Private ruling: Transfer of pre-CGT property
Date of advice: 30 October 2017
Published: March 2018
Ruling period: Income year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will a pre-CGT (capital gains tax) asset owned by a parent company retain its pre-CGT status if the asset is transferred to a wholly owned subsidiary of the parent company? | A1: Yes

Relevant facts and circumstances: X Pty Ltd owns real property. A new company will be incorporated in the relevant income year. This new company will be a wholly owned (100%) subsidiary of X Pty Ltd. The new company will be able to distribute. X Pty Ltd will transfer the property to its new subsidiary. The property was purchased before 20 September 1985. At that time there were X shareholders of X Pty Ltd, individuals who each held 20% of the shares. There has been only one change to shareholdings since that time. There was a share buyback from one of the shareholders, and the remaining Y shareholders now each hold 25% of the shares. These shares have equal rights as to income and capital distributions from the company.

Relevant legislative provisions: Subdivision 149-A of the ITAA 1997 | Subdivision 149-B of the ITAA 1997

Reasons for decision: Summary: The property will retain its pre-CGT status on the transfer to a wholly owned subsidiary company. | Detailed Reasoning - Detailed reasoning: Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the provisions regarding when an asset stops being a pre-CGT asset. Subdivision 149-B considers assets of non-public entities. Subsection 149-30(1) of the ITAA 1997 states: The asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not held by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. Majority underlying interests is defined in section 149-15 of the ITAA 1997 as consisting 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. An ultimate owner is defined in section 149-15 of the ITAA 1997 and, relevantly for this Ruling, includes individuals. In this situation, X Pty Ltd originally had X ultimate owners, each with an interest of 20% of the company. It changed its shareholdings with a buyback of shares from one shareholder, and now has X ultimate owners, each with a 25% interest. After the share buyback, the majority of the underlying interests in the pre-CGT property continued to be maintained. This has not changed since that time. The proposal is to now transfer the property to a new company, which will be a wholly owned subsidiary of X Pty Ltd. ATO ID 2010/99 provides the Commissioner’s view on such a situation. It explains that it is possible for the ultimate owners to alter the way in which they held their pre-CGT interest in an asset without affecting the pre-CGT status of that asset. For example, a new entity being interposed between the entity that directly owns the asset and the ultimate owners, or a transfer of assets between entities wholly owned by the same head entity. As the property will be transferred to a wholly owned subsidiary of X Pty Ltd, there will be no change to the underlying interest as the ultimate owners will continue to maintain their interest in the asset. As the majority underlying interest in the property that was held immediately before 20 September 1985 has continued to be held, the property will retain its pre-CGT status on transfer into the new wholly owned subsidiary company.

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