA 1997 does not apply. 16. Where subsection 130-20(2) of the ITTPA 1997 applies, a taxpayer works out the cost base and reduced cost base of the bonus shares under subsection 130-20(3) of the ITAA 1997 (regardless of whether any part of the amount owed to you by the company is a dividend). 17. Subsection 130-30(3) of the ITAA 1997, as originally enacted, contains a table that sets out when a taxpayer will be taken to have acquired bonus shares in three different circumstances covered by Items 1 to 3. 18. In this case, item 3 of the table at subsection 130-20(3) of the ITAA 1997 applies to work out the acquisition date of the bonus share because the Trustees of the Testamentary Trust acquired the original shares before 20 September 1985 and the bonus shares were fully paid. Item 3 of the table states that, in these circumstances the taxpayer is taken to have acquired the bonus shares when they acquired the original shares and that the effect is that any capital gain or capital loss from the bonus equities is disregarded. 19. In conclusion, as the bonus shares were issued to the Trustees of the Testamentary before 30 June 1987 and they were issued as fully paid shares, the Trustees of the Testamentary Trust are taken to have acquired the bonus shares before 20 September 1985, pursuant to item 3 of the table at subsection 130-20(3) of the ITAA 1997 and 130-20(2) of the ITTPA 1997. | Detailed Reasoning - Question 2a: Will the bonus ordinary shares and original ordinary shares in the Company, and the pre-CGT shares held by the Company, remain pre-CGT assets within the meaning of section 149-10 of the ITAA 1997 after a proposed date and will they remain pre-CGT assets when the Remainder Beneficiaries request the capital of the Testamentary Trusts to be distributed to them? | Summary: Yes, the bonus ordinary shares and original ordinary shares in the Company, and the pre-CGT shares held by the Company, remain pre-CGT assets. | Detailed Reasoning - Detailed reasoning: 20. Division 149 of the ITAA 1997 , applicable to assessments for the 1999 and later income years, contains the current rules which govern when an asset acquired before 20 September 1985 stops being a 'pre-CGT asset'. 21. Section 149-10 provides: A CGT asset that an entity owns is a pre-CGT asset if, and only if: (a) the entity last acquired the asset before 20 September 1985; and (b) the entity was not, immediately before the start of the 1998-99 income year, taken under: (i) former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 ; or (ii) Subdivision C of Division 20 of former Part IIIA of that Act; to have acquired the asset on or after 20 September 1985; and (c) the asset has not stopped being a pre-CGT asset of the entity because of this Division. 22. Relevantly, as stated in subsection 149-10(1)(b), for a CGT asset of an entity to remain a pre-CGT asset the entity cannot have been taken to have acquired the asset before 20 September 1985 under former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Therefore, the former provisions of section 160ZZS are also relevant to consider for the period up to the start of the 1998-1999 income year. | Detailed Reasoning - Former section 160ZZS of the ITAA 1936: 23. Former section 160ZZS in Division 20 of former Part IIIA of the ITAA 1936, which applied before the commencement of the 1999 income year, contained rules which governed when an asset acquired before 20 September 1985 stopped being a 'pre-CGT asset'. Section 160ZZS was amended over the period from its introduction until it was repealed. It relevantly provided as follows: | Detailed Reasoning - 160ZZS(1) [Deemed acquisition after 19 September 1985]: For the purposes of the application of this Part in relation to a taxpayer, an asset acquired by the taxpayer on or before 19 September 1985 shall be deemed to have been acquired by the taxpayer after that date unless the Commissioner is satisfied, or considers it reasonable to assume, that, at all times after that date when the asset was held by the taxpayer, majority underlying interests in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset. | Detailed Reasoning - 160ZZS(1A) [Time when change in majority underlying interests occurred]: If subsection (1) applies so as to deem an asset to have been acquired by a taxpayer after 19 September 1985: (a) the time when the taxpayer is taken, for the purposes of this Part, to have acquired the asset is the time when the natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset ceased, or first ceased, to hold those interests; and (b) the taxpayer is taken to have acquired the asset for a consideration equal to the market value of the asset as at the time mentioned in paragraph (a). ... (3) In this section, 'majority underlying interests' and 'underlying interest', in relation to an asset, have the same meanings as those expressions have in relation to property in Subdivision G of Division 3 of Part III. 24. Former section 82KZC of the ITAA 1936 in Subdivision G of Division 3 of Part III provided: majority underlying interests, in relation to property, means more than one-half of - • the beneficial interests held by natural persons (whether directly or through one or more interposed companies, partnerships or trusts) in the property; and • the beneficial interests held by natural persons (whether directly or through one or more interposed companies, partnerships or trusts) in any income that may be derived from the property. 25. In 1997, the terms majority underlying interest and underlying interest were defined in subsection 160ZZRR(1) as follows: majority underlying interests, in relation to an asset, means more than one-half of: (a) the beneficial interests that natural persons hold (whether directly or indirectly) in the asset; and (b) the beneficial interests that natural persons hold (whether directly or indirectly) in any income that may be derived from the asset. ... underlying interest, in relation to an asset, means a beneficial interest that a natural person holds (whether directly or indirectly) in the asset or in any income that may be derived from the asset. 26. Further, indirect beneficial interests in the asset or income that may be derived from the asset were defined in sections 160ZZRT and 160ZZRS, as follows: 160ZZRS INDIRECT BENEFICIAL INTEREST IN ASSET A natural person is taken to hold an indirect beneficial interest in an asset of an entity (other than another natural person) for the purposes of this Division where: (a) if the entity were to distribute any of its capital; and (b) in the case where another entity or other entities are interposed between the first-mentioned entity and the person - if the capital were then distributed by the other entity or successively distributed by each of the other entities; the person would have the right to receive any of the capital for the person's own benefit. 160ZZRT INDIRECT BENEFICIAL INTEREST IN INCOME DERIVED FROM ASSET A natural person is taken to hold an indirect beneficial interest in income that may be derived from an asset of an entity (other than another natural person) for the purposes of this Division where: (a) if the entity were to pay a dividend or otherwise distribute any of its income; and (b) in the case where another entity or other entities are interposed between the first-mentioned entity and the person - if the dividend or income were then paid or distributed by the other entity or successively paid or distributed by each of the other entities; the person would have the right to receive any of the dividend or income for the person's own benefit. 27. Section 160ZZRU, and prior to its enactment 160ZZS(2), provided that: For the purposes of this Division, if, because of a person's death, a natural person acquires a percentage (the acquired percentage) of the underlying interests in an asset, the natural person is taken to have held (in addition to any other part of the total underlying interests that the person held or is taken to have held), at any time when the dead person held a percentage (the dead person's percentage) of the total underlying interests in the asset, a percentage of the total underlying interests in the asset equal to the acquired percentage, or the dead person's percentage at that time, whichever is the less. 28. The explanatory memorandum to the Income Tax Assessment Amendment (Capital Gains) Bill 1986 stated: Sub-section 160ZZS(2) restricts the operation of sub-section (1) so that a change in the beneficial ownership of an asset on account of death will not be regarded as a change in ownership. An underlying interest in an asset held by the deceased at any time is deemed to have been held at the time by the person acquiring the underlying interest by reason of the death. The provision is expressed in terms of percentages of total underlying interests to ensure that it applies where the deceased has held different kinds of beneficial interests in the asset at different times (for example, a shareholder in a company that had owned the asset and who became the legal owner after acquiring the asset from the company). 29. There were special transitional rules that apply to assets that stopped being pre-CGT assets under section 160ZZS(1) in section 149-5 of the Income Tax (Transitional Provisions) Act 1997 , which provides as follows: 149-5(1) This section applies to a CGT asset that: (a) an entity last acquired before 20 September 1985; and (b) the entity owned just before the start of the 1998-99 income year; and (c) the entity was taken to have acquired on a day (the acquisition day) on or after 20 September 1985 under Division 20 of former Part IIIA of the Income Tax Assessment Act 1936. 149-5(2) In applying Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 to the entity: (a) the entity is taken to have acquired the asset on the acquisition day; and (b) the first element of the cost base and reduced cost base of the asset on the acquisition day is the amount for which the entity is taken to have acquired it under Division 20 of former Part IIIA of the Income Tax Assessment Act 1936. | Detailed Reasoning - Division 149 - When an asset stops being a pre-CGT asset: 30. Division 149 of the ITAA 1997, applicable to assessments for the 1999 and later income years, contains the current rules which govern when an asset acquired before 20 September 1985 stops being a 'pre-CGT asset'. Section 149-10 provides: A CGT asset that an entity owns is a pre-CGT asset if, and only if: (a) the entity last acquired the asset before 20 September 1985; and (b) the entity was not, immediately before the start of the 1998-99 income year, taken under: (i) former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 ; or (ii) Subdivision C of Division 20 of former Part IIIA of that Act; to have acquired the asset on or after 20 September 1985; and (c) the asset has not stopped being a pre-CGT asset of the entity because of this Division. 31. Subsection 149-30(1) provides: The 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. 32. Subsection 149-30(1A) provides that Part 3-1 and Part 3-3 apply to the CGT asset as if the entity had acquired it at the earliest time. 33. Subsection 149-30(2) states: 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, subsections (1) and (1A) apply as if that were in fact the case. 34. An 'ultimate owner' is defined in subsection 149-15(3) relevantly to include an individual. 35. The other relevant definitions in subsection 149-15 are: 149-15(1) Majority underlying interests in a *CGT asset consist of: (a) more than 50% of the beneficial interests that *ultimate owners have (whether directly or *indirectly) in the asset; and (b) 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. 149-15(2) An underlying interest in a *CGT asset is a beneficial interest that an *ultimate owner has (whether directly or *indirectly) in the asset or in any *ordinary income that may be *derived from the asset. .. 149-15(4) An *ultimate owner indirectly has a beneficial interest in a *CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of the capital of the other entity if: (a) the other entity were to distribute any of its capital; and (b) the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner. 149-15(5) An *ultimate owner indirectly has a beneficial interest in *ordinary income that may be *derived from a *CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of a *dividend or income if: (a) the other entity were to pay that dividend, or otherwise distribute that income; and (b) the dividend or income were then successively paid or distributed by each entity interposed between the other entity and the ultimate owner. 36. Subsection 149-30(3) provides circumstances when a new owner is taken to stand in the shoes of a former owner: Subsection (4) affects how the *majority underlying interests in the asset are worked out if an *ultimate owner (the new owner ) has acquired a percentage (the acquired percentage ) of the *underlying interests in the asset because of an event described in column 2 of an item in the table. The former owner is the entity described in column 3 of that item. This section applies as if the new owner had (in addition to any other *underlying interests), at any time when the former owner had a percentage (the former owner's percentage ) of the underlying interests in the asset, a percentage of the underlying interests in the asset equal to the acquired percentage, or the former owner's percentage at that time, whichever is the less. 37. In summary, the term 'majority underlying interests', on the basis of which section 149-30 (and its predecessor, section 160ZZS) operate, are concerned with the measurement of underlying interests in relation to the assets concerned. Underlying interests in a CGT asset is a beneficial interest that an ultimate owner has (whether directly or indirectly) in the asset or in any ordinary income that may be derived from the asset (s. 149-15(2)). An ultimate owner of an asset is typically, but not exclusively, a natural person or individual (s. 149-15(3)(a)). A trustee of a trust is not an entity that falls within the definition of 'ultimate owner'. Therefore, for the purposes of Division 149 (and section 160ZZS), a trust must be 'looked through' in order to determine whether there has been a change in the underlying interests of natural persons (or other ultimate owners) in the assets held by the trust. | Detailed Reasoning - Application to your circumstances: 38. In your case, the pre-CGT shares held by the Company and the bonus and ordinary shares of the Company held by the Trustees of the Testamentary Trust were acquired before 20 September 1985. However, those assets will stop being pre-CGT assets if majority underlying interests in the assets were not had by ultimate owners who had majority underlying interests in the assets immediately before 20 September 1985. The ordinary and bonus shares in the Company 39. In our view, based on the particular terms of the Testamentary Trusts, from 20 September 1985 and during their lifetime B and C held 'underlying interests' in the ordinary (and bonus) shares in the Company for the purposes of Division 20 in the ITAA 1936 and Division 149 in the ITAA 1997. During their lifetime, they each had a beneficial interest in the assets of the Testamentary Trusts within the meaning of those terms as set out in Division 20 of the ITAA 1936 and Division 149 of the ITAA 1997. Under the terms of the Testamentary Trusts, each daughter of A had the right to receive 50% of the income and capital of the Testamentary Trusts, if any of that income or capital of the trusts were distributed by the Trustees. Together, they held majority underlying interests (more than one-half of the beneficial interests) in the assets of the Testamentary Trusts, for present purposes, being the ordinary shares (including the bonus shares) in the Company. 40. In our view, when B passed away, her children acquired, for the purposes of Division 149 in the ITAA 1997 and in particular subsection 149-30(3), a percentage of the underlying interests in the assets of the Testamentary Trusts, being a 1/3 share of their mother's half share in the assets and income of the Testamentary Trusts (i.e. XX%). Those underlying interests were acquired as a result of the death of their mother. 41. Therefore, subsection 149-30(4) of the ITAA 1997 applies to treat the children as if they held those acquired percentages of underlying interests at any time when B held underlying interests in the assets of the Testamentary Trusts. Consequently, upon B's death, majority underlying interests are treated as continuing to be held by the same pre-CGT ultimate owners. 42. Similarly, when C passed away her children acquired, for the purposes of Division 149 in the ITAA 1997 and in particular subsection 149-30(3), a percentage of the underlying interests in the assets of the Testamentary Trusts, being a 1/4 share of their mother's half share in the assets and income of the Testamentary Trusts (i.e. XX%). Those underlying interests were acquired as a result of the death of their mother. 43. Therefore, subsection 149-30(4) of the ITAA 1997 applies to treat C's children as if they held those acquired percentages of underlying interests at any time when C held underlying interests in the assets of the Testamentary Trusts. Consequently, upon C's death, majority underlying interests are treated as continuing to be held by the same pre-CGT ultimate owners. 44. Having regard to reasoning expressed in ATO ID 2003/777, we note the intent of subsections 130-20(3) and (4) and the former section 160ZZRU and subsection 160ZZS(2) is to treat those who acquire what can be described as a percentage underlying interest in the pre-CGT assets as a result of the death of a person, to be treated as if they always held those underlying interests. 45. Consequently, on the facts of this case, the Commissioner is satisfied that at all times on and after 20 September 1985 and until the shares in the Company are cancelled as a result of the proposed liquidation, majority underlying interests in the ordinary (including bonus shares) in the Company were had by ultimate owners who had those majority underlying interests in the asset immediately before 20 September 1985. 46. Consequently, the ordinary and bonus shares in the Company will not stop being pre-CGT assets for the purposes of section 149-30(1) of the ITAA 1997. The pre-CGT shares held by the Company 47. In relation to the pre-CGT shares held by the Company, the Testamentary Trusts held the majority interests in the company at all times from 20 September 1985 as it held all of the ordinary shares that were entitled to dividends and to capital distributions. For the reasons given immediately above, there was no change in the majority underlying interests of the ordinary (including bonus) shares in the Company. 48. Furthermore, there has not been any change in the majority underlying interests in the preference shares. 49. When those preference shares passed to the beneficiaries of B's estate upon her death, the beneficiaries (her children) are treated as having held their acquired percentage underlying interest in those preference shares at all times when B held her interest in those shares under subsection 149-30(4) of the ITAA 1997. 50. Similarly, the beneficiaries of the residue of C's estate (her children) will also be treated as having held their acquired percentage underlying interest in those preference shares at all times that C held her interest in those shares under subsection 149-30(4) of the ITAA 1997. Consistent with the intent of subsection 149-30(3) and (4), we accept that to be the case although the administration of the estate may not yet have been completed. 51. Consequently, the pre-CCT shares held by the Company will not stop being pre-CGT assets for the purposes of section 149-30(1) of the ITAA 1997. | Detailed Reasoning - Question 2b: Are the Remainder Beneficiaries' interests in the Testamentary Trust pre-CGT assets within the meaning of section 149-10 of the ITAA 1997? | Detailed Reasoning - Answer: The Commissioner declined to rule on this question | Detailed Reasoning - Question 3: Are the Company's bonus shares and shares arising from converting convertible notes in respect of the public Company, treated as if they were acquired prior to 20 September 1985 pursuant to section 130-20 and section 130-60 of the ITTPA 1997? | Summary: Yes, the Company's bonus shares and shares arising from converting convertible notes in respect of the Public Company are treated as if they were acquired prior to 20 September 1985. | Detailed Reasoning - Bonus share: 52. The law regarding bonus shares acquired before 30 June 1987 is set out under Question 1. Application to your circumstances 53. An application of that law to the bonus shares issued to the Company by the Public Company on or before 30 June 1987, means that the bonus shares were acquired when the original pre-CGT shares in the Public Company were acquired, and therefore, are treated as if they were acquired prior to 20 September 1985. | Detailed Reasoning - Convertible Notes: 54. Subdivision 130-C of Part 3-3 of the ITAA 1997 sets out the modifications to the rules about acquisition time, cost base and reduced cost base for shares that are acquired by converting a convertible interest. 55. Under subsection 130-60(2) of the ITAA 1997, a taxpayer is taken to acquire the shares when the conversion of the convertible interest happens. However, Note 2 to section 130-60 of the ITAA 1997 provides that transitional rules apply to some convertible notes. 56. Subsection 130-60(3) of the ITTPA 1997 provides that subsection 130-20(2) of the ITAA 1997 does not apply to the acquisition of shares by the conversion of a convertible note that was acquired before 20 September 1985, if the taxpayer did not pay of give anything in relation to the conversion. In that case, the taxpayer is taken to have acquired the shares when they acquired the convertible note. Application to your circumstances 57. The Company held the convertible notes in the Public Company before 20 September 1985 and was not required to pay anything to convert the convertible notes. Therefore, the Public Company shares acquired on conversion of the convertible notes are taken to have been acquired when the Company acquired the convertible notes. | Detailed Reasoning - Question 4: Does CGT Event E5 happen after a proposed date and after the Remainder Beneficiaries call for the capital of the Testamentary Trust in accordance with the rule in Saunders v Vautier 49 E.R. 282? | Summary: No, CGT Event E5 does not happen. | Detailed Reasoning - Detailed reasoning: 58. CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (subsection 104-75(1)). 59. The trustee makes a capital gain if the market value of the asset (at the time of the event) is more than its cost base or a capital loss if that market value is less than the asset's reduced cost base (subsection 104-75(3). 60. TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25) explains the circumstances in which the Commissioner considers a beneficiary of a trust is absolutely entitled to a CGT asset of the trust as against its trustee: 10. The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction... ... 23. If there is more than one beneficiary with interests in the trust asset, then it will usually not be possible for any one beneficiary to call for the asset to be transferred to them or to be transferred at their direction. This is because their entitlement is not to the entire asset. 24. There is, however, a particular circumstance where such a beneficiary can be considered absolutely entitled to a specific number of the trust assets for CGT purposes. This circumstance is where: • the assets are fungible; • the beneficiary is entitled against the trustee to have their interest in those assets satisfied by a distribution or allocation in their favour of a specific number of them; and • there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets. 25. Because the assets are fungible, it does not matter that the beneficiaries cannot point to particular assets as belonging to them. It is sufficient in these circumstances that they can point to a specific number of assets as belonging to them. 61. TR 2004/D25, explained the Commissioner's view of the relevance of the rule in Saunders v Vautier to the concept of absolute entitlement, and relevantly states: 41. The principle invoked in the case of Saunders v. Vautier was that if a sole beneficiary's interest in the trust property is vested and indefeasible and they are of age then they can put an end to the trust by directing the trustees to transfer the trust property to them or at their direction, even though the trust deed contains a contrary intention. The basis of the principle is that a beneficiary is entitled now to that which will be theirs eventually anyway: Saunders v. Vautier (1841) 4 BEAV 115; 49 ER 282. ... 47. It should be noted that the principle is concerned with whether a beneficiary has the ability to terminate the trust in respect of the asset, and not whether the beneficiary actually terminates the trust, or even whether they seek to terminate it. 48. The principle from Saunders v. Vautier has been extended over the years such that it also applies if there is more than one beneficiary with an interest in the trust property, even if the several interests are not all immediate but are successive, provided all of the beneficiaries consent to bringing the trust to an end, see Jacobs' Law of Trusts in Australia, 6th edn, Butterworths, Australia at p 2308. It has even been said that the objects of a discretionary trust fund can join together to terminate the trust: see Sir Moses Montefoire Jewish Home v. Howell & Co (No 7) Pty Ltd [1984] 2 NSWLR 406. 49. As such: The rule derived from [ Saunders v. Vautier ] may be stated as follows: if all the beneficiaries are sui juris and are collectively possessed of the entire beneficial interest, and are in unanimous agreement, they can terminate the express trust and subsequently instruct the trustee to deal with the trust property as they choose. (footnotes omitted) ... | Detailed Reasoning - The CGT provisions: 51. The rule in Saunders v. Vautier must be viewed in the context of the CGT provisions. Those provisions, and the scheme established by them, set the parameters within which the concept of absolute entitlement is invoked for CGT purposes. In some important respects they modify the application of the rule in Saunders v. Vautier - most notably in the way in which it applies if there is more than one beneficiary with an interest in the trust asset. (emphasis added) ... | Detailed Reasoning - Do the provisions address beneficiaries separately or collectively?: 56. The CGT provisions work out the capital gains or losses made by individual taxpayers in respect of their CGT assets. Consistent with that scheme the absolute entitlement provisions are also concerned with whether 'you', that is a single beneficiary, are absolutely entitled. Given this context, it is considered that the normal rule of statutory interpretation (contained in paragraph 23(b) of the Acts Interpretation Act 1901) that words in the singular number include the plural does not apply. That rule does not apply if a contrary intention appears. The CGT provisions exhibit a contrary intention. 57. Therefore, unlike the rule in Saunders v. Vautier , the test is not whether the beneficiaries can together agree to end the trust, but rather whether a particular beneficiary can terminate the trust, or at least terminate the trust in respect of a particular trust asset. 58. It is for this reason that a beneficiary of a trust will have difficulty in establishing the requirements for absolute entitlement to an asset of the trustee if one or more other beneficiaries of the trust also has an interest in that asset. See further the discussion under the heading 'More than one beneficiary with interests in a trust asset' (paragraphs 80 to 126). 59. If the provisions were viewed as addressing beneficiaries collectively, those provisions would be very difficult, if not impossible, to administer. For example, if the mere fact that the objects of a discretionary trust can join together to end the trust were sufficient to make each object absolutely entitled, to what, given the existence of the trustee's discretion, would each object be absolutely entitled? This difficulty with the 'collective' approach lends further support to the 'separate' beneficiary approach. (emphasis added) ... 81. The fact that under the rule in Saunders v. Vautier multiple beneficiaries may together terminate the trust is of no assistance to such beneficiaries wanting to establish absolute entitlement for the purposes of the Australian CGT provisions. As already discussed, those provisions require a single beneficiary to be absolutely entitled to the whole of a trust asset, whereas the entitlement of a beneficiary who shares their interest with others will generally be to a share of each trust asset. 82. It is also true that equity may permit a beneficiary who has an interest in trust assets along with one or more others to have that interest satisfied by a distribution to the beneficiary of entire assets (provided the assets are readily divisible and the distribution can be made without prejudice to the other beneficiaries). While a beneficiary's ability to have their interest satisfied is necessary in order to establish absolute entitlement for CGT purposes, it is not, of itself, sufficient. This is because it is not possible for the beneficiary, prior to the distribution or sale, to show that they are entitled to any particular assets. (emphasis added) 62. In respect of the circumstances when the Commissioner will consider absolute entitlement in respect of fungible assets, the Commissioner explains that this could only apply when the beneficiary is entitled to have their interest satisfied by a distribution or allocation in their favour of a specific number of the assets and there is a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to that specific number of the trust's assets. Relevantly, the following paragraphs in TR 2005/D25 state: | Detailed Reasoning - Multiple beneficiaries: specific number of assets held for each beneficiary: 117. As discussed, the ability of a beneficiary to demand a number of trust assets in satisfaction of their interest, and the obligation of the trustee to meet that demand, is necessary, but not sufficient, to establish absolute entitlement for CGT purposes. There must also be a clear understanding on the part of all the relevant parties that, despite the shared interests, a specific number of assets of a clearly defined asset class are held for each beneficiary to the exclusion of the other beneficiaries. 118. Shared interests in trust assets may exist despite a requirement, contained for example in the trust deed, that a specific number of assets be held exclusively for each of the beneficiaries, if the assets are fungible. If specific assets are not identified as being in respect of particular beneficiaries, then arguably each beneficiary necessarily retains an interest in each asset even in the face of a contrary instruction in the trust deed. 119. The kinds of situations in which there might be shared interests fall into the following two categories: • where the assets cannot be separately identified, so it is impossible to match a particular asset with a particular beneficiary (for example, shares in a listed public company), or • where the high level of homogeneity between the assets suggests that the matching of beneficiaries with assets would be a mere formality (for example, new cars of the same make and model). 120. However, in the second case if there are three such cars and three beneficiaries and the trust deed provides that each beneficiary is entitled to a car and the trustee marks which car is set aside for each beneficiary, then absolute entitlement will easily be established. In that case there is only one beneficiary with an interest in each asset and the problems associated with multiple beneficiaries do not arise. Of course in these kinds of cases, where particular assets are set aside for particular beneficiaries, absolute entitlement can arise irrespective of the kinds of assets involved. 63. TR 2004/D25 provides the following examples of multiple beneficiaries with an interest in trust assets consisting of shares as tenants in common that have no absolute entitlement to the shares : | Detailed Reasoning - Example 8: multiple beneficiaries (no absolute entitlement): 169. ... settled shares in a listed public company on trust for his two daughters as tenants in common in equal shares. 170. Notwithstanding that the shares may be fungible and that each daughter may be able to demand that her interest be satisfied by a distribution in specie of one half of the number of shares to her, neither daughter is absolutely entitled. The reason is that under the trust it is clear that the settlor intends that each daughter has an interest in each share. Therefore, any capital gain or loss made by the trustee in respect of the shares will be included in the net income of the trust. | Detailed Reasoning - Example 9: multiple beneficiaries (no absolute entitlement): 171. Assume the same facts as for Example 8, except that the trust instrument simply said that the shares were to be held on trust for the two daughters equally. Further, the trustee 'turned over' the shares a number of times. That is, in accordance with their powers under the trust instrument, the trustee sold the shares and bought others, and then sold the new shares and bought further shares. All resulting capital gains and losses were taken into account in working out the net income of the trust and assessments were issued to the daughters in accordance with Division 6 of the ITAA 1936. 172. It is not clear from the terms of the trust instrument whether or not the settlor intended that one half of the total number of shares be set aside for each of the daughters exclusively. Certainly equity would be prepared to satisfy the interest each daughter has in the trust by a distribution in specie of sufficient shares to satisfy her interest. But more is required in order to establish absolute entitlement. 173. Because the trustee has not recorded a specific number of assets as being held for each beneficiary, neither daughter is absolutely entitled. Accordingly, the trustee has correctly taken capital gains and losses into account in working out the net income of the trust. 64. Further, more recent case law supports that a proportionate share of the trust fund as a whole is not sufficient to enable any beneficiary to be absolutely entitled to any particular asset of the trust fund. 65. The Commissioner summarised the Tax Office view of the decision of Justice Lindgren in Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242 in his Decision Impact Statement, as follows: ... To be absolutely entitled to an asset as against the trustee, the beneficiary must have both a vested and an indefeasible interest in the asset and be able to demand transfer of the asset by the trustee. It does not suffice for the beneficiary merely to have an entitlement under the deed to be paid a benefit. The beneficiary must have an immediate entitlement to demand transfer of the particular asset in circumstances where that entitlement cannot be defeated. The decision of Justice Lindgren also confirms that any enquiry into the quality of a beneficiary's interest in an asset of the trust requires close and careful examination of the constituent document of the trust. This is consistent with the observation by the High Court in CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic) 2005 ATC 4925 where the High Court emphasised in the context of resolving the application of the particular statutory provision then in issue to the trust under examination that: All depends, as Tamberlin and Hely JJ put it in Kent v SS ''Maria Luisa'' (No 2), upon the terms of the particular trust' (at paragraph 15 of the joint judgement). In particular, the presence in the particular deed of a clause that gives the trustee power to sell and vary investments, will be inconsistent with the existence of absolute entitlement; as will be the presence of a clause stating that no beneficiary of the trust has a beneficial interest in any asset of the trust. 66. Oswal v. Commissioner of Taxation [2013] FCA 745 (Oswal) also considered the concept of absolute entitlement. Although it was not necessary for the Federal Court to consider whether CGT event E5 occurred, Edmond J found that the phrase 'absolutely entitled to a CGT asset of a trust... as against the trustee' requires a beneficiary to have a vested, indefeasible, and absolute entitlement to a trust asset and to be entitled to require the trustee to deal with the asset as the beneficiary directs. 67. In Oswal, the trustee's statutory right of sale of trust property meant that the beneficiaries' interests 'while absolute were defeasible'.Edmond J also held that the trustee's right of indemnity was an impediment to absolute entitlement as against the trustee. Application to your circumstances 68. As discussed in TR 2004/D25, the Commissioner considers that the rule in Saunders v Vautier is relevant to interpreting and applying the concept of absolute entitlement. What will be relevant is whether a beneficiary has the ability to terminate the trust in respect of the CGT asset, and not whether the beneficiary seeks to terminate it. Even if the beneficiaries can collectively terminate the trust by calling for the trustee to distribute the trust fund, a beneficiary will not be absolutely entitled to a particular trust asset if one or more other beneficiaries also have an interest in the asset. Further a beneficiary will not be absolutely entitled if there is some basis upon which a trustee can legitimately resist a beneficiary's call for a particular asset to be transferred to them or at their direction. 69. In this case, all of the Remainder Beneficiaries, after the death of the life interest holders, have interests that enable them to collectively call for the Testamentary Trust to be wound up. However, they do not have an absolute interest in any particular assets of the trust. Even though certain investments such as public company shares may be regarded as fungible, they may not be conveniently divisible. In any event, it is clear in this case that the Remainder Beneficiaries upon the death of their mother (the life interest holder) have a vested and indefeasible interest in the entire trust fund as tenants in common. The terms of the trust created under the Will do not support that a specific number of assets of a clearly defined asset class in the trust fund are to be held for each beneficiary to the exclusion of the other beneficiaries. 70. Furthermore, until any assets are distributed to the beneficiaries, the Trustees have the power to sell the assets or convert the assets into cash. In fact, the Trustees do intend to wind up the Testamentary Trust and satisfy the Remainder Beneficiaries interests by a payment to them of their share of the trust fund in cash, following the liquidation of the Company and the sale of its other investments. 71. Similar to Example 8 in TR 2004/D25, none of the Remainder Beneficiaries are absolutely entitled to any CGT asset as against the Trustee. 72. Accordingly, CGT event E5 will not happen after the proposed date and after the Remainder Beneficiaries call for the capital of the Testamentary Trust in accordance with the rule in Saunders v Vautier . | Detailed Reasoning - Question 5: Are the Remainder Beneficiaries able to claim franking tax offsets under Division 207 in respect of the franked distributions that are made by the Company to the Trustees of the Testamentary Trust and then distributed by the Trustees to the Remainder Beneficiaries in accordance with their entitlements under the Will? | Summary: Yes, the Remainder Beneficiaries are able to claim franking tax offsets under Division 207 in respect of the franked distributions that are made by the Company to the Trustees of the Testamentary Trust and then distributed by the Trustees to the Remainder Beneficiaries in accordance with their entitlements under the Will. | Detailed Reasoning - The holding period rules and qualified person provisions: 73. Division 207 of the ITAA 1997 sets out the consequences of an entity receiving directly or indirectly a franked distribution from a corporate tax entity. Generally, an entity receiving a franked distribution will be required to include an amount equal to the franking credit in their assessable income and be entitled to a tax offset equal to the same amount. 74. Section 207-150 of Subdivision 207-F of the ITAA 1997 applies where a franked distribution flows indirectly to an entity. 75. Under subsection 207-150(1) of the ITAA 1997, if an entity to whom a franked distribution is made is 'not a qualified person in relation to the distribution for the purposes of Division 1A' the amount of franking credit received on the distribution is not included in their assessable income, nor can they claim a tax offset equal to the franking credit; and if the distribution flows indirectly through the entity to another entity - subsection 207-35(3) and section 207-45 of the ITAA 1997 do not apply to that other entity. 76. The very wording of section 207-150 of the ITAA 1997 makes it clear that regard is to be had to the rules in Division 1A in determining whether a person is a qualified person for the purpose of these provisions in respect of a franked distribution. 77. Though Part IIIAA of the ITAA 1936 ceased to have application from 1 July 20XX, it is necessary to have regard to the rules in Division 1A in determining whether an entity is a qualified person for the purpose of the rules contained in the Imputation System irrespective of whether the distribution is made directly or indirectly to the entity on or after 1 July 20XX. 78. Item 8 of Schedule 4 of the Taxation Laws Amendment Act (No.2) 1999 (93 of 1999) inserted Division 1A of former Part IIIAA of the ITAA 1936. 79. Item 25 of Schedule 4 of the Taxation Laws Amendment Act (No.2) 1999 (93 of 1999) amended Division 1A to apply to shares and interests in shares acquired on or after 1 July 1997 unless an exception occurred. 80. The qualified person provisions of Division 1A applied to shares that were: • If held directly - acquired on or after 1 July 1997; or • If held indirectly through a trust - acquired after 3pm on 31 December 1997. 81. Former subsection 160APHG(3) of the ITAA 1936 states: If the trustee of a trust (other than a widely held trust) acquires, holds, or disposes of, shares or an interest in shares, each beneficiary of the trust (including, if the trust is a discretionary trust, a potential beneficiary) is taken to acquire, hold, or dispose of, as the case may be, an interest in the shares. 82. Former section 160APHG(3) will apply to deem a beneficiary to have acquired their interest in the shares at the same time as the relevant trust acquired their interest. Application to your circumstances 83. All of the ordinary shares in the Company were acquired by the Testamentary Trust prior to 31 December 1997. 84. The interests of the Remainder Beneficiaries in the Testamentary Trust were acquired when they became a beneficiary of the Testamentary Trusts or when the assets were acquired after establishment. Former subsection 160APHG(3) makes it clear that for the purposes of Division 1A of former Part IIIAA of the ITAA 1936, in respect of shares held in a trust, each beneficiary is taken to have acquired an interest in the shares when the trustee acquires the shares. Therefore, the qualified person provisions do not apply to the ordinary shares in the Company. | Detailed Reasoning - Entitlement to claim franking tax offsets under Division 207: 85. Subdivision 207-B of the ITAA 1997 provides for the taxation treatment for franked distributions and franking credits. 86. Subsection 207-35(1) provides that where a franked distribution is made to a partnership or a trustee of a trust (but not a corporate tax entity or a complying superannuation entity) in an income year, the assessable income of the partnership or trust for that income year includes the franking credit on the franked distribution. The amount is in addition to any other amount included in their assessable income in relation to the distribution under any other provision of this Act: subsection 207-35(2). 87. When a franked distribution flows indirectly to a beneficiary of a trust, the beneficiary's share of the franked distribution and the franking credit is included in the beneficiary's assessable income by virtue of subsections 207-35(3) and (4). 88. Subject to the operation of section 207-150, section 207-45 of the ITAA 1997 deals with tax offsets where the distribution flows indirectly to an entity. 89. Section 207-45 of the ITAA 1997 states that: An entity to whom a *franked distribution *flows indirectly in an income year is entitled to a *tax offset for that income year that is equal to its *share of the *franking credit on the distribution, if it is: a) an individual; or b) a *corporate tax entity when the distribution flows indirectly to it; or c) the trustee of a trust that is liable to be assessed on a share of, or all or a part of, the trust's *net income under section 98, 99 or 99A of the Income Tax Assessment Act 1936 for that income year; or d) the trustee of a *complying superannuation fund, a *non-complying superannuation fund, a *complying approved deposit fund, a *non-complying approved deposit fund or a *pooled superannuation trust in relation to that income year. 90. Under subsection 207-50(3) of the ITAA 1997 a franked distribution flows indirectly to a beneficiary of a trust in an income year if, and only if: (a) during that income year, the distribution is made to the trustee of the trust, or *flows indirectly to the trustee as a partner or beneficiary because of a previous application of subsection (2) or this subsection; and (b) the beneficiary has this amount for that income year (the share amount ): (i) a share of the trust's *net income for that income year that is covered by paragraph 97(1)(a) of the Income Tax Assessment Act 1936; or (ii) an individual interest in the trust's net income for that income year that is covered by section 98A or 100 of that Act; (whether or not the share amount becomes assessable income in the hands of the beneficiary); and (c) the beneficiary's *share of the distribution under section 207-55 is a positive amount (whether or not the beneficiary actually receives any of that share). 91. The Commissioner has been asked to assume that these requirements will be met. A franked distribution is proposed to be made from the Company to the Testamentary Trust. The Remainder Beneficiaries will be presently entitled to a share of the Testamentary Trust's income in accordance with the Will and the Commissioner assumes their share will be a positive amount. Therefore, a franked distribution will flow indirectly to the Remainder Beneficiaries. 92. Section 207-150 of the ITAA 1997 will not deny the Remainder Beneficiaries entitlement to the tax offset. The qualified person rule in paragraph 207-150(1)(a) of the ITAA 1997 has no application in respect to the Company shares as discussed. Further, the Commissioner does not consider that any of the circumstances listed in paragraphs (b) to (eb) of this section will apply. | Detailed Reasoning - Question 6: Will liquidators distributions from the Company to its shareholders that are derived from gains on the sale of pre-CGT shares of the Company and from share capital amounts be deemed to be assessable dividends under section 47 of the ITAA 1936 or otherwise assessable to the shareholders of the Company as ordinary income or under section 6-10 of the ITAA 1997? | Summary: No. Liquidator's distributions sourced from the gains made on the sale of pre-CGT shares of the Company and from share capital amounts will not be assessable dividends under section 47 of the ITAA 1936 or otherwise assessable to the shareholders of the Company as ordinary income or under section 6-10 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: 93. At common law, a distribution to a shareholder by a liquidator is capital, not income, in the hands of the shareholder since it is a realisation of the shareholder's interest in the company which is wound up: FC of T (NSW) v Stevenson (1937) 4 ATD 415; (1937) 59 CLR 80; FC of T v Blakely (1951) 9 ATD 239 at 245, 247; (1951) 82 CLR 388 at 402, 407; FC of T v Brewing Investments Ltd [2000] FCA 920; 2000 ATC 4431 per Hill J at 4437. 94. In Commissioner of Taxation (NSW) v Stevenson (1937) 59 CLR 80, Rich, Dixon and McTiernan JJ said at 98-99: ... But an entirely different set of considerations arises when accumulated profits exist in a company which winds up. In the liquidation the excess of its assets over its external liabilities is distributed among the shareholders in extinguishment of their shares. The shareholders, in other words, as contributories receive nothing but the ultimate capital value of the intangible property constituted by the shares. The res itself ceases to exist. The profits are not detached, released or liberated, leaving the share intact as a piece of property. There is no dividend upon the share. There is no distribution of profits because they are profits. The shareholder simply receives his proper proportion of a total net fund without distinction in respect of the source of its components and he receives it in replacement for his share. [emphasis added] 95. The relevant provision to consider in these circumstances is section 47 of the ITAA 1936 which deems certain amounts paid to shareholders of a company to be dividends paid to shareholders out of the profits derived by the company. 96. Subsection 47(1) of the ITAA 1936 provides that: Distributions to shareholders of a company by a liquidator in the course of winding-up the company, to the extent to which they represent income derived by the company (whether before or during liquidation) other than income which has been properly applied to replace a loss of paid-up share capital, shall, for the purposes of this Act, be deemed to be dividends paid to the shareholders by the company out of profits derived by it. 97. The use of the term 'income' in the context of subsection 47(1) of the ITAA 1936 has been interpreted in Gibb v FCT (1966) 118 CLR 628 as meaning income according to ordinary concepts rather than 'assessable income'. In response to the uncertainty surrounding the term 'income', subsection 47(1A) of the ITAA 1936 was introduced to extend the definition of 'income' in subsection (1) and states: A reference in subsection (1) to income derived by a company includes a reference to: (a) an amount (except a net capital gain) included in the company's assessable income for a year of income; or (b) a net capital gain that would be included in the company's assessable income for a year of income if the Income Tax Assessment Act 1997 required a net capital gain to be worked out as follows: Method statement Step 1. Work out each capital gain (except a capital gain that is disregarded) that the company made during that year of income. Do so without indexing any amount used to work out the cost base of a CGT asset. Step 2. Total the capital gain or gains worked out under Step 1. The result is the net capital gain for that year of income. 98. The effect of subsection 47(1A) of the ITAA 1936 is that it only includes in income net capital gains that are included in a company's assessable income (without indexation) under Part 3-3 of the ITAA 1997. Capital gains that are 'disregarded' or otherwise not within the concept of a net capital gain included in the assessable income of the company are not within the extended meaning of the word 'income'. 99. Liquidator distributions sourced from the sale of assets acquired prior to 20 September 1985 where a capital gain is disregarded, do not fall within subsection 47(1A) of the ITAA 1997. | Detailed Reasoning - The Archer Brothers Principle: 100. Taxation Determination TD 95/10 Income tax: what is the significance of the Archer Brothers principle in the context of liquidation distributions? (TD 95/10) discusses the significance of the "Archer Brothers principle" in the context of liquidation distributions and section 47 of the ITAA 1936, stating at paragraph 2 that: ...The principle is that if a liquidator appropriates (or 'sources') a particular fund of profit or income in making a distribution (or part of a distribution), that appropriation ordinarily determines the character of the distributed amount for the purposes of section 47 and other provisions of the Income Tax Assessment Act 1936 (the Act). Generally, we accept that a liquidator may rely on the Archer Brothers principle, except where a specific provision in the Act produces a different result (e.g., the rules in section 160ZLA that specify the order in which different types of funds are distributed). 101. TD 95/10, at paragraph 4, states that the Archer Brothers principle applies if: (a) the company accounts have been kept so that a liquidator can clearly identify a specific profit or fund in making a distribution; and (b) it is clear from either the accounts or statement of distribution that the liquidator has appropriated the specific profit or fund in making the distribution. 102. Importantly, paragraph 5 of TD 95/10 also notes that the maintenance of 'separate accounts' is not essential to identify a fund or profit from which a distribution is made: It has been suggested that the Archer Brothers principle operates only if separate accounts have been kept for each specific fund or profit so that a liquidator's appropriation from any account is unequivocally from a particular fund or profit. Although the maintenance of separate accounts makes it easier to identify the source of a distribution, and is, in our opinion, preferable from a practical point of view, we do not consider that separate accounts are essential provided the liquidator is able to identify a fund or profit from which a distribution is made. For example, if pre-CGT non-assessable profits and post-CGT capital gains have been accumulated in the same reserve, but can still be separately identified, we will accept a liquidator's nominated appropriation. Application to your circumstances 103. The proposed Liquidator's distributions are capital distributions and not ordinary income under section 6-5 of the ITAA 1997. 104. The Liquidator's distributions will comprise share capital and profits or gains on pre-CGT assets. 105. The return of share capital does not represent income derived by the Company and so will not form part of the assessable dividends under section 47 of the ITAA 1936. 106. The effect of subsection 47(1A) of the ITAA 1936 is that capital gains that are disregarded or otherwise not a 'net capital gain that would be included in company's assessable income' will also not be 'income' for the purposes of subsection 47(1) of the ITAA 1936. 107. Therefore, the components of the Liquidator's distributions received by the shareholders of the Company that relate to the capital gains made on the pre-CGT shares of the Company will also not be income derived by the Company for the purposes of section 47(1) of the ITAA 1936 provided the profits are able to be separately identified. 108. We see no reason why the amounts could not be separately identified in these circumstances, provided adequate records are kept. 109. Consequently, to the extent that the Liquidator's distributions received by the shareholders of the Company are sourced from share capital or the gains on the sale of the pre-CGT shares of the Company, the distributions will not be dividends under section 47 of the ITAA 1936. The relevant statutory provision is section 47. These amounts will not otherwise constitute statutory income under section 6-10 of the ITAA 1997. | Detailed Reasoning - Question 7: Will Liquidator's distributions from the Company to shareholders be frankable to the extent that they are deemed to be assessable dividends under section 47 of the ITAA 1936? | Summary: Yes, Liquidator's distributions from the Company to shareholders will be frankable to the extent that they are deemed to be assessable dividends under section 47 of the ITAA 1936 | Detailed Reasoning - Detailed reasoning: 110. Under section 202-30 of the ITAA 1997, distributions from a company are frankable unless it is specified that they are unfrankable. 111. There is a list of unfrankable distributions in section 202-45 of the ITAA 1997. Deemed dividends under section 47 are not listed as unfrankable. 112. Consequently, Liquidator's distributions from the Company to its shareholders will be frankable to the extent that any part of the distribution is deemed to be a dividend under section 47 of the ITAA 1936. | Detailed Reasoning - Question 8: Will CGT Event G1 apply to that part of the Liquidator's distributions from the Company to shareholders to the extent that it is not assessable under section 47 of the ITAA 1936? | Summary: No, CGT Event G1 will not apply as the Company will be deregistered, and therefore cease to exist, within 18 months of the first Liquidator's payment. | Detailed Reasoning - Detailed Reasoning: 113. Section 104-135 of the ITAA 1997 provides that CGT event G1 happens if: (a) a company makes a payment to you in respect of a share you own in the company (except for CGT event A1 or C2 happening in relation to the share); and (b) some or all of the payment (the non-assessable part) is not a dividend, or an amount that is taken to be a dividend under section 47 of the Income Tax Assessment Act 1936; and (c) the payment is not included in your assessable income. 114. TD 2001/27 explains that CGT event G1 in subsection 104-135(1) of the ITAA 1997 may result in capital gains being made and (or) the need for cost base and reduced cost base reductions in respect of shares in a company in liquidation. However, it may do so only to the extent that the distribution made by the company's liquidator is not an amount that is deemed to be a dividend under subsection 47(1) of the ITAA 1936. The part that is not deemed to be a dividend under subsection 47(1) of the ITAA 1936 is called the 'non-assessable part'. 115. Generally, where a company is liquidated within 18 months of a liquidator's distribution, CGT event C2 will take precedence due to the exception within CGT event G1 in subsection 104-135(6) of the ITAA 1997 as follows: (6) You disregard a payment by a liquidator for the purposes of this section if the company ceases to exist within 18 months of the payment. Note: The payment will be part of your capital proceeds for CGT event C2 happening when the share ends 116. Any capital gain made as a result of the CGT Event G1 will be disregarded if the share in the company was acquired before 20 September 1985: subsection 104-135(5). Application to your circumstances 117. It is assumed that the Company will be deregistered, and therefore cease to exist, within 18 months of the first Liquidator's payment made in the course of winding up the Company. Therefore, the Liquidator's distributions will be disregarded for the purposes of section 104-135 and CGT Event C2 will happen instead of CGT Event G1. 118. In the event that the company does not cease to exist within 18 months of the first liquidator's payment as assumed, CGT event G1 will be triggered (and not CGT event C2). 119. If CGT Event G1 does happen, any capital gain will be disregarded because the shares in the Company were acquired before 20 September 1985 pursuant to subsection 104-135(5) of the ITAA 1997 (also see Answer to Question 2). | Detailed Reasoning - Question 9a to 9d: In respect of the deregistration of the Company: • Will CGT Event C2 happen on deregistration of the Company? • Will any capital gains arise from the deregistration of the Company under CGT Event C2 for preference shareholders? • Will any Liquidator's distributions in respect of the Company to the Trustees of the Testamentary Trusts form part of the capital proceeds of any capital gain of the Trustees in respect of CGT Event C2 on deregistration of the Company? • Will any capital gains from deregistration of the Company arising under CGT Event C2 be disregarded for the Trustees of the Testamentary Trust? | Summary: Yes, CGT Event C2 will happen on deregistration of the Company. The preference shareholders will not make any capital gains from the deregistration of the Company under CGT Event C2. Yes, Liquidator's distributions in respect of the Company to the Trustees of the Testamentary Trusts will form part of the capital proceeds of any capital gain of the Trustees in respect of CGT Event C2 on deregistration of the Company. Yes, any capital gains from deregistration of the Company arising under CGT Event C2 will be disregarded for the Trustees of the Testamentary Trust. | Detailed Reasoning - Detailed Reasoning: 120. Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset: (a) being redeemed or cancelled; or (b) being released, discharged or satisfied; or (c) expiring; or (d) being abandoned, surrendered or forfeited; or ... 121. The time of the event is when you enter into the contract that results in the asset ending or, if there is no contract, when the asset ends: subsection 104-25(2) of the ITAA 1997. 122. A taxpayer will make a capital gain if the capital proceeds from the ending are more than the asset's cost base or a capital loss if those capital proceeds are less than the asset's reduced cost base: subsection 104-25(3) of the ITAA 1997. 123. Broadly, capital proceeds include the money and market value of property you receive (or are entitled to receive) when an event happens: section 116-20 of the ITAA 1997. 124. Taxation Determination TD 2001/27 Income tax: capital gains: how do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 ('ITAA 1997') treat: (a) a final liquidation distribution, including where all or part of it is deemed by subsection 47(1) of the Income Tax Assessment Act 1936 ('ITAA 1936') to be a dividend; and (b) an interim liquidation distribution to the extent it is not deemed to be a dividend by subsection 47(1)? (TD 2001/27) considers how Parts 3-1 and 3-3 of the ITAA 1997 treat interim and final liquidation distributions. 125. In respect to final liquidation distributions, paragraph 1 of TD 2001/27 states that: The full amount of a final distribution made by a liquidator on the winding-up of a company constitutes capital proceeds from the ending of the shareholder's shares in the company for the purposes of capital gains or capital losses made on the happening of CGT event C2 (about cancellation, surrender and similar endings) in section 104-25 of the ITAA 1997. After the winding-up of a company, CGT event C2 happens to the shares when the company ceases to exist in accordance with the Corporations Act 2001 (see Taxation Determination TD 2000/7 paragraphs 3 and 4). 126. Paragraph 3 of TD 2001/27 states that even if all or part of the liquidator's distribution constitutes a dividend under subsection 47(1) of the ITAA 1936, it does not alter the position that the full amount is the capital proceeds for CGT event C2 in section 104-25 of the ITAA 1997 happening to the shares. 127. Paragraph 4 of TD 2001/27 explains that: The apportionment rule in subsection 116-40(2) of the ITAA 1997 does not apply. The capital proceeds for the ending of the shares are not limited to the portion of the distribution that is not assessable under subsection 44(1) of the ITAA 1997. 128. The anti-overlap provision in section 118-20 of the ITAA 1997 reduces any capital gain by amounts that are otherwise assessable as a result of the event. Accordingly, any component of a liquidator's distribution that would be a dividend under subsection 47(1) of the ITAA 1936 will reduce the capital gain, as the amount will be otherwise assessable as a dividend under section 44 of the ITAA 1936. 129. Subsection 104-25(5)(a) of the ITAA 1997 provides that a capital gain arising from CGT event C2 is disregarded if the taxpayer acquired the asset before 20 September 1985. Application to your circumstances 130. CGT Event C2 will happen on deregistration of the Company as the shares in the Company will be cancelled in accordance with paragraph 104-25(1)(a) of the ITAA 1997. The timing of CGT event C2 is when the Company is deregistered and ceases to exist, pursuant to subsection 104-25(2) of the ITAA 1997. 131. Consistent with paragraphs 1 and 3 of TD 2001/7, the full amount of the Liquidator's distributions will be consideration for the cancellation of shares (the capital proceeds) under CGT Event C2. This will include amounts sourced in pre-CGT gains and share capital and any amounts that are deemed to be dividends under section 47(1) of the ITAA 1936. The anti-overlap provision in section 118-20 of the ITAA 1997 will reduce any capital gain by amounts that are otherwise assessable under section 47(1) as a result of the event. Preference shares 132. The preference shareholders will make a capital gain if the capital proceeds from the ending are more than the asset's cost base or a capital loss if those capital proceeds are less than the asset's reduced cost base: subsection 104-25(3) of the ITAA 1997. 133. We accept that, at most, the capital proceeds from the preference shares will be the return of the share capital on those shares. 134. We also accept that the cost base of those shares in the hands of the children as beneficiaries of B's estate and in the hands of the trustees of the estate of C, being determined as the market value of the shares on the date of death of B and C, as the case may be, will be at least equal to or higher than the capital proceeds as it will be the market value of the shares on the day that B or C died. Therefore, in those circumstances, a capital gain will not be made. Ordinary shares 135. As the ordinary shares (including bonus shares) held in the Company by the Trustees of the Testamentary Trust were acquired before 20 September 1985 and remain pre-CGT shares, any capital gain is disregarded under subsection 104-25(5)(a) of the ITAA 1997 | Detailed Reasoning - Question 10: Will CGT Event K6 happen to the Trustees of the Testamentary Trust at the time when the Company is deregistered? | Summary: No, CGT Event K6 will not happen to the Trustees of the Testamentary Trust at the time when the Company is deregistered. | Detailed Reasoning - Detailed Reasoning: 136. CGT event K6 is an anti-avoidance measure designed to prevent the possible avoidance of CGT where the owners of interests in a company or trust acquired prior to 20 September 1985 dispose of these interests, rather than the actual property of the company or trust acquired after 20 September 1985. 137. Under subsection 104-230(1) of the ITAA 1997, CGT event K6 happens if: • you own shares in a company that were acquired before 20 September 1985 (pre-CGT shares); • a CGT event as set out in paragraph 104-230(1)(b) of the ITAA 1997 (including CGT Event C2) happens in relation to the shares; • there is no roll-over for the 'other CGT event'; and • the requirement in subsection 104-230(2) of the ITAA 1997 is satisfied. 138. The time of CGT event K6 is when the other CGT event happens: subsection 104-230(5) of the ITAA 1997. 139. CGT event K6 only happens if, just before the other CGT event happened, the market value of post-CGT property (other than trading stock) of the company or the market value of interests the company owned through interposed companies in post-CGT property is at least 75% of the net value of the company (subsection 104-230(2) of the ITAA 1997). That is, the amount by which the sum of the market values of the assets of the company exceeds the sum of the liabilities of the company: definition of 'net value' in subsection 995-1(1) of the ITAA 1997. 140. Taxation Ruling TR 2004/18 Income tax: capital gains: application of CGT event K6 (about pre- CGT shares and pre-CGT trust interests) in section 104-230 of the Income Tax Assessment Act 1997 ( TR 2004/18) considers whether CGT event K6 can happen when pre-CGT shares end under CGT event C2 on deregistration of a company in liquidation following its winding up and states: 48. Although CGT event K6 is theoretically capable of happening, it is most unlikely that the company would have any property of the kind referred to in subsection 104-230(2) just before the time CGT event C2 happens. That is, the company is highly likely to be a 'shell' at that stage. ... 193. On the deregistration of a company in liquidation, CGT event C2 (which is about cancellation, surrender and similar ending of intangible CGT assets) happens in respect of shares in the company. A capital gain or a capital loss may arise under subsection 104-25(3) upon the ending of the post-CGT shares. 194. CGT event K6 can happen when, among other events, CGT event C2 happens in relation to pre-CGT shares in a company: paragraph 104-230(1)(b) and subsection 104-230(5). However, for CGT event K6 to happen, the company must hold post-CGT property just before CGT event C2 happens: subsection 104-230(2). It is unlikely that this requirement would be satisfied just before a company is deregistered (that is, it would be unlikely to have any property at this time). Application to your circumstances 141. The shares in the Company were acquired by the Testamentary Trusts before 20 September 1985 and remain pre-CGT assets and hence paragraph 104-230(1)(a) of the ITAA 1997 will be satisfied. In this case there is also no roll-over for the happening of CGT event C2 to the shares. 142. However, consistently with the position stated in TR 2004/18, the requirement in subsection 104-230(2) would not be satisfied just before the Company is deregistered (that is, just before CGT Event C2 happens) because any property in the Company will have already been distributed. Therefore, just before the CGT Event C2, the company will not hold any post-CGT property so subsection 104-230(2) is not capable of being satisfied. 143. Therefore, CGT event K6 will not apply. | Detailed Reasoning - Question 11: Will CGT Events E4, E6, E7 or E8 happen when the Trustee of the Testamentary Trusts makes distributions to the Remainder Beneficiaries under the terms of the Will sourced in the Liquidator's distributions? | Summary: Neither CGT Event E4, E6, E7 or E8 will happen when the Trustee of the Testamentary Trusts makes distributions to the Remainder Beneficiaries under the terms of the Will sourced in the Liquidator's distributions. | Detailed Reasoning - CGT Event E4: 144. Subsection 104-70(1) of the ITAA 1997 states: CGT event E4 happens if: (a) the trustee of a trust makes a payment to you in respect of your unit or your interest in the trust (except for *CGT event A1, C2, E1, E2, E6 or E7 happening in relation to it); and (b) some or all of the payment (the non-assessable part) is not included in your assessable income. 145. Taxation Determination TD 2003/28 sets out the Commissioner's view on how CGT event E4 applies in the circumstances of a discretionary trust where the trustee makes a non-assessable payment to a 'default beneficiary'. It relevantly states: 4. The meaning to be given to the words 'interest in the trust' depends on the context in which they are used, see for example Leedale v. Lewis [1982] 3 All ER 808 and Gartside v. IRC [1968] AC 553. In its context in section 104-70, the interest in the trust is one that is coloured by the nature of a unit in a unit trust, that is, the interest in the trust is one that is akin to the interest that a unit holder has in a unit trust. The interest that is contemplated is one in which a taxpayer invests. 5. ... An interest of a default beneficiary has been held to constitute a vested, but defeasible, proprietary interest in a trust (see Queensland Trustees v. Commissioner of Stamp Duties (Queensland) (1952) 88 CLR 54 at page 63). 1 It can be assigned and be the subject of a testamentary disposition. However, it is not an interest potentially subject to CGT event E4 where it has not been acquired for consideration or by way of assignment. Application to your circumstances 146. The interest held by the Remainder Beneficiaries in the Testamentary Trust was not acquired for consideration or by way of assignment and is not one that is akin to an interest in a unit trust in which a person invests. In line with the view in TD 2003/28, the Remainder Beneficiaries do not have an interest in the Testamentary Trusts of the nature or character required in paragraph 104-70(1)(a) of the ITAA 1997. 147. Therefore, CGT event E4 under section 104-70 of the ITAA 1997 will not happen when the Trustees make a payment to the Remainder Beneficiaries sourced in the Liquidator's distributions. | Detailed Reasoning - CGT Event E6 and E7: 148. Subsection 104-80(1) states that: CGT event E6 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) *disposes of a *CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's right, or part of it, to receive *ordinary income or *statutory income from the trust. 149. Subsection 104-85(1) states that: CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) *disposes of a *CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital. Application to your circumstances 150. The Trustees of the Testamentary Trusts will not dispose of any CGT assets to the Remainder Beneficiaries. Rather, The Trustees intend to distribute the cash proceeds from the Liquidator's distributions and sale of trust assets to the Remainder Beneficiaries. 151. Therefore, neither CGT event E6 under section 104-80 or CGT event E7 under section 104-85 of the ITAA 1997 will happen. | Detailed Reasoning - CGT Event E8: 152. Subsection 104-90(1) of the ITAA 1997 states: CGT event E8 happens if: (a) you are the beneficiary under a trust (except a unit trust or a trust to which Division 128 applies); and (b) you did not give any money or property to *acquire the *CGT asset that is your interest in the trust capital and you did not acquire it by assignment; and (c) you *dispose of the interest, or part of it (but not to the trustee). Note: Division 128 deals with the effect of death. Application to your circumstances 153. The Remainder Beneficiaries are not disposing of their interest, or any part of their interest, in the Testamentary Trusts. 154. Therefore, CGT Event E8 has no application. | Detailed Reasoning - Question 12: Will Division 7A of Part III of the ITAA 1936 apply to payments made by the Liquidator of the Company to the Trustees of the Testamentary Trust and the preference shareholders? | Summary: Division 7A will not apply to payments made by the Liquidator of the Company to the Trustees of the Testamentary Trust and the preference shareholders. | Detailed Reasoning - Detailed Reasoning: 155. Section 109C of Division 7A of Part III of the ITAA 1936 provides that an amount paid by a private company to a shareholder is taken to be a dividend unless one of the exceptions in sections 109J to 109R of the ITAA 1936 applies. 156. Where a distribution is made by a liquidator in the course of the winding up of a private company, section 109NA of the ITAA 1936 provides that the company is not taken to pay a dividend under section 109C of the ITAA 1936. Application to your circumstances 157. In this case, it is proposed that a liquidator will make a distribution to the shareholders of the Company in the course of the winding up the company. Therefore, section 109C of the ITAA 1936 will not apply to deem the payment to be a dividend in accordance with section 109NA. | Detailed Reasoning - Question 13: Will section 99B of the ITAA 1936 apply to any payments made by the Trustees of the Testamentary Trust to the Remainder Beneficiaries that are sourced in the Liquidator's distributions paid by the liquidator of the Company to the Trustees? | Summary: Section 99B of the ITAA 1936 will not apply to any payments made by the Trustees of the Testamentary Trust to the Remainder Beneficiaries that are sourced in the Liquidator's distributions paid by the liquidator of the Company to the Trustees. | Detailed Reasoning - Detailed Reasoning: 158. Subsection 99B(1) of the ITAA 1936 provides that where an amount, being property of a trust estate, is paid or applied for the benefit of a beneficiary during a year of income, and the beneficiary was a resident at any time during the year, that amount is included in the assessable income of the beneficiary. 159. Subsection 99B(2) of the ITAA 1936 relevantly provides that the subsection 99B(1) amount is reduced by so much (if any) of the amount, as represents: (a) corpus of the trust estate (except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer of a year of income); (b) an amount that, if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of a year of income; ... (c) an amount: (i) that is or has been included in the assessable income of the beneficiary in pursuance of section 97; or (ii) in respect of which the trustee of the trust estate is or has been assessed and liable to pay tax in pursuance of section 98, 99 or 99A; or (iii) that is reasonably attributable to a part of the net income of another trust estate in respect of which the trustee of the other trust estate is assessed and is liable to pay tax under subsection 98(4); ... 160. The reference to 'corpus of the trust estate' in paragraph 99B(2)(a) is a reference to the corpus or trust capital which is represented by the assets of a trust estate, excluding income which has not been accumulated: paragraph 19 in TD 2024/9 161. As stated in TD 2024/9 at paragraph 6: Determining whether a distribution represents an amount which is 'attributable to' amounts which would be assessed in the hands of a hypothetical resident taxpayer for the purposes of paragraph 99B(2)(a) or whether an amount 'represents' an amount that would not have been assessable if derived by the hypothetical resident taxpayer for the purposes of paragraph 99B(2)(b) involves considering how the amount became an asset of the trust. 162. Paragraph 37 of TD 2024/9 explains that If the relevant amount being tested under the hypothetical resident taxpayer tests in paragraphs 99B(2)(a) or (b) is the proceeds of realisation of a capital asset of the trustee of the trust, the acquisition of the asset by the trustee and its sale are relevant circumstances in determining whether the proceeds would be assessable to a hypothetical resident taxpayer. Application to your circumstances 163. As discussed in Question 6, Liquidator's distributions to the Trustees of the Testamentary Trusts that are sourced from share capital or from pre-CGT capital profits following the disposal of shares that were acquired prior to 20 September 1985, are capital and not deemed to be dividends under section 47 of the ITAA 1936. 164. As discussed in Question 9d, the capital gain made under CGT Event C2 on the ending of the bundle of rights comprising the pre-CGT shares in the Company held by the Trustees of the Testamentary Trust will be disregarded. CGT Event K6 is also not triggered in these circumstances. 165. To the extent that any amount of the Liquidator's distribution is assessable as a dividend under section 47(1) of the ITAA 1936, as discussed in Question 9c, the Remainder Beneficiaries will have a share of that amount included in their assessable income under section 97(1) of the ITAA 1936 as they are presently entitled to income of the Testamentary Trusts. 166. Therefore, the distributions that the Trustees are proposing to make to the Remainder Beneficiaries that are sourced in the Liquidator's distributions will not be assessable under section 99B of the ITAA 193, as the amount or parts of the amount will either be: • corpus of the trust estate attributable to amounts derived by the trust estate that, if they had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of a year of income; • amounts that, if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of a year of income; • an amount that is or has been included in the assessable income of the Remainder Beneficiary in pursuance of section 97 of the ITAA 1936. 167. Therefore, any amount included in assessable income under subsection 99B(1) of the ITAA 1936 will be reduced in full under paragraphs 99B(2)(a) or (b) or (c). | Detailed Reasoning - Question 14: Will the Commissioner apply sections 45A or 45B and 45C of the ITAA 1936 on liquidation of the Company in respect of capital payments by the liquidator to the Trustees of the Testamentary Trust and preference shareholders and in respect of any dividends paid prior to liquidation as proposed? | Summary: No, the Commissioner will not apply not sections 45A or 45B and 45C of the ITAA 1936 on liquidation of the Company in respect of capital payments made by the liquidator to the Trustees of the Testamentary Trust and preference shareholders or in respect of any dividends paid prior to the liquidation. | Detailed Reasoning - Detailed Reasoning: 168. Section 45C has the effect that if the Commissioner makes a determination under subsection 45A(2) or 45B(3) of the ITAA 1936, with respect to a capital benefit provided to a shareholder, the amount of the relevant capital benefit, or part of the benefit, is taken, for the purposes of this Act, to be an unfranked dividend that is paid by the company to the shareholder or relevant taxpayer at the time that the shareholder or relevant taxpayer is provided with the capital benefit. | Detailed Reasoning - Section 45A: 169. Section 45A of the ITAA 1936 applies where capital benefits are streamed to certain shareholders (the advantaged shareholders) who derive a greater benefit from the capital benefits than other shareholders and it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received or will receive dividends. Application to your circumstances 170. The Liquidator' distributions involve the distribution to the shareholders of the Company of their share capital and their share of the capital of the company on winding up. The share capital of the preference shareholders and the Trustees of the Testamentary Trusts will be repaid. The remainder of the capital payment is paid to the Testamentary Trusts in accordance with their entitlement as the only ordinary shareholder in the Company. That amount would be deemed dividends to the extent that the amount is not sourced in the capital gains made on the sale of pre-CGT shares. This is the outcome of section 47(1) of the ITAA 1936 which deals with the taxation of liquidation distributions. There is no streaming of capital distributions to a shareholder who will derive a greater benefit from the capital payments. The preference shareholders and those that will benefit from the estate of C are the Remainder Beneficiaries. 171. Although a capital benefit (as defined in paragraph 45A(3)(b)) of the ITAA 1936 is provided, the circumstances indicate that there was no streaming of capital benefits to some shareholders and dividends to other shareholders. Therefore, section 45A does not apply to the distributions made on liquidation of the Company. | Detailed Reasoning - Section 45B: 172. Section 45B of the ITAA 1936 applies where certain capital payments are paid to shareholders in substitution for dividends. In broad terms, section 45B applies where: (a) there is a scheme under which a person is provided with a capital benefit by a company (paragraph 45B(2)(a) of the ITAA 1936). (b) under the scheme, a taxpayer, who may or may not be the person provided with the capital benefit, obtains a tax benefit (paragraph 45B(2)(b) of the ITAA 1936), and (c) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose), of enabling a taxpayer to obtain a tax benefit (paragraph 45B(2)(c) of the ITAA 1936). Application to your circumstances 173. In this case, the conditions of paragraphs 45B(2)(a) and (b) of the ITAA 1936 are met. The Liquidation distributions will include the distribution to the shareholders of the Company of share capital and their share of the capital of the company on winding up. 174. However, the requisite purpose under paragraph 45B(2)(c) of enabling a person to obtain a tax benefit, by way of a capital distribution, is not present. 175. The life interest holders in the Testamentary Trusts have now passed away and the Remainder Beneficiaries of the Testamentary Trust have determined that it is time for the Testamentary Trust to be wound up and will call for their entitlements to capital and income of the trusts to be paid out to them. In order to affect an orderly winding up of the Testamentary Trust, the Company will be wound up and liquidation distributions will be made in accordance with the shareholders entitlements. The Remainder Beneficiaries and the preference shareholders are Australian tax residents. There is nothing to suggest that any of the people who are entering into the scheme or any part of the scheme are doing so for a purpose (whether or not the dominant purpose but not including an incidental purpose), of enabling a taxpayer to obtain a tax benefit. It is clear that the Testamentary Trusts have served their purpose as set out in the Will and the Proposed Transactions are to give effect to the orderly winding up of the entities so that the Remainder Beneficiaries can deal with their entitlements independently as they see fit. 176. Having regard to the relevant circumstances (as set out in subsection 45B(8) of the ITAA 1936), it cannot be concluded that a person entered into, or carried out, for a more than incidental purpose of enabling a shareholder to obtain a tax benefit from the provision of capital benefits. 177. Therefore, section 45B of the ITAA 1936 does not apply to the Liquidator's payments.