Private ruling: Capital gains tax
Published: May 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Will assets acquired prior to 20 September 1985 remain pre-CGT assets if there is a transfer of shares to an existing shareholder (proposal 1)? | A1: No | Q2: Will assets acquired prior to 20 September 1985 remain pre-CGT assets if there is a transfer of shares to a new shareholder (proposal 2)? | A2: No

Relevant facts and circumstances: The company was incorporated in prior to 1985. Prior to 1985 the company purchased a commercial property. Prior to 1985 the company purchased a second commercial property. The shareholding on incorporation was as follows: · X - 33.33% · Y - 33.33% · Z - 33.33% Prior to 1985, further shares were issued. The share allocation subsequent to the issue was as follows: · X - 0.02% · Y - 49.99% · Z - 49.99% After 1985, X transferred their remaining shares to Z, this changed the share allocation to: · Y - 49.99% · Z - 50.01% Y wishes to sell their shares either in the 2011-12 income year or the 2012-13 income year. The company is considering two alternative acquisition proposals regarding Y's shares. Proposal 1 - Z will acquire all of Y's shares. The share allocation under this proposal will be: · Z - 100.00% Proposal 2 - A new shareholder will acquire all of Y's shares. The share allocation under this proposal will be: · Z - 50.01% · New shareholder - 49.99%

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 149 | Income Tax Assessment Act 1997 Subsection 149-30(1)

Reasons for decision: Summary: Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines the rules which govern when an asset acquired by a taxpayer before 20 September 1985 is treated as being acquired after that date for capital gains tax (CGT) purposes. Under subsection 149-30(1) of the ITAA 1997, a pre-CGT asset of a non-public entity stops being a pre-CGT asset at the earliest time when the majority underlying interest in the asset were not had by the ultimate owners who had the majority underlying interests in the asset immediately before 20 September 1985. Subsection 149-15(1) of the ITAA 1997 provides that majority underlying interests in a CGT asset consists of: · more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and · more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset. | Detailed Reasoning - Proposal 1: Under the first proposal, Z would acquire 100% of the company's shares. In this case, Z would be the only person to have held shares both immediately before 20 September 1985 and after the change. Immediately before 20 September 1985, Z only held a 49.99% shareholding in the company and therefore did not have a majority underlying interest in the pre-CGT assets at this time. Accordingly, under proposal 1, the majority underlying interests will have changed since 20 September 1985 and any properties that were acquired prior to 20 September 1985 will not retain their pre-CGT status. | Detailed Reasoning - Proposal 2: Under the second proposal, a new shareholder will acquire 49.99% of the company's shares and Z will retain his shareholdings of 50.01%. Again in this case, Z would be the only person to have held shares both immediately before 20 September 1985 and after the change. Immediately before 20 September 1985, Z only held a 49.99% shareholding in the company and therefore did not have a majority underlying interest in the pre-CGT assets at this time. Accordingly, under proposal 2, the majority underlying interests will have changed since 20 September 1985 and any properties that were acquired prior to 20 September 1985 will not retain their pre-CGT status. Taxation Ruling IT 2530 states that a change in the proportions in which natural persons hold an interest in an asset will not affect the pre-CGT status of an asset. However in this case, immediately before 20 September 1985, it was Y and Z that held the majority underlying interests; Z alone could not hold the majority underlying interest as their shareholdings represented less than 50%. Under both of the proposals, Y will no longer hold any shares in the company. Therefore, the proposed changes represent more than a mere change in the proportions of the interests between the two shareholders.

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