Private ruling: Division 149 – pre CGT asset
Date of advice: 12 February 2019
Published: May 2019
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the transfer of shares in an estate to the spouse of the deceased and a further transfer of those shares via the spouse’s estate to their relatives, trigger Division 149 of the Income Tax Assessment Act 1997 ( ITAA 1997)? | A1: No | Q2: Will the addition of the new classes of shareholders holding post-capital gains tax (CGT) ‘Group 3’, and ‘Group 4’ redeemable preference shares trigger Division 149 of the ITAA 1997? | A2: No

Relevant facts and circumstances: Company A was incorporated. Company A is a private company. Prior to 19 September 1985 Person A owned X ‘A’ Class shares, X preference shares and X original shares in Company A. Prior to 19 September 1985 the original shares were converted to ‘Group 1’ Redeemable Preference Share that was allotted to Person C and ‘Group 2’ Redeemable Preference Share that was allotted to Person D. Person A passed away prior to 19 September 1985 and their X ‘A’ class shares and X preference shares in Company A were transferred to Person B via their estate. Person B passed away post 20 September 1985. Person B’s estate was to be divided between Person C and Person D. On Administration of Person B’s estate All preference shares were converted to ‘A’ class shares All ‘A’ class shares were transferred to Person C and Person D in equal proportions. The share Group 1 share was redeemed and in its place a Group 3 and Group 4 share was issued to Company B. Person C and their spouse were sole shareholders of Company B. Person C’s spouse passed away. Company A’s constitution does not provide any details on the rights of different classes of equity. Person C and Person D agreed the company would pay dividends and capital equally between Person D and Company B. Dividends have been paid monthly equally to Person C and Person D / Company B. That is at all times 50% of the dividend has gone to Person C and some portion of the dividend has gone to Person D. The Property was sold in the year ended 30 June 2018.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 149 | Income Tax Assessment Act 1997 Subsection 149-15(1) | Income Tax Assessment Act 1997 Subsection 149-30(1) | Income Tax Assessment Act 1997 Subsection 149-30(1A) | Income Tax Assessment Act 1997 Subsection 149-30(2) | Income Tax Assessment Act 1997 Subsection 149-30(3) | Income Tax Assessment Act 1997 Subsection 149-30(4)

Reasons for decision: Summary: The transfer of shares from Person A via their estate to Person B and a further transfer of those shares via their estate to Person C and D will not trigger Division 149 of the ITAA 1997 as pre-CGT interests held by the deceased retain their pre-CGT status when transferred as a result of the death of the deceased. The addition of the new classes of shareholders holding post-CGT ‘Group 3’ and ‘Group 4’ shares will not trigger Division 149 of the ITAA 1997 as the new shareholders have not received more than 50% of any dividend income since their inception. In addition they do not hold more than 50% of the beneficial interest in the assets of the company. | Detailed Reasoning - Majority underlying interest: Subsections 149-30(1) and 149-30(1A) of the Income Tax Assessment Act 1997 (ITAA 1997) provide that an asset stops being a pre-capital gains tax (CGT) asset at the earliest time when majority underlying interests in the asset were not held by the ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. This applies to the asset as if the entity had acquired the asset at the earliest date when majority underlying interest changed. Majority underlying interests is defined in subsection 149-15(1) of the ITAA 1997 as more than 50% of: (a) the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset and (b) the beneficial interests that ultimate owners have (whether directly or indirectly) in any income that may be derived from the asset. Accordingly, ultimate owners who held majority underlying interests in an asset just before 20 September 1985 must retain such interests after that date, otherwise Division 149 of the ITAA 1997 will be triggered to convert the asset into a post-CGT asset. In these cases, the asset is deemed to have a new date of acquisition (the date the majority underlying interest changed). Section 149-35 of the ITAA 1997 provides that the deemed first element acquisition costs for the purposes of determining the cost base (and reduced cost base), will be the market value of the asset at the time of change. Subsection 149-30(2) of the ITAA 1997 provides that: 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. That is, subsection 149-30(2) of the ITAA 1997 provides scope for the Commissioner to simply be satisfied that there was continuity of majority underlying beneficial interests. Subsections 149-30(3) and 149-30(4) of the ITAA 1997 provide that, if an ultimate owner (new owner) has acquired an interest in an asset because it was transferred to the new owner by way of a marriage breakdown rollover or because of the death of a person (former owner), the 'new owner' is treated as having held the underlying interest of the 'former owner' for the period the 'former owner' held them. On the death of Person A their shareholdings passed to Person B. Under subsections 149-30(3) and 149-30(4) of the ITAA 1997, Person B is taken to have held the underlying interests held by Person A for the period Person A held the shares. Accordingly, the shares transferred from Person A to Person B retain their pre-CGT status. On the death of Person B their shareholdings pass to their estate with Person C and Person D, receiving equal shares. According to subsections 149-30(3) and 149-30(4) of the ITAA 1997, the shares will retain their pre-CGT status. As at 19 September 1985, the underlying interests in the company were held by:- ● Person A ● Person C and ● Person D. At this date, Person 1 held 99.9% of the shares and consequently the majority underlying interests. Post 20 September 1985 and up until the death of Person B, the underlying interests in the company were held by; Person B Person C and Person D. At this dates they held 100% of the issued shares of the company between them and consequently the same individuals continue to hold the majority underlying interests in the company. After the death of Person B, the ‘Group 1’ share was redeemed and the a new ‘Group 3’ share, and ‘Group 4’ share was issued to Company B Company B is a private company fully owned by Person C and their spouse. The issue of new classes of shares to Company B (post-CGT shareholders,) introduced new shareholders to the company in whose favour a distribution of income could be made. Due to the discretionary right to dividends which all the shares carry, the company can distribute the dividends to these new shareholders to the exclusion of the other shareholders (the pre-CGT shareholders). This means that the company could pay 100% of any dividends to the post-CGT shareholders. Accordingly, the possibility exists that the ultimate owners (pre-CGT shareholders) who between them collectively had majority underlying interests in the asset immediately before 20 September 1985 may receive less than 50% of the ordinary income that may be derived by the company from the asset. However, the dividend distribution policy was that the company would pay dividends and capital between Person D and Company B, and this was indeed followed. That is, at all times, during that period, 50% of the dividend has gone to Person D and some portion of the dividend has gone to Person C. In addition, Person C and Person D both own equal ‘A’ class shares. Based on this information, the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985, the majority underlying interests in the asset were had by ultimate owners who had majority underlying interests in the asset immediately before that day. Accordingly, Division 149 of the ITAA 1997 will not be triggered by any of the events discussed above.