Private ruling: Capital gains tax (CGT) - majority underlying ownership
Date of advice: 3 March 2017
Published: August 2017
Ruling period: Income year ended 30 June 2016
Date scheme commenced: The scheme has commenced

Ruling: Q1: Does the Commissioner think it reasonable to assume, that at all times on or after 20 September 1985 there has been a continuity of majority underlying interests by ultimate owners in assets held by Trustee X as trustee for the Z Family Trust (Z trust) such that there is no application of Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) to affect the pre-CGT status of assets held by the Z trust. | A1: Yes. The Commissioner accepts that there has been no change in majority underlying interests by ultimate owners of the Z trust with respect to relevant pre-CGT assets held by the Z trust as a consequence of the amending deed on a particular date.

Relevant facts and circumstances: The Z trust was established in the 1970s. The trustee of the Z trust is Trustee X. The beneficiaries of the Z trust were the Founder's immediate family and their descendants. The deed of the Z trust was amended after 20 September 1985 which expanded the beneficiary categories. The expanded beneficiaries specifically included the Founder as a named beneficiary who was inadvertently omitted from the original deed. Prior to the amendment of the Z trust deed the distributions by Trustee X were only made to individual beneficiaries who were members of the Founder's immediate family. Since the amendment of the Z trust deed, Trustee X has continued to make distributions only to individual beneficiaries who are members of the Founder's immediate family, with the exception in a single year of a minor percentage distribution to the Founder.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 108-5(1) | Income Tax Assessment Act 1997 section 149-10 | Income Tax Assessment Act 1997 section 149-15 | Income Tax Assessment Act 1997 section 149-30

Reasons for decision: Summary: A CGT asset is defined in subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as any kind of property or a legal or equitable right that is not property. A CGT asset is a pre-CGT asset if it was last acquired before 20 September 1985 and no income tax provision has operated to treat it as having been acquired after that date. Division 149 of the ITAA 1997 contains the rules which govern when an asset acquired before 20 September 1985 is treated as having been acquired after that date. Section 149-10 of the ITAA 1997 defines what is meant by a pre-CGT asset as follows: 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 ITAA 1936; or (ii) Subdivision C of Division 20 of former Part IIIA of the ITAA 1936; 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. A CGT asset acquired before 20 September 1985 remains a pre-CGT asset if the majority underlying interests in the asset have not changed since before 20 September 1985. Where a change in majority underlying interests occurs after 19 September 1985, the CGT asset is deemed to be acquired on the date the change occurred, either under Division 20 of the Income Tax Assessment Act 1936 (ITAA 1936) (pre 1998-99 income years) or Division 149 of the ITAA 1997. Pursuant to subsection 149-30(1) of the ITAA 1997, an asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by the ultimate owners who held the majority underlying interests in the asset immediately before 20 September 1985. Pursuant to subsection 149-30(2) if the Commissioner is satisfied or thinks it reasonable to assume that, at all times on and after 20 September 1985, that the majority underlying interests in an asset were maintained by the ultimate owners who had majority underlying interests in the asset immediately before that day, then subsection 149-30(1) will not apply. Otherwise the asset is deemed to have been acquired at the time that the change in majority underlying interests in the asset happened. Subsection 149-30(2) provides scope for the Commissioner to simply be satisfied that there was continuity of majority underlying beneficial interests -even if that is not quantifiable or cannot be conclusively proved. 'Majority underlying interests' is defined in subsection 149-15(1) of the ITAA 1997 as more than 50% of: (a) the beneficial interests that the ultimate holders hold (whether directly or indirectly) in the asset; and (b) the beneficial interests that ultimate owners hold (whether directly or indirectly) in any ordinary income that may be derived from that asset. An 'ultimate owner' is defined to include an individual - refer subsection 149-15(3) of the ITAA 1997. Accordingly, it is necessary to trace the underlying beneficial interests in the relevant assets back to natural persons. The expression 'beneficial interests' as used in the definition of 'majority underlying interests' is not defined. At general law, a shareholder does not have any legal or equitable interest in the asset of a company. Similarly, beneficiaries in a discretionary trust do not have an interest, either individually or collectively, in the assets or the income of a trust. Under ordinary legal concepts, where there is a discretionary trust deed, no beneficiary is entitled to income or capital of the trust until the trustee exercises its discretion to distribute income or to make an appointment of capital. Because the beneficiary of a discretionary trust does not hold an interest in any asset of the trust or in the ordinary income derived from the asset until the trustee's discretion is exercised, it would not be possible for a discretionary trust to satisfy the continuing majority underlying interests test set out in subsection 149-30(1) 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) however provides that the Commissioner will apply an approach of looking through interposed entities to determine which natural persons hold the beneficial interests for the purposes of section 160ZZS of the ITAA 1936, which preceded Division 149 of the ITAA 1997. This is highlighted in paragraph 2 of IT2340 which states: The terms “underlying interest” and “majority underlying interests”, on the basis of which the provision operates, have the same meanings as they have in Subdivision G of Division 3 of Part III of the Act - which deals with the income tax treatment of interest in relation to “negatively geared” investments in rental property. In both cases (and like other provisions of the Act concerned with the measurement of ownership interests) underlying interests in relation to the assets concerned mean beneficial interests held by natural persons whether directly or through one or more interposed companies, partnerships or trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be “looked through” in order to determine whether there has been a change in the effective interests of natural persons in the assets. Z trust is a discretionary trust and therefore, as specified in paragraph 2 of IT 2340, it is necessary to 'look-through' the Z trust to identify its 'ultimate owners'. In these circumstances, paragraphs 5 and 6 of IT 2340 are relevant as they state: 5. In relation to what are generally referred to as discretionary trusts, i.e., family trusts, the trustees of which have discretionary powers as to the distribution of trust income or property to beneficiaries, in considering the question of whether majority underlying interests have been maintained in the assets of the trust it will be relevant to take into account the way in which the discretionary powers of the trustees are in fact exercised. 6. Where a trustee continues to administer a trust for the benefit of members of a particular family, for example, it will not bring section 160ZZS into application merely because distributions to family members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of his discretion. Prior to the amendment of the Z trust deed the distributions by Trustee X were only made to individual beneficiaries who were members of the Founder's immediate family. Since the amendment of the Z trust deed, Trustee X has continued to make distributions only to individual beneficiaries who are members of the Founder's immediate family, with the exception in a single year of a minor percentage distribution to the Founder. Therefore, in accordance with paragraph 6 of IT 2340 it is reasonable for the Commissioner to assume that the changes made to the Z trust deed after 19 September 1985 did not change the majority underlying ownership of the income or assets of the Z trust because the Z trust ultimately continued to be administered for the benefit of the Founder's family members As a result, Division 149 of the ITAA 1997 will not cause any pre-CGT asset of the Z trust to stop being a pre-CGT asset for the purposes of the ITAA 1997.