Senate

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Capital gains tax - majority underlying interests in assets

Overview

6.1 Schedule 4 of the Bill will amend the Income Tax Assessment Act 1936 (the Act) to change the way certain public entities determine whether assets acquired on or before 19 September 1985 will become subject to the capital gains tax (CGT) rules because of a change in the majority underlying interests in those assets.

Summary of the amendments

Purpose of the amendments

6.2 The amendments contained in Schedule 4 of the Bill (the amendments) will amend the Act to require public entities (public companies, publicly traded unit trusts and mutual insurance organisations) to periodically test on prescribed dates whether there has been a change in a majority of underlying interests in assets of the entity since 19September 1985. The amendments will:

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require public entities to make a determination on 20 January 1997 and at 5 year intervals showing whether the majority underlying interests in the assets owned by the public entity have changed since 19 September 1985;

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require public entities to test for changes in the majority underlying interest in their assets when there is abnormal trading in instruments of ownership;

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provide clear legislative consequences if there has been a change in majority underlying interest and if the test is not conducted as required;

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where a change in ownership has been found, require entities to determine the cost base for CGT purposes of affected assets on the basis of market value at the date the test was required; and

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provide streamlined rules for testing whether there has been a change in majority underlying interests.

6.3 The new tests for changes in majority underlying interests will differ from the current test under section 160ZZS in two significant aspects.

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First, testing for changes in majority underlying interests in the assets of the public entity will be periodic rather than at all times after 19 September 1985.

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Secondly, when a public company or publicly listed unit trust is required to determine whether there has been a change in majority underlying interests in its assets the following rules may be applied by the public company or publicly listed unit trust:

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all registered shareholdings or unitholdings in the public company or publicly listed unit trust that are less than 1% will be taken to be owned by a notional holder who is a natural person;

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direct and indirect holdings of a complying superannuation fund, complying approved deposit fund, foreign superannuation funds, certain companies and government bodies may in certain circumstances be treated as if they were natural persons who held all the interests of the fund, company or government body in its own right.

6.4 This means that, for certain categories of shareholders or unitholders, a public company or publicly listed unit trust may choose not to identify the actual individuals who hold the underlying interests in its assets. Rather, the notional holder, fund, company or government body may be taken to hold those interests as a natural person.

Date of effect

6.5 The amendments will take effect from 20 January 1997 and apply for the 1996-97 year of income and subsequent years of income. The amendments will only apply to assets disposed of by public entities on or after 20 January 1997.

Background to the legislation

6.6 The CGT provisions of the Act generally only apply to assets acquired by a taxpayer on or after 20 September 1985. Section 160ZZS of the Act provides that an asset acquired by a taxpayer before 20 September 1985 will be deemed to have been acquired on or after that date unless the Commissioner of Taxation is satisfied or considers it reasonable to assume that there has been continuity of majority underlying interests in the asset.

6.7 The term majority underlying interests refers to more than one-half of the beneficial interests held by natural persons in the asset and income from the asset, regardless of how those interests are held. [Item 2 - new subsection 160ZZRR(1)]

6.8 Section 160ZZS currently requires taxpayers (including public entities) to determine whether the majority underlying interests in its assets has changed and, if so, the date on which that change occurred in order to determine the time when the pre-CGT assets became post-CGT. They must then value the affected assets as at the date of the change.

6.9 Under the current law, public entities (public companies, publicly traded unit trusts and mutual insurance organisations) can face considerable difficulties determining whether there has been a change in the underlying interests in the assets of the public entity. This is particularly the case where the public entity has large numbers of shareholders or unit holders where shares or units are constantly being traded.

Explanation of the amendment

6.10 The amendments will restructure Division 20 of Part IIIA of the Act to provide clear provisions to deal with public entities and non public entities. Section 160ZZS has been moved into new Subdivision B which is one of seven new Subdivisions in Division 20. Subdivision B will generally deal with non public entities only. Division A defines terms which are used by both public and non public entities. All of the remaining subdivisions in Division 20 apply only to public entities. [Items 2 and 7]

6.11 The seven new Subdivisions of Division 20 are:

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Subdivision A - Preliminary;

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Subdivision B - Provisions applying to taxpayers other than public entities;

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Subdivision C - Provisions applying to public entities;

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Subdivision D - Abnormal trading;

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Subdivision E - How holdings of shares or units of less than 1% in certain public entities may be treated;

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Subdivision F - How interposed superannuation funds, approved deposit funds , special companies and government bodies may be treated; and

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Subdivision G - Determination of underlying interests if mutual insurance organisation with more than 50 members ceases to be such an organisation but continues to be a public entity.

Section 160ZZS

6.12 The amendments remove public entities from the application of section 160ZZS and create a new Subdivision C in Division 20 which applies to public entities [item 7 - new Subdivision C] . However, if Subdivision C does not apply to the public entity, then the entity is still subject to section 160ZZS [item 3 - new subsection 160ZZS(1AA)] .

6.13 The amendments do not affect the way the current rules in section 160ZZS apply to non-public entities. As part of the reorganisation of the Division, however, a number of current provisions have been repealed and replaced by new provisions.

6.14 Subsections 160ZZS (2), (2A) and (3) have been repealed by the amendments. Equivalent provisions, however, are now found in new Subdivision A, and will apply to both public entities as well as non-public entities. [Items 2, 4, 5 and 6 - new subsections 160ZZRR(1) and (4) and new section 160ZZRU]

Minor changes in terms used

6.15 As part of the reorganisation of Division 20, the term 'body politic' has been replaced by the term 'government body'. This change is intended to remove any doubt as to the meaning of 'body politic'. [Item 2 - new subsections 160ZZRR(1) and (4)]

Section 160ZZT

6.16 160ZZT has been moved to new Division 20A of Part IIIA of the Act titled 'Special provisions relating to disposals of certain pre-20 September 1985 assets'. This change does not affect, in any way, the operation of the section. [Item 8]

New testing rule for public entities

Key definitions used in this part of the explanation

6.17 The term 'public entity' means:

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a public company; or

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a mutual insurance organisation; or

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a publicly traded unit trust. [Item 2, 'public entity' - new subsection 160ZZRR(1)]

6.18 The term 'public company' means:

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a listed public company; or

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a company (other than a listed public company) all the shares in which are beneficially owned by any one or more of the following:

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listed public companies;

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a mutual insurance organisations;

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a publicly traded unit trusts; or

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a 100% subsidiary of such a company. [Item 2, 'public company' - new subsection 160ZZRR(1)]

6.19 The term '100% subsidiary' means:

6.20 A company (the company) will be a 100% subsidiary of another company (the holding company) where the company is directly or indirectly owned by the holding company.

6.21 The company will be directly owned by the holding company if all the shares in the company are beneficially owned by the holding company (eg. all the shares in the company are owned by ABC).

6.22 The company will be indirectly owned by the holding company if:

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all the shares in the company are beneficially owned by one or more 100% subsidiaries of the holding company (eg. all the shares in the company are owned by a company which is wholly owned by ABC); or

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all the shares in the company are beneficially owned by the holding company and one or more 100% subsidiaries of the holding company (eg. half of the shares in the company are owned by ABC and the other half by a company which is a 100% subsidiary of ABC).

6.23 A company will not be a 100% subsidiary of a holding company if a person is in a position to affect rights (now or in the future) in relation to the holding company or the 100% subsidiary. [Item 2, - new subsection 160ZZRRA, Item 2, - new section 160ZZRRB]

6.24 The term 'mutual insurance organisation' means:

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a mutual insurance company within the meaning of section 121AB of the Act; or

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a mutual affiliate company within the meaning of section 121AC of the Act. [Item 2, 'mutual insurance organisation' - new subsection 160ZZRR(1)]

6.25 The term 'publicly traded unit trust' means a unit trust the units in which:

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are listed for quotation in the official list of an approved stock exchange; or

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are ordinarily available for subscription or purchase by the public. [Item 2, 'publicly traded unit trust' - new subsection 160ZZRR(1)]

New testing rules

6.26 The new rules proposed by these amendments will require public entities to test for changes in the majority underlying interests in assets held by natural persons between the 'base time' and the 'test time'. Both of these terms are discussed in detail below. [item 2, 'base time' - new subsection 160ZZRR(1), 'test time' - new subsection 160ZZRR(1) & subsection 160ZZRR(3)] .

6.27 The new testing rules in new Subdivisions E and F are designed to assist public companies and publicly traded unit trusts complete their tests for underlying interests by allowing them to treat certain interposed entities who hold interests in their assets as natural persons, without the need to determine the actual identity of the individuals holding the interests through that entity. The rules in Subdivision G may be used by all public entities required to test for changes in majority underlying interests in their assets.

6.28 The new testing rules only apply to public entities. [Item 7 - new subsection 160ZZSA(1) in new Subdivision C]

What is a public entity

6.29 The new testing rules will only apply to 'public entities' as defined in new subsection 160ZZRR(1) [item 2 - 'public entity' - new subsection 160ZZRR] . Non public entities will remain subject to the current law.

6.30 A public entity is public company, a mutual insurance organisation or a publicly traded unit trust. Each of these terms is specifically defined in the amendments. [Item 2 - 'public company' 'mutual insurance organisation' 'publicly traded unit trust' new subsection 160ZZRR]

When will the new rules apply to a public entity?

6.31 The new testing rules will only apply to a public entity in relation to an asset if, at the test time:

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the asset was acquired on or before 19 September 1985;

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the public entity was the owner of the asset at the test time; and

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the asset has not been taken under subsection 160ZZS(1) or new Subdivision C to have been acquired by the entity after 19 September 1985. [Item 7 - new subsection 160ZZSA(1)]

6.32 A public entity will not be required to test whether there has been a change in the underlying interests in assets which have been disposed of prior to 20 January 1997.

Application to new public entities

6.33 If an entity becomes a public entity after 20 January 1997 - it will be required to test for changes in underlying interests in any assets it acquired on or before 19 September 1985 which it owns at the test time, unless the asset or assets have already been taken to have been acquired after 19September 1985 because of an earlier application of subsection 160ZZS(1) prior to becoming a public entity. [Item 7 - new subsection 160ZZSA(1)]

No need to test after change in majority underlying interest

6.34 A public entity does not have to make any further determinations under these amendments after there has been a change in underlying interest in all of its assets acquired on or before 19 September 1985. [Item7 - new subsection 160ZZSA(1)]

When must public entities test for changes in majority underlying interests?

The first test

6.35 Public entities are required to test for changes in majority underlying interests in their assets as at the last moment of 20 January1997. [Item 2, 'test time' - new subsection 160ZZRR(1) & (3); item 7 - new subsection 160ZZSA(2)]

5 yearly tests

6.36 Subsequent tests must be done on the last moment of a day that is 5 years (or multiples of that time) after 20 January 1997. [Item 2, 'test time' - new subsection 160ZZRR(1) & (3); item 7 - new subsection 160ZZSA(2)]

6.37 If the date so calculated is a Saturday, Sunday or public or bank holiday in the place where the records of ownership are kept, the test must be completed as at the last moment of the next day which is a business day. [Item 2, 'business day', 'test time' - new subsection 160ZZRR(1); new subsection 160ZZRR(3)]

Abnormal trading

6.38 If the public entity is a public company or a publicly traded unit trust it will also be required to test for changes in majority underlying interests if after 20 January 1997 there is an abnormal trade in the shares or units of the trust [item 2, 'test time' - new subsection 160ZZRR(1) & (3); item 7 - new subsection 160ZZSA(2)] . What constitutes an abnormal trade is discussed below.

6.39 In addition, a company which is a public company, or a 100% subsidiary of a public company all the shares of which are beneficially owned by a listed public company or publicly listed trust will be required to test for changes in the underlying interests in its assets if there is an abnormal trade in the shares of the listed public company or the publicly traded unit trust.

6.40 For the purposes of these amendments, the last moment of a day is based on the last moment of the day using legal time in the place where the public entities records of ownership are kept. [Item 2, 'test time' - new subsections 160ZZRR(1) & (3) ]

How does a public entity test whether changes have occurred in the majority underlying interests of pre-CGT assets of the entity ?

Key definitions used in this part of the explanation

6.41 The term 'majority underlying interests' means more than one-half of:

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the beneficial interests held by natural persons in the asset; and

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the beneficial interests held by natural persons in any income that may be derived from the asset;

regardless of whether those interests are held directly or through one or more interposed companies, partnerships or trusts. [Item 2, 'majority underlying interests' - new subsection 160ZZRR(1)]

6.42 The term 'base time' means the last moment of any day chosen by the public entity in the period from 1 July 1985 to 30 June 1986 (inclusive) that gives a reasonable approximation of ownership as at the last moment of 19September 1985. If no day is chosen, public entities must use the last moment of 19 September 1985 as their base time. [Item2, 'base time' - new subsection 160ZZRR(1) & (3)]

Determination as to change in majority underlying interests

6.43 Public entities are required to determine, by an examination of their records, whether majority underlying interests in a pre-CGT asset at the test time were held by natural persons who held majority underlying interests in the asset at the base time. [Item 7 - new subsection 160ZZSA(2)]

6.44 There are special tracing rules explained later which assist public entities determine whether changes have occurred in the majority underlying interests in the assets of the entity, particularly where there are one or more other entities interposed between the public entity and the ultimate beneficial owner of the underlying interests in the public entity. [Item 7 - new Subdivisions E, F & G]

Interests whose holders cannot be identified

6.45 If, at the base time, the public entity cannot identify the natural persons who hold underlying interests in an asset, those interests will be taken to be held by different natural persons at the test time for the purposes of making a determination. [Item 7 - new subsection 160ZZSA(3)]

Testing must be completed within a certain period after the test time

6.46 The public entity must, unless the Commissioner extends the period, make its determination as to whether there has been a change in majority underlying assets within the longer of the following periods: [item 7 - new subsection 160ZZSA(2); and item 2, 'prescribed period' - new subsection 160ZZRR(1)] :

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6 months beginning from the day after the test time; or

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3 months beginning from the day after the day on which this Act receives the Royal Assent.

What are the consequences of not testing as required ?

6.47 Public entities will be required to test for changes in majority underlying interests in the pre-CGT assets of the entity at 20 January 1997, at 5 yearly intervals (eg. 20 January 2002) after that date and at each abnormal trade. Public entities have been given a 6 month period after such dates in order to complete the test. In certain circumstances, this 6 month period is or may be extended. [Item 7 - new subsection 160ZZSA(2) and item 2, 'test time' and 'prescribed period - new subsection 160ZZRR(1)]

6.48 If a public entity fails to test in respect of 20 January 1997 by the end of the 6 month period, all pre-CGT assets of the entity will be taken to have been acquired by the entity on 20 September 1985 [item 7 - new subsection 160ZZSB(2)] . If a public entity fails to test in respect of any subsequent test time by the end of the 6 month period, each pre-CGT asset of the entity will be taken to have been acquired by the entity on the last test time that the entity passed the test in respect of the asset. For example if the entity failed the test in respect of the test time, 20 January 2002 and there has been no abnormal trades since the entity passed the 20 January 1997 test, the asset will be taken to have been acquired on 20 January 1997 [item 7 - new subsection 160ZZSB(4)] .

Public entities that became public entities after 20 January 1997

6.49 A public entity that becomes a public entity after 20 January 1997 will be required to test in respect of each subsequent abnormal trade and 5 yearly intervals and will have the same time to complete the test as other public entities (eg. 6 months). The 5 yearly intervals commence from 20 January 1997 but the public entity is only required to test in respect of those intervals which occur after they became a public entity. [Item 7 - new subsection 160ZZSA(2) and item 2, 'test time' and 'prescribed period' - new subsection 160ZZRR(1)]

6.50 If an entity which became a public entity after 20 January 1997 fails to test as required in respect of the first time it is required to test (eg. 20 January 2002- assuming there were no prior abnormal trades), all pre-CGT assets of the entity will be taken to have been acquired by the entity on the date it became a public entity [item 7 - new subsection 160ZZSB(3)] . For each subsequent test time, a failure to test as required will have the same consequences as for those public entities that were public entities on 20 January 1997 (ie. each pre-CGT asset of the entity will be taken to have been acquired by the entity on the last test time that the entity passed the test in respect of the asset) [item 7 - new subsection 160ZZSB(4)] .

The asset is taken to have been acquired for its market value

6.51 A public entity fails a test in respect of a particular test time where:

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within 6 months after the test time (in certain circumstances this period is or may be extended), the entity makes a determination showing whether there has been a change in the majority underlying interests in a pre-CGT asset of the entity; and

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the determination shows that there has been a change in the majority underlying interest in the asset. [Item 2, 'test time' and 'prescribed period' - new subsection 160ZZRR(1)]

6.52 A determination showing a change in majority underlying in the interests of the public entity at a particular test time may be treated as NOT showing such a change if the Commissioner is satisfied or considers it reasonable to assume that there has not been a change in the majority underlying interests in the public entity's assets. This could occur, for example, if the public company could not fully trace through its shares, but can otherwise demonstrate there has not been a change in majority underlying interests in the assets of the company. [Item 7 - new subsections 160ZZSA(2), 160ZZSC(2) and 160ZZSD(2)]

What are the consequences of failing the test ?

6.53 A public entity fails a test in respect of a particular test time where:

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within 6 months after the test time (in certain circumstances this period is or may be extended);

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the entity makes a determination showing whether there has been a change in the majority underlying interests in a pre-CGT asset of the entity;

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the determination shows that there has been a change in the majority underlying interests in the asset; and

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the Commissioner has not indicated that he or she is satisfied or considers it reasonable to assume that there has not been a change in the majority underlying interests in the asset. This could occur, for example, if the public company could not fully trace through its shares, but can otherwise demonstrate there has not been a change in majority underlying interests in the assets of the company. [Item 7 - new subsections 160ZZSA(2), 160ZZSC(2) and 160ZZSD(2) and item 2, 'test time' and 'prescribed period' - new subsection 160ZZRR(1)]

The asset is taken to have been acquired on the earliest date that continuity of majority underlying ownership cannot be demonstrated

6.54 If in respect of a particular test time, a public entity fails a test for whether there has been a change in the majority underlying interests in a pre-CGT asset of the entity, the asset is taken to have been acquired on:

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if the test time is the first test time for the entity, the earliest date in respect of which the entity was required to test under a ruling given by the Commissioner that was made available to the public but cannot demonstrate that there was no change in the majority underlying interests in the asset; or

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if there is no such date or the test time is a subsequent test time for the entity, the particular test time in respect of which the entity failed. [Item 7 - new subsections 160ZZSC(3) and (4) and paragraph 160ZZSD(1)(a)]

The asset is taken to have been acquired for its market value

6.55 The asset is taken to have been acquired for its market value on the day it is taken to have been acquired by the public entity. [Item 7 - new subsections 160ZZSC(1)(b) and 160ZZSD(1)(b)]

Abnormal trading

Background

6.56 Abnormal trading can be indicative of a change in majority underlying interests in the assets of an entity.

6.57 Accordingly, the amendments require public companies and publicly traded unit trusts to test for changes in majority underlying interests in the assets of the company or trust in respect of every abnormal trading in the shares of the company or units in the trust. In addition, a company which is a public company, or a 100% subsidiary of a public company all the shares of which are beneficially owned by a listed public company or publicly listed trust will be required to test for changes in the underlying interests in its assets if there is abnormal trading in the shares of the listed public company or the publicly traded unit trust. [Item 2, 'test time' - new subsection 160ZZRR; item 7 - new section 160ZZSA]

6.58 The requirement to test in respect of abnormal trades does not apply to mutual insurance organisations because the prospect of 'abnormal trading' in mutual insurance organisations is remote due to the circumstance that the members of the organisation are also the insured.

What is abnormal trading ?

6.59 The key definition in the term 'abnormal trading' is the term 'trading'. The term trading means an issue, redemption, transfer of shares in a public company or units in a publicly traded unit trust or any other dealing in the shares or units. [Item 7 - new subsection 160ZZSE(2)]

6.60 Specifically excluded from this definition, however, are dealings in the shares in a public company or units in a publicly traded trust that do not change the proportions in which natural persons hold underlying interests in the assets of the company or trust. For example, a bonus issue which did not change the proportions individuals hold underlying interests will not be an abnormal trading. As such, the public entity will not be required to examine its records to make a determination as to whether there has been a change in the majority underlying interests in its assets. [Item 7 - new subsection 160ZZSE(3)]

6.61 There are two ways that trading in the shares or units of a public company or publicly traded unit trust can be taken to be abnormal trading. [Item 7 - new sections 160ZZSF to 160ZZSI in new Subdivision D of Division 20]

The first method

6.62 The first method is a general factual test where a number of factors must be weighed to determine whether the trading is, on balance, abnormal. [Item 7 - new subsection 160ZZSF(1)]

6.63 All relevant factors (including the three specific factors specified below) must be taken into account when determining if a trading is abnormal. The specific factors are:

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the timing of the trading when compared to normal trading of shares in the company or units in the trust;

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the number of shares or units traded by comparison to the normal number of shares or units traded (eg. voluminous trading in shares or units may indicate the possibility of a significant change in the underlying interests in the assets of the company or trust); and

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any connection between the trading in shares or units and any other trading (eg. two or more lots of trading may be linked and may indicate a meaningful change in the underlying interests in the assets of the company or trust). [Item 7 - new subsection 160ZZSF(1)]

The second method

6.64 The second method deems abnormal trading to have occurred in the three sets of circumstances, as explained below. [Item 7 - new sections 160ZZSG, 160ZZSH and 160ZZSI]

Trading of 5% or more in one transaction

6.65 There is abnormal trading if 5% or more of the shares in a public company or units in a publicly traded unit trust are traded in one transaction [item 7 - new section 160ZZSG] . The size of such a transaction is enough to indicate that there may have been a significant change in the underlying interests in the assets of the company or trust.

Suspected acquisition or merger

6.66 There is abnormal trading in the shares of a public company or units of a publicly traded unit trust if the trading is part of a proposed acquisition or merger of the company or trust. However, the trading will only be abnormal if the company or trustee knows or reasonably suspects this to be the case. The abnormal trading will be taken to occur at the time of the trading. [Item 7 - new section 160ZZSH]

More than 20% change in a 60 day period

6.67 There is abnormal trading in the shares of a public company or units of a publicly traded unit trust if more than 20% of the shares in the company or units in the trust are traded within a 60 day period. As discussed previously, trading in the shares of a company or units of a trust can be the issue, redemption or transfer of shares or units. If there is a turnover of more than 20% of the shares in a public company or units in a publicly traded unit trust because of one or more of these events, then there is abnormal trading. [Item 7 - new section 160ZZSI]

6.68 The abnormal trading is deemed to occur at the end of the 60 day period. [Item 7 - new subsection 160ZZSI(2)]

The new tracing rules

The new tracing rules are only available to public entities

6.69 The new tracing rules in new Subdivision E may only be used by public companies and publicly traded unit trusts. [Item 7 - new subsection 160ZZSK]

Tracing concession - less than 1% share or unitholdings - the notional holder

Overview

6.70 The rules in this Subdivision make it easier for a public company (head company) or publicly traded unit trust (head trust) to determine, at the base and test time, the holders of majority underlying interests in its assets. [Item 7 - new section 160ZZSJ]

6.71 Broadly, all holdings of less than 1% in the head company or head trust are treated as if they were held by a single notional natural person (the notional holder). This means that the company or trust does not have to trace through to the actual natural persons who beneficially hold underlying interests in the assets of the company or trust that are taken to be held by the notional holder. [Item 7 - new subsection 160ZZSM(2)]

6.72 Similar rules apply if another public company or publicly traded unit trust is interposed between the head company or head trust and those persons. All holdings of less than 1% in the interposed company or interposed trust are treated as if they were held by a different single notional natural person. This means that the head company or head trust does not have to trace through the interposed company or interposed trust to the actual natural persons who beneficially hold underlying interests in the assets of the head company or head trust that are taken to be held by the notional holder in the interposed company or trust. [Item 7 - new section 160ZZSM(3)]

6.73 A public company or publicly traded unit trust is not compelled to use the notional holder rules in Subdivision E. [Item 7 - new subsection 160ZZSM(1)]

Public company or publicly traded unit trust must have 'share or unit holdings of less than 1%'

6.74 A public company or publicly traded unit trust must have less than 1% share or unitholdings before the notional holder rules can be applied. [Item 7 - new section 160ZZSK]

6.75 In Subdivision E, the public company which is making the determination as to whether there has been a change in the majority underlying interests in its assets is called the head company. If a publicly listed unit trust is making the determination, it will be called the head trust. [Item 7 - new section 160ZZSK]

Notional holder of head company or head trust taken to own all share or unitholdings of less than 1%

6.76 If the notional holder rule is used by the head company or head trust to help it make its determination showing whether there has been a change in the majority underlying interests in its assets, a single notional natural person (the notional holder ) [item 7 - new subsection 160ZZSM(2)] is taken to be the ultimate beneficial owner of:

6.77 In the case of a head company, all shares of the head company in aggregate that:

•

have rights to less than 1% of any distributions of capital ( capital shareholding of less than 1% ); and

•

have rights to less than 1% of dividends payable ( dividend shareholding of less than 1% ).

6.78 In the case of a head trust, all units of the head trust in aggregate that:

•

have rights to less than 1% of any distributions of capital ( capital unitholding of less than 1% ); and

•

have rights to less than 1% of any distributions of income ( income unitholding of less than 1% ).

6.79 The notional holder is taken to have the right to the dividends or capital attached to the shares in the head company, or in the case of units in a publicly listed unit trust, the right to income and capital attached to the units in the head trust. [Item 7 - new subsection 160ZZSM(2)]

6.80 The entity is a natural person for the purposes of the test. [Item7 - new subsection 160ZZSM(2)]

6.81 To avoid doubt, persons who have the rights to dividends or capital in the head company or income or capital in the head trust when interposed entities are traced through are taken not to have the rights. [Item 7 - new subsections 160ZZSM(4) and (5)]

6.82 The two main outcomes of the notional holder rule are:

•

a public company or publicly traded unit trust will not be required to trace through interposed entities to the ultimate beneficial owner if the registered holder of the public company's shares or the units in the trust holds shares or units that have less than 1% of the ownership rights; and

•

transactions between registered holders (both continuing and new) that do not result in a holding of 1% or more are effectively ignored.

6.83 The notional holder is treated as a continuing shareholder.

Share or unitholdings of less than 1% defined

6.84 Each of the rights to dividends or income and rights to capital are treated separately when defining share or unitholdings of less than 1%.

6.85 A shareholding of less than 1% is one where all the shares held by a registered holder carry between them less than 1% of the particular ownership right. Similarly, a unitholding of less than 1% is one where all the units held by the registered holder carry between them less than 1% of the particular ownership right. Any shares that are part of a substantial shareholding are specifically excluded from a shareholding of less than 1%. [Item 7 - new sections 160ZZSN and 160ZZSO]

6.86 The corporations law requires disclosure of substantial shareholdings to similarly prevent the disguising of substantial beneficial ownership as part of its acquisitions and takeovers code. Those rules will be used to define substantial shareholding . [Item 7 - new section 160ZZSP]

6.87 The definition is applied at the test time.

Shares that are part of a substantial shareholding

6.88 The corporations law contains rules that require persons beneficially owning a substantial shareholding in a company to disclose that matter to the company. In the common situation where shares are held by nominees or other registered holders without any beneficial interest in the shares, these rules ensure a public company has knowledge of its beneficial owners.

6.89 A person has a substantial shareholding when he or she is entitled to not less than 5% of the voting shares in the company. Entitlement is a fundamental concept of the corporations law. Broadly, a person is entitled to shares of a company if he or she has a relevant interest in the shares or associates of the person have a relevant interest in the shares. Relevant interest in sharesbroadly equates to beneficial ownership of shares as set out in the income tax law. [Item 2, 'relevant interest' - new subsection 160ZZRR(1)]

6.90 A person who reaches the 5% threshold is required to give notice within two days to the company of that substantial shareholding under section 709 of the corporations law. Any variation, up or down, of 1% or more must also be notified (section 710) as must a change in entitlement that causes a person to stop being a substantial shareholder (section 711).

6.91 The notices are required to disclose the person with the substantial shareholding, the associates and the particulars of the relevant shares (including the registered holder).

6.92 For the purposes of the notional shareholder rule, shares become part of a substantial shareholding when:

•

an initial substantial shareholder notice identifies the shares as part of a substantial shareholding; or

•

a subsequent notice identifies the shares as part of a substantial shareholding which has varied;

whichever happens first. [Items 2 and 7 - new subsection 160ZZSR(1); 'part of a substantial shareholding' - new subsection 160ZZRR(1)]

6.93 Conversely, shares stop being part of a substantial shareholding when:

•

a subsequent notice discloses the shares as no longer being part of a substantial shareholding because the shareholding has decreased; or

•

a notice discloses that a person has ceased to be a substantial shareholder and the shares were part of that former substantial shareholding;

whichever happens first. [Items 2 and 7 - new subsection 160ZZSR(2); 'part of a substantial shareholding' - new subsection 160ZZRR(1)]

Consequence of notional holder

6.94 The notional holder is taken to be the beneficial owner of shares or units carrying the respective ownership rights at each time the public company or publicly traded unit trust is required to make a determination showing whether there has been a change in the majority underlying interests in its assets. The notional holder will be a continuing holder who can be taken into account when a public company or publicly traded unit trust is required to make a determination about the majority underlying interests in its assets.

6.95 For example, XYZ Ltd has only ever had one class of share. On 19 September 1985, because of the various shareholdings of less than 1%, XYZ Ltd's notional holder is taken to beneficially own 46% of the public company's shares under new section 160ZZSM(2). Also, beneficial owner B holds 20% of the public company's shares. During 1998 there is abnormal trading in XYZ Ltd's shares. Immediately after the abnormal trading the notional shareholder is taken to beneficially own 36% while B still owns 20%. There is no change in the majority underlying interests in XYZ Ltds assets for the purposes of new subsection 160ZZSA(2) because majority underlying interests XYZ Ltds assets, between B and the notional shareholder (66% then 56%), has been maintained.

Notional shareholder taken to own minimum shareholding

6.96 A notional holder's holding could increase from the base time to the test time. Such an increase is indicative of a change in beneficial ownership of shares or units. This is because the increase will have most likely resulted from a disposal by a large beneficial owner of shares or units outside of the notional holder pool to a number of new share or unitholders each holding less than 1%.

6.97 Consequently, for each of the ownership rights the notional holder will be taken to have rights no greater than those rights it had at the base time. [Item 7 - new subsection 160ZZSM (6)]

Notional holder rule not to apply if public company or publicly traded unit trust would not otherwise have the same holding of majority underlying interests

6.98 The notional holder rule as it applies to both a head company and an interposed entity will not apply in relation to a test time if, at that time, the Commissioner considers it reasonable to assume that the majority underlying interests in the assets of the entity would have changed, but for the operation of the notional holder rules set out in this Subdivision. [Item 7 - new section 160ZZSQ]

6.99 As discussed previously, changes of beneficial ownership of holdings of less than 1% are effectively ignored. There will be circumstances where such changes if taken into account would mean there would be a change in majority underlying interests held by natural persons between the base time and the test time.

6.100 Matters the Commissioner will take into account include:

•

the size of the notional holder holdings;

•

the period between the base time and the test time; and

•

changes of underlying interests outside the notional holder holding.

Notional holder of interposed entity taken to own all share or unitholdings of less than 1%

6.101 The notional holder rule will apply to a public company or publicly traded unit trust (interposed entity) that is interposed between the head company or head trust and the ultimate beneficial owner of shares in the head company or units in the head trust if there are share or unitholdings of less than 1% in the interposed entity. [Item 7 - new subsection 160ZZSM(3)]

6.102 The interposed entity rule will operate for the purposes of determining whether there has been a change in the majority underlying interests in the assets of the head company or head trust. The interposed entity must be interposed between the head company or trust and at least one natural person for each of the ownership rights held indirectly, namely:

•

right to receive any income or dividends payable; and

•

right to any distributions of capital.

6.103 The test for changes in majority underlying interests are applied to the head company or head trust on the basis that the notional holder rules apply to the interposed entity. That is, a single notional natural person (notional holder) is taken to be the ultimate beneficial owner of:

6.104 In the case of an interposed company, all shares of the interposed company in aggregate that:

•

have rights to less than 1% of any distributions of capital ( capital shareholding of less than 1% ); and

•

have rights to less than 1% of dividends payable ( dividend shareholding of less than 1% ).

6.105 In the case of an interposed trust, all units of the interposed trust in aggregate that:

•

have rights to less than 1% of any distributions of capital ( capital unitholding of less than 1% ); and

•

have rights to less than 1% of distributions of income ( income unitholding of less than 1% ).

6.106 The notional holder is taken to have the right to the dividends or capital attached to the shares in the interposed company, or in the case of units in a publicly listed unit trust, the right to income and capital attached to the units in the interposed trust. [Item 7 - new subsection 160ZZSM(3)]

6.107 For example, the head company XYZ Ltd has a shareholder, ABC Ltd, a public company. Both companies have one class of share. ABC Ltd holds 60% of XYZ Ltd. At a test time for XYZ Ltd, because of its less than 1% shareholdings, ABC Ltd as an interposed company has a notional holder with 40% of the underlying interests in XYZ Ltds assets. For the purposes of XYZ Ltd making a determination to show whether there has been a change in majority underlying interests in its assets, ABC Ltd's notional holder would be taken to beneficially own shares with 24% (40% of 60%) of the underlying interests in the assets of XYZ Ltd.

6.108 The entity is a natural person for the purposes of the test. [Item 7 - new subsection 160ZZSM(3)]

6.109 In circumstances where the interposed entity holds shares or units other than in its own right, such as a nominee, the notional holder rule would have no effect.

6.110 The interposed entity notional holder is a separate entity from the head company or head trust notional holder. [Item 7 - new subsection 160ZZSM(3)]

6.111 The notional holder rules for the interposed company apply in the same way as for the head company. Accordingly:

•

the interposed entity notional holder is taken to be a natural person;

•

the ultimate beneficial owners are taken not to have the particular rights taken to be held by the notional holder;

•

share or unitholdings of less than 1% for each ownership right are defined in the same way including the substantial shareholder exclusions;

•

the notional holder rule will not apply if the Commissioner considers it reasonable to assume that the majority underlying interests in the assets of the entity would have changed, but for the operation of the notional holder rules set out in this Subdivision. [Item 7 -new subsections 160ZZSM(3) & (5); new sections 160ZZSN to 160ZZSQ]

Treatment of interposed complying superannuation funds, complying approved deposit funds, special companies and government bodies

Key definitions used in this part of the explanation

6.112 The term 'complying superannuation fund' means a complying superannuation fund within the meaning of section 45 of the Superannuation Industry (Supervision) Act 1993. [Item 2, 'complying superannuation fund' - new subsection 160ZZRR(1)]

6.113 The term 'complying approved deposit fund'means a complying approved deposit fund within the meaning of section 47 of the Superannuation Industry (Supervision) Act 1993. [Item 2, 'complying approved deposit fund' - new subsection 160ZZRR(1)]

6.114 The term ' foreign superannuation fund' means a foreign superannuation fund as defines in subsection 6(1) of the Act.

Broadly, a 'foreign superannuation fund' is a provident, benefit, superannuation or retirement fund -

•

that was established in a country outside Australia;

•

that was established, and is maintained and applied, for the sole purpose of providing superannuation benefits for persons other than persons who are, or would ordinarily be or become, residents of Australia or residents of a Territory; and

•

the central management and control of which is carried on outside Australia by persons none of whom is a resident of Australia or a resident of a Territory, not being a fund for which an amount has been set aside, or to which an amount has been paid, by a taxpayer that is an amount that has been allowed or is allowable as a deduction, or in respect of which a rebate of tax has been allowed or is allowable, under any provision of this Act.

6.115 The term 'special company' means:

•

a company that is, by the terms of its constituent document, prohibited from making any distribution, whether in money, property or otherwise, to its members; or

•

a mutual insurance organisation. [Item 2, 'special company' - new subsection 160ZZRR(1)]

6.116 The term 'government body' means:

•

the Commonwealth, a State or a Territory; or

•

a municipal corporation or other local government body; or

•

a foreign state. [Item 2, 'government body' - new subsection 160ZZRR(1)]

Overview

6.117 New Subdivision F provides for special rules to help public companies and publicly listed unit trusts identify the individuals who hold underlying interests in their assets, when the interests are held through an interposed entity which is a complying superannuation fund, complying approved deposit fund, foreign superannuation fund, special company or government body.

6.118 A public company or publicly traded unit trust, when testing the underlying interests in its assets, will not have to trace through complying superannuation funds, approved deposit funds , foreign superannuation funds, special companies or government bodies, that are interposed between it and the persons who are the ultimate beneficial owners of the company or trust. [Item 7 - new Subdivision F]

6.119 Use of this concession is optional to the public company or publicly traded unit trust. If the public company or publicly traded unit trust wishes to do so, it may fully trace through the interposed fund, special company to the individual beneficial owners. [Item 7 - new subsection 160ZZSS(1)]

Circumstances in which the concession is available

6.120 The concession will be available if:

•

the fund, special company or government body is interposed between the company or trust and at least one natural person who holds indirectly:

•

the right to receive any income payable; or

•

the right to any distributions of capital [item 7 - new paragraphs 160ZZSS(1)(a) and (b)] ; and

•

in the case of a superannuation fund, the fund must either be a complying superannuation fund or a foreign superannuation fund at the test time [item 7 - new paragraph 160ZZSS(1)(c)] .

•

in the case of an approved deposit fund, the fund must be a complying approved deposit fund at the test time [item 7 - new paragraph 160ZZSS(1)(d)] .

Where the interposed fund or special company has more than 50 members or where the interposed entity is a government body

6.121 If the interposed fund or special company has more than 50 members at the base time or test time, then the test for changes in majority underlying assets is applied at that time as if the fund or special company is a single natural person who holds all of the rights held by the fund or company. [Item 7 - new subsection 160ZZSS(2)]

6.122 An interposed government body is also taken to hold the right to the income or distributions of capital of the company or trust as if it were a single natural person with those rights, regardless of the size of the membership (if any) of the body. [Item 7 - new subsections 160ZZSS(2) and (5)]

Where the interposed fund or special company has 50 members or less

6.123 If the interposed fund or special company has 50 or less members, each of the members will be treated as a natural person with an equal fixed proportion of the right to income or distributions of capital of the public company or publicly traded unit trust. [Item 7 - new subsection 160ZZSS(3)]

Actual natural persons taken not to have rights to income or capital

6.124 To avoid doubt the persons who have the actual rights to income or capital are taken not to have those rights for the purposes of this concession [item 7 - new subsection 160ZZSS(4)] . The exception is where the rule on less than 50 members give those persons such rights [item 7 - new subsections 160ZZSS(3) and (4)] .

Government body always treated as natural person

6.125 If the public company or publicly traded unit trust chooses to fully trace the individuals who hold the interests in its assets through a government body, the government body will always be treated as being an individual. The public company or publicly traded unit trust will not be required to trace further though a government body. [Item 2 - subsection 160ZZRR(4)]

Tracing concession - treatment of former mutual insurance organisations

Overview

6.126 The new tracing concession for companies and trusts that were mutual organisations applies to public companies and publicly traded unit trusts that were mutual insurance organisations as at the base time and had more than 50 members at the time of demutualisation. [Item 7 - new subsection 160ZZST(1) contained in new Subdivision G of Division 20]

6.127 No concession is provided for companies and trusts that were mutual insurance organisations with 50 or less members at the time of demutualisation.

6.128 The concession provides that when testing the underlying interests in its assets, companies and trusts to which the concession applies may consider the natural persons who were:

•

immediately before demutualisation, members of the company or trust; and

•

who immediately after demutualisation held an underlying interest in an asset of the company or trust or an underlying interest, through the company or trust, in an asset of another public entity;

as the same natural persons who held the underlying interests at the base time. [Item 7 - new subsection 160ZZST(2)]

6.129 The natural persons are treated as holding the underlying interests as at the base time in the same proportion that they held the underlying interests immediately after the demutualisation.

6.130 Any changes in the underlying interests after demutualisation will be treated in accordance with normal principles (ie. a comparison of the underlying interests as at the base time and test time is required).

6.131 Use of the concession by public entities is optional. [Item 7 - new subsection 160ZZST(1)]