Private ruling: Capital gains tax (CGT) - pre-cgt asset - majority underlying interests
Date of advice: 1 May 2017
Published: September 2017
Ruling period: Income year ending 30 June 20YY | Income year ending 30 June 20ZZ
Date scheme commenced: 1 July 20XX.

Ruling: Q1: Has the property you own stopped being a pre-CGT asset for the purpose of Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: You are a private company that was incorporated prior to 20 September 1985. Your shareholding consists of a specified number of ordinary shares that carry rights to income, capital, including any surplus, and voting rights on a proportionate basis. The shareholders (the original shareholders) who held various numbers of shares issued around the time you were incorporated were as follows: ● Person A; ● Person B; ● Person C; ● Person D; ● Person E; ● Person F; and ● Person G. The original shareholders are related. A number of years before 20 September 1985, you purchased a property (the Property). Events prior to 20 September 1985 Person F was a shareholder in Company XY with their former spouse being the other shareholder. Person F's shares in you were transferred to Company XY prior to 19 September 1985. Person D passed away prior to 20 September 1985, and share interests in you were transferred to Person E. As at 19 September 1985, your shareholders were as follows: ● Person A; ● Person B; ● Person C; ● Person D; ● Person E; ● Person G; and ● Company XY. Events after 20 September 1985 A number of years after 20 September 1985, Person F passed away and their shares in Company XY were left to their child. A number of years later, Person E entered into an agreement (the Agreement) with Person F's child, Company XY, and other parties to acquire the shares held in you. The shares formerly owned by Company XY were transferred to Person E in accordance with the Agreement. After a period of time, Person E passed away and in accordance with their will a trust (the Trust) was created to hold the residue of their estate, including a specified number of shares in you, to pay the income to Person G during their life. On Person G's death, the income and capital would be held for Person G's children, being Person AB, Person CD and Person EF if they survived Person E, and in the event that they hadn't survived Person E, to be held for their children. The trustees of the Trust were Person G, Person AB, Person CD and Person EF. Person E's remaining shares in you were transferred to Persons AB, CD and EF in accordance with Person E's will. Persons AB, CD and EF sold each of their shares to the trustees of the Trust. After a period, Person B passed away and their shares were transferred to Person A. During the following year, Person A transferred shares to Person C. A number of years later, Person A passed away and their shares were transferred to Person C. Your current shareholding is as follows: ● Person C; ● Person G; and ● Company XY. The property located adjacent to the Property has recently been sold for $XX,XXX,XXX. Following the sale of the adjoining property, you have received a proposal from an interested party for the sale of the Property. Contracts of sale are currently being drawn up, and a clearance certificate has been applied for.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 149 | Income Tax Assessment Act 1997 Section 149-10 | Income Tax Assessment Act 1997 Section 149-15 | Income Tax Assessment Act 1997 Section 149-30 | Income Tax Assessment Act 1936 Section 160ZZS | Income Tax Assessment Act 1936 Subdivision C of Division 20

Reasons for decision: Summary: The Commissioner is satisfied that the majority of underlying interests in the Property has not changed from just prior to 20 September 1985 to the present time, with more than 50% of your shares being held by the original shareholders at any time throughout that period. | Detailed Reasoning - Asset stops being a pre-capital gains tax asset: Division 149 of the ITAA 1997 determines when an asset acquired on or before 19 September 1985 stops being a pre-capital gains tax (CGT) asset. Section 149-10 of the ITAA 1997 states: 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 Income Tax Assessment Act 1936 (ITAA 1936); or (ii) Subdivision C of Division 20 of former Part IIIA of that Act; to have acquired the asset on or after 20 September 1985; and (c) the asset has not stopped being a pre-CGT asset of this Division. Once it is established that the asset has been acquired before 20 September 1985, it is necessary to consider if former subsection 160ZZS(1) of the ITAA 1936 would apply. This subsection deals with changes in majority ownership of an asset, between 19 September 1985 and 30 June 1998. Subdivision C of Division 20 of former Part IIIA of the ITAA 1936 applies to public entities. If it has been determined that the the entity was not taken under former subsection 160ZZS(1) of the ITAA 1936; to have acquired the asset on or after 20 September 1985, then Section 149-15 of the ITAA 1997 must be considered to determine whether the asset will continue to be a pre-CGT asset. In relation to the income years from 1999 onwards, subsection 149-15(1) of the ITAA 1997 defines “majority underlying ownership” as being 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. | Detailed Reasoning - New owner standing in for former owner: Under section 149-30 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 majority underlying interests in the asset immediately before 20 September 1985. Where shares are transferred to a person upon the death of another person, that person is taken to have held the same interests as those held by the former owner (item 2 of subsection 149-30(3) of the ITAA 1997). The new owner is taken to have an underlying interest in the asset equal to the sum of their original interest and the lesser of the acquired interest or the former owner's interest at any time when the former owner had a percentage of the underlying interests in the asset (subsection 149-30(4) of the ITAA 1997). In other words, if a person holds an interest in an asset because it was transferred to him/her by death of a person, the person is taken to have held the interests held by the former owner. Income Tax Ruling IT 2340 (IT 2340) provides guidance on the administration of former 160ZZS of the ITAA 1936. IT 2340 outlines that a change in the proportions in which majority underlying interests are held in a pre-CGT asset will not cause the land to stop being a pre-CGT asset. | Detailed Reasoning - Application to your situation: You are a private company who has a specified number of issued shares. You purchased the Property prior to 20 September 1985. As you are a private company, being a non-public entity, Subdivision C of Division 20 of former Part IIIA of the ITAA 1936 will not apply to you. However, Subdivision 149-B of the ITAA 1997 will apply. Your shareholders in the year you were incorporated (the original shareholders) were all natural persons, who are treated as having beneficial interests in your assets. They would be the ultimate owners of your assets, with the interests in the assets and income derived from the asset being represented by their shareholdings. Your original shareholders were Person A, Person B, Person C, Person D, Person E, Person F and Person G. Prior to 20 September 1985 ● Person D passed away and their shareholding was transferred to Person E; and ● Person F transferred their shares to Company XY. Just prior to 20 September 1985, with the exception of Person F's former shares, the majority of the shares were still held by the original shareholders in varying numbers. Based on this information, it is determined that more than 50% of the beneficial interests in your capital were held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985. During the period from 20 September 1985 to 30 June 1998, Person F had passed away and in the following year Person E had entered into the Agreement to acquire Person F's former shares from Company XY. The Commissioner is satisfied that at all times on or after 20 September 1985 until 30 June 1998, the majority of the underlying interests in the Property were held by the original owners in various numbers. Therefore, it is not viewed that subsection 160ZZS(1) of the ITAA 1936 would apply to deem that you had acquired the Property after 19 September 1985 . After 30 June 1998: ● Person E had passed away with some of their shares being held in the Trust formed in accordance with their will, with the remaining shares being transferred to Persons AB, CD and EF; ● Persons AB, CD and EF sold each of their shares to the Trust; ● Person B passed away and their shares were transferred to Person A; ● Person A transferred some of their shares to Person C; and ● Person A passed away and their shares were transferred to Person C. Your current shareholders are Persons C and G and Company XY. Following the deaths of Persons D, E and A, their respective shares were transferred to other original shareholders, who at any given time prior to 20 September 1985, held more than a 50% interest in you. The transfer of the shares to other original shareholders due to the deaths of some of the original shareholders did not cause any change in the majority underlying interests in the shares to happen, as those shareholders are taken to have held the same interests as those held by deceased shareholders, being the former owners (Item 2 of subsection 149-30(3) of the ITAA 1997). Based on the information and documentation provided the Commissioner is satisfied that at all times from the time the Property was purchased by you until the present time, more than 50% of the underlying interests in the Property were held by the ultimate owners who held the majority of underlying interests in the Property. Therefore, the Property has not stopped being a pre-CGT asset under section 149-30 of the ITAA 1997. Note: The Property will continue to be viewed as a pre-CGT asset in accordance with section 149-10 of the ITAA 1997 while more than 50% of the majority of the underlying ownership interests continues to be held by the ultimate owners.