Private ruling: Capital gains tax (CGT): majority underlying interests in pre-cgt assets
Date of advice: 2 March 2020
Published: April 2020
Ruling period: Income year ended 30 June 201x
Date scheme commenced: Pre 20 September 1985

Ruling: Q1: For the purposes of subsection 149-60(1) of the Income Tax Assessment Act 1997 (ITAA 1997), on the basis of the evidence provided, is the Commissioner satisfied that, or does the Commissioner think it reasonable to assume that, at the end of the test day, majority underlying interests in the pre-CGT assets of the taxpayer were had by ultimate owners who also had majority underlying interests in the assets at the end of the starting day? | A1: Yes

Relevant facts and circumstances: The taxpayer is a public entity that owns CGT assets acquired before 20 September 1986 ("the pre-CGT assets"). The taxpayer has chosen 19 September 1985 as the starting day for the purpose of subsection 149-60(1) of the ITAA 1997. Majority underlying interests in the pre-CGT assets at the end of previous test days were held by ultimate owners who also had majority underlying interest in the assets at the end of the starting day. There has been no change in relation to the taxpayer's business structure since the most recent prior test day. The shareholders that had majority underlying interests in the pre-CGT assets at the end of the starting day and at the end of previous test days were: · Shareholder A · Shareholder B · Shareholder C Shareholding of shareholder A A particular shareholding interest in the taxpayer is held directly by individual shareholder A. Shareholding of shareholder B as the trustee for the trust A particular shareholding interest in the taxpayer is held indirectly by shareholder B in the capacity of trustee for a trust. The trust has always been administered by the trustee for the benefit of the family members (defined beneficiaries). The terms of the trust have not changed since the most recent prior test day. Shareholding of shareholder C including the superannuation fund A particular shareholding interest in the taxpayer was held directly an individual shareholder C prior to the transfer of that interest to the superannuation fund. A particular shareholding interest in the taxpayer since then has been and is held indirectly by the superannuation fund for the sole benefit of shareholder C as the funds only member. There has been no change in the superannuation fund since the last test day.

Relevant legislative provisions: Income Tax Assessment Act 1997 subdivision 149-A | Income Tax Assessment Act 1997 subsection 149-15(1) | Income Tax Assessment Act 1997 subsection 149-15(2) | Income Tax Assessment Act 1997 subsection 149-15(3) | Income Tax Assessment Act 1997 subsection 149-15(4) | Income Tax Assessment Act 1997 subsection 149-15(5) | Income Tax Assessment Act 1997 subdivision 149-C | Income Tax Assessment Act 1997 subsection 149-50(1) | Income Tax Assessment Act 1997 subsection 149-55(1) | Income Tax Assessment Act 1997 subsection 149-55(2) | Income Tax Assessment Act 1997 subsection 149-60(1) | Income Tax Assessment Act 1997 subsection 149-60(2) | Income Tax Assessment Act 1997 subsection 149-70(1) Question | Summary | The Commissioner is satisfied on the evidence provided that at the end of the test day, majority underlying interests in the pre-CGT assets of the taxpayer were had by ultimate owners who also had majority underlying interests in the assets at the end of the starting day 19 September 1985. | As the condition in subsection 149-60(1) of the ITAA 1997 is complied with, the pre-CGT assets of the taxpayer have maintained their pre-CGT status at the end of the test day. | Detailed reasoning | Subdivision 149-C of theITAA 1997 deals with when a CGT asset of a public entity stops being a pre-CGT asset. That subdivision applies to the taxpayer as it is an entity of the kind listed at subsection 149-50(1) of the ITAA 1997. | Within six months after each test day, an entity to which subdivision 149-C applies must give the Commissioner written evidence about the majority underlying interests in the CGT asset at the end of that day, in a form that makes the information about those interests readily apparent (subsections 149-55(1) and (1A) of the ITAA 1997). | On the basis solely of the evidence given to the Commissioner under subsection 149-55(1) of the ITAA 1997, the Commissioner must be satisfied that, or think it reasonable to assume that, at the end of the test day, majority underlying interests in the asset were had by ultimate owners who also had majority underlying interests in the asset at the end of the starting day (subsection 149-60(1) of the ITAA 1997). | An asset stops being a pre-CGT asset if the condition in subsection 149-60(1) of the ITAA 1997 is not satisfied (subsection 149-70(1) of the ITAA 1997). | Public entities should not assume the Commissioner would be satisfied, or think it reasonable to assume, that continuity of majority underlying interests has been maintained in their particular case, but should apply for a private ruling (see Taxation Ruling TR 2004/7 Income tax: capital gains: application of Division 149 of the Income Tax Assessment Act 1997 and Division 20 of Part IIIA of the Income Tax Assessment Act 1936 to public entities ("TR 2004/7"), at paragraph 4). Generally, a public entity's starting day is 19 September 1985, or a day chosen by the entity within the period 1 July 1985 to 30 June 1986 (subsections 149-60(1) and (2) of the ITAA 1997). | Generally, each of the following is a test day for the purposes of subdivision 149-C of the ITAA 1997: | · 30 June 1999 | · a day that is 5 years after that date; and | · a day on which there is abnormal trading of shares in the company (subsection 149-55(2) of the ITAA 1997). | The following terms are integral in the operation of Division 149 of the ITAA 1997: | · majority underlying interests | · underlying interest | · ultimate owner | · indirectly has a beneficial interest in a CGT asset of another entity | · indirectly has a beneficial interest in ordinary income that may be derived from a CGT asset of another entity | The 'majority underlying interests' in a CGT asset consist of more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset and in any ordinary income that may be derived from the asset (subsection 149-15(1) of the ITAA 1997). | 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 (subsection 149-15(2) of the ITAA 1997). | An 'ultimate owner' relevantly includes an individual and a company whose constitution prevents it from making any distribution, whether in money, property or otherwise, to its members (subsection 149-15(3) of the ITAA 1997). | 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 if the other entity were to distribute any of its capital and the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner (subsection 149-15(4) of the ITAA 1997). | 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 the other entity were to pay a dividend, or otherwise distribute that income and the dividend or income were then successively paid or distributed by each entity interposed between the other entity and the ultimate owner (subsection 149-15(5) of the ITAA 1997). | Application to the taxpayer | The taxpayer is a public entity that has CGT assets which were acquired before 20 September 1985. | For the assets to continue being pre-CGT assets the taxpayer must give the Commissioner written evidence to satisfy the Commissioner, or from which the Commissioner thinks it reasonable to assume, that at the end of the test day, majority underlying interests in the assets have been maintained by ultimate owners who also had majority underlying interests in the assets at the end of the starting day 19 September 1985. | The taxpayer provided the written evidence demonstrating the continuity of majority underlying beneficial interests to the Commissioner within six months after the test day, satisfying subsection 149-55(1) of the ITAA 1997. | The evidence confirms that there are three major shareholders (shareholder A, shareholder B, and shareholder C including the Superannuation Fund) who together have held more than 50% of the underlying beneficial interests in the taxpayer (and hence have had corresponding beneficial interests in the taxpayer's pre-CGT assets and in any income that may be derived from the assets) from the starting day 19 September 1985 to the end of the test day. | The condition in subsection 149-60(1) of the ITAA 1997 requires considering whether each major shareholder above is an 'ultimate owner' for the purposes of Division 149 of the ITAA 1997. | Shareholder A | Shareholder A is an individual and hence is an ultimate owner (paragraph 149-15(3)(a) of the ITAA 1997). | Shareholder B as the trustee for the trust | Shareholder B has held the taxpayer's shares in its capacity as the trustee of the trust and therefore is not an ultimate owner as specified in subsection 149-15(3) of the ITAA 1997. | Taxation Ruling IT 2340 Income Tax: Capital Gains: Deemed Acquisition of Assets by a Taxpayer After 19 September 1985 Where a Change Occurs in the Underlying Ownership of Assets Acquired by the Taxpayer On or Before that Date ("IT 2340") adopts an approach of 'looking through' interposed entities to determine which ultimate owners hold beneficial interests for the purposes of former section 160ZZS of the ITAA 1936, which preceded Division 149 of the ITAA 1997. In considering whether majority underlying interests in a pre-CGT asset have been maintained, it is relevant to take into account the way in which the powers of the trustee are exercised (IT 2340, at paragraph 5). If a trustee continues to administer a trust for the benefit of family members, section 160ZZS of the ITAA 1936 does not apply (IT 2340, at paragraph 6). | In this case, the trust has the main source of its income from investment activities. Distributions of capital or income made by the taxpayer at any time since the starting day to the trust were received by shareholder B as the trustee with powers to make distributions of trust income and capital to beneficiaries pursuant to the terms of the Trust Deed. | The trust has, at all times since the starting day, been administered by the trustee for the benefit of the family members who were beneficiaries of the trust at the end of the test day. There have been no changes in the terms of the Trust Deed and the terms defining the identity and rights of the beneficiaries since the end of the starting day 19 September 1985. | As individuals, the defined beneficiaries (family members and shareholder A) can be ultimate owners pursuant to paragraph 149-15(3)(a) of the ITAA 1997. They indirectly have beneficial interests in the pre-CGT assets of the taxpayer as they receive for their own benefit any capital/income distributions made by the trust. | Having regard to these factors, it is reasonable for the Commissioner to accept that, for practical purposes, the underlying interests had by shareholder B in the taxpayer, and hence in its CGT assets, are still had by ultimate owners who indirectly have a beneficial interest in the assets. | Accordingly, the underlying beneficial interests in capital and ordinary income that may be derived from the pre-CGT assets through the interposed entity (the trust) have been had indirectly by the same ultimate owners (defined beneficiaries) at the end of the test day (subsections 149-15(4) and 149-15(5) of the ITAA 1997). | Shareholder C and the Superannuation Fund | Shareholder C, as an individual, is an ultimate owner under paragraph 149-15(3)(a) of the ITAA 1997 for the period prior to the transfer of beneficial interest in the taxpayer to the Superannuation Fund. | However the Superannuation Fund is not an entity of a kind that is an ultimate owner (subsection 149-15(3) of the ITAA 1997). It is therefore necessary to identify the ultimate owner who indirectly has a beneficial interest in a capital or income of the pre-CGT assets of the taxpayer. | Following the transfer, shareholder C has been the sole member of the Superannuation Fund at all relevant times. Furthermore, there has been no change in relation to the Superannuation Fund. | Having regard to these factors, it is reasonable for the Commissioner to accept that, for practical purposes, the underlying interests had by shareholder C including the superannuation fund in the taxpayer, and hence in its CGT assets, are still had by ultimate owners who indirectly have a beneficial interest in the assets. | Accordingly, the underlying beneficial interests in capital and income that may be derived from the CGT assets through the interposed entity (the superannuation fund) have been had indirectly by the same ultimate owner (shareholder C) at the end of the test day (subsections 149-15(4) and 149-15(5) of the ITAA 1997). | Majority underlying interests | Based on the evidence, the total of the beneficial interests in the taxpayer which were held directly/indirectly by shareholder A, shareholder B and shareholder C including the Superannuation Fund constitute majority (more than 50%) underlying interests in the CGT assets of the taxpayer for the purposes of the subsection 149-15(1) of the ITAA 1997, being: | · more than 50% at the end of the starting day, and | · more than 50% at the end of the test day. | Conclusion | On the evidence provided, the Commissioner is satisfied that, at the end of the test day, majority underlying interests in the CGT assets of the taxpayer were had by ultimate owners who also had majority underlying interests in the assets at the end of the starting day 19 September 1985. | Therefore, the condition in subsection 149-60(1) has been complied with. | Accordingly, the pre-CGT status of the CGT assets of the taxpayer has been maintained at the end of the test day.