In what appears to be the first reported tribunal or court decision on Sub-division 149-B of the ITAA 1997 or its predecessor s 160ZZS of the Income Tax Assessment Act 1936 (ITAA 1936), the Administrative Review Tribunal (XLZH and FCT (Taxation) 2025 ARTA 21543 October 2025: reported at 2025 WTB 43 [804]) held that there had been no change in the “majority underlying interests” in a pre-CGT asset of a discretionary trust (Primary Trust) via its “ultimate owners”) meaning circa $64 million in capital gain made by the Primary Trust was disregarded (sub-section 104-10(5) ITAA 1997) rendering it a tax free receipt in the Applicant’s hands as a beneficiary despite the Commissioner’s arguments to the contrary.
Background facts summary
The discretionary beneficiaries of the Primary Trust (being a common family trust) included the Applicant, her and her husband’s children and grandchildren. The Applicant’s husband could nominate any beneficiaries of the Primary Trust, excluding himself.
The directors of private trustee company of the Primary Trust comprised the Applicant and her husband.
The trustee had the typical broad discretion/powers as to which, if any, and the quantum of income or capital of the Primary Trust was to be distributed to a beneficiary or beneficiaries.
The Primary Trust owned all the shares in a private company, anonymously (like all stakeholders) called Alpha Pty Ltd, which conducted a pre-CGT business.
The shares were sold in the 2019/20 FY for $100m with $64,405,094 being all of the capital gain made, distributed to the Applicant as a beneficiary of the Primary Trust which she disclosed as a pre-CGT and hence , non-taxable gain.
Earlier, in the 2008/09 FY and 2009/10 FY members of the Applicant’s and husband’s family, and companies in which they owned shares, were duly nominated as additional beneficiaries of the Primary Trust with which the Commissioner had no issue.
However, on 10 June 2011, Beta Pty Ltd (Beta), a private company, was appointed as a beneficiary of the Primary Trust.
Beta’s only share was owned by Delta Pty Ltd (Delta) as trustee of the Delta Trust (Delta Trust).
The Delta Trust was a Hybrid Unit Trust with its unitholders being the Applicant and her husband. There were also discretionary beneficiaries of the Delta Trust together with other family members and beneficiaries. Again, Delta held broad discretionary powers as to which unitholder, unitholders or beneficiaries were to receive any income or capital distributions from the Delta Trust.
The Applicant and the husband were also the only directors of Beta and Delta.
In the financial years 2010/11 to 2019/20 after Beta’s appointment as a discretionary beneficiary of the Primary Trust, the husband received less than 50% of the dividends declared by Alpha, via the Delta Trust.
ATO position
The Commissioner argued the mere appointment of Beta as a discretionary beneficiary (with the attendant possibility of the husband being able to receive distributions from the Delta Trust, either as a unitholder or discretionary beneficiary) caused the “majority underlying interests” in shares in Alpha, being an asset of the Primary Trust to stop being a pre-CGT asset under Subdivision 149-B.
Main Statutory Provisions of Subdivision 149-B (with bolding by the author):
149-30 Effects if asset no longer has same majority underlying ownership
(1) The asset stops being a *pre-CGT asset at the earliest time when *majority underlying interests in the asset were not had by*ultimate owners who had *majority underlying interests in the asset immediately before 20 September 1985.
(1A) Also, Part 3-1 and this Part (except this Division) apply to the asset as if the entity had acquired it at that earliest time.
(2) 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.
149-15 Majority underlying interests in a CGT asset
(1) Majority underlying interests in a *CGT asset consist of:
(a) more than 50% of the beneficial interests that *ultimate owners have (whether directly or *indirectly) in the asset; and
(b) 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.
(2) An underlying interest in a *CGT asset is a beneficial interest that an *ultimate owner has (whether directly or *indirectly) in the asset or in any *ordinary income that may be *derived from the asset.
The Primary Trust not the “ultimate owner” of the Alpha Shares
The tribunal noted the phrase “ultimate owner” is defined in subsection 149-15(3) when taken in tandem with subsections 995-1(1), 960-100(1) and (3) of the ITAA 1997 means “.. that a trust, which is an “entity” for taxation purposes under subsection 960-100(1) of the ITAA 1997, cannot be an “ultimate owner”, as defined” and “ a tracing exercise must be undertaken to determine the “ultimate owners” of its assets
Subsection 149-15(4) states:
An *ultimate owner indirectly has a beneficial interest in a *CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of the capital of the other entity if:
- the other entity were to distribute any of its capital; and
- the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner.
Subsection 149-15(5) states:
(5) An *ultimate owner indirectly has a beneficial interest in *ordinary income that may be *derived from a *CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of a *dividend or income if:
(a) the other entity were to pay that dividend, or otherwise distribute that income; and
(b) the dividend or income were then successively paid or distributed by each entity interposed between the other entity and the ultimate owner.
The Tribunal stated ..” both subsections 149- 30(1) and (2) require the “majority underlying interests” of “ultimate owners” in the asset immediately before 20 September 1985 to be compared with the “majority underlying interests” of “ultimate owners” after 20 September 1985 and up to the time in question, namely, when the relevant CGT event happens……… “majority underlying interests” refers to the “beneficial interests” that “ultimate owners” have in the asset itself and in any ordinary income that may be derived from the asset. There is, however, no definition of the phrase “beneficial interests” in the statutory provisions and it is necessary to address this in the analysis of the issue”.
Tribunal’s reasons
The Tribunal dismissed all the Commissioner technical arguments put for why Subdivision 149 B ought to apply and most but not all of the Applicants as well. reaching its conclusion as follows:
- A discretionary Beneficiary cannot have a beneficial interest in a Trust asset prior to its appointment or vesting in that Beneficiary … so a non-technical meaning of “beneficial interest” is required: “First…… It follows, that as 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, prima facie it would not be possible to satisfy a test which traces beneficial interests in the assets of a discretionary trust….. for the purposes of applying s 149-30 of the ITAA 1997, the “ultimate owners” in the case of an asset of a discretionary trust are deemed to have interests in the trust’s assets akin to ownership interests. That is, the statutory provisions, in particular, subsections 149-15(4) and (5) adopt a non-technical meaning of the phrase “beneficial interest”. For the purposes of Subdivision 149-B, the “ultimate owners” are taken to effectively have ownership interests in the assets of a discretionary trust on the basis that they may benefit.” Significantly, a comparison of the percentage change of the beneficial interests the “ultimate owners” had cannot be performed for the purposes of subsection 149-30(1).”
- Mere appointment of a new Beneficiary or Group of Beneficiaries authorised by the trust deed does not affect the necessary 50% change: The Tribunal said “I also disagree with the Commissioner’s related argument that there was a change in the “majority underlying interests” because there was a change in the group of discretionary objects of the Settlement Trust when Beta was added as a discretionary object”. … “The statutory context makes clear that subsection 149-30(2) applies as an exception to subsection 149-30(1), which may prima facie apply. The fact that subsection 149-30(1) is extraordinarily difficult to apply in certain circumstances, including with respect to discretionary trusts, informs the “beneficial” interpretation of subsection 149-30(2).” based on the reasoning in Eichmann v Commissioner of Taxation [2020] FCAFC 155 (Eichmann) subsection 149-30(2) has an application over and above subsection 149-30(1), contrary to the Commissioner’s submissions. Moreover, “it should be construed so as to give the most complete remedy” ..to the Applicant..”
- Role of IT 2340 and S.160ZZS-Still administratively binding on Commissioner – distribution patterns are relevant: The Tribunal quoted and endorsed the IT 2340 dealing with s.160ZZS, the predecessor to Subdivision 149-B. Specifically, it said “..IT 2340 is a formal ruling issued before 1 July 1992 (when the formal rulings regime commenced). It is not a binding public ruling for the purposes of s 357-60 of Schedule 1 to the TAA. The Commissioner nevertheless considers it to be “administratively binding” on him. Specifically, he acknowledges in paragraph 39 of TR 2006/10: “Public rulings”, under the heading “Status and binding effect of formal rulings which are not public rulings” that “the policy of the ATO is to stand by what is said in a formal ruling and to depart from a formal ruling only when there are good and substantial reasons to do so”.
The Tribunal continued “.. IT 2340, .. deals with questions regarding the application of s 160ZZS “to assets held by trustees of family trusts where the trustees are vested with discretionary powers as to distributions …”. As former s 160ZZS of the ITAA 1936 expresses the same ideas and its purpose was also relevantly identical to Division149 of the ITAA 1997, IT 2340 is arguably still “administratively binding” on the Commissioner, and the Commissioner did not suggest otherwise.”
Further the Tribunal said” .., …. when considering … 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”. The distributions made to beneficiaries can be considered, contrary to the Commissioner’s argument before the Tribunal that that was not appropriate or only permissible in certain situations of factual uncertainty.”
Thus, the Tribunal relying on IT 2340 said “The Applicant was able to satisfy me that the assets of the … Trust always have been held for the benefit of the same family group, being the Applicant’s and the Husband’s family.” … The proportion of dividends on the Alpha Shares that were paid to members of the Applicant’s family and to related entities other than Beta (all of whom could benefit under the Primary Trust), as compared to the Husband demonstrated that in the period between 2011 to 2020, the Husband received less than 50% of the dividends sourced from Alpha. It is clear on the evidence that the same majority group of ultimate owners benefited at all relevant times. The Husband did not receive more than 50% of the relevant income or capital in any single year within the period covering the 2011- and 2020-income years, or collectively across all ten of those income years.
Conclusion
- The constituent trust deeds of many discretionary trusts (including hybrid trusts) enable the trustee, appointor or relevant office holders to appoint additional beneficiaries within the class of beneficiaries usually contemplated by the trust’s founders and with more modern trust deeds, beyond their founders intentions.
- Adding additional beneficiaries where permitted by the trust deed to members of a family reasonably contemplated by the founders and then distributing a majority of the income and capital to them should not attract sub-division 149 -B and convert its pre-CGT assets into post CGT assets based on this Tribunal decision.
- Further distributing less than 50% of the capital or income attributable to a pre-CGT asset of the Trust to a beneficiary of the trust outside the founder’s family ought not enliven Sub division 149 -B and convert a pre CGT asset to a post CGT asset based on this Tribunal decision.
- Having said that, the decision is nevertheless still open to appeal by the Commissioner and a number of the interpretations of these complex provisions including “beneficial ownership” may be subject to future judicial analysis and rigour.
- However, introducing beneficiaries foreign to the founders as part of the de facto transfer and maintenance of the pre CGT assets of the Trust in favour of those beneficiaries in return for capital receipts/compensation is fraught with substantial risk under s.100A and will likely enliven Part IVA , where Sub division 149 -B is held not to apply.
- Based on the above, the application of Subdivision 149 -B to pre CGT assets in a partnership or company limited by shares is far easier to assess when equity interests change than where they are owned by a discretionary trust . That is due to the clear correlation between beneficial interests and the ownership interests of individuals having equity interests in those types of entities. Naturally, if those equity interests are held by discretionary trusts, the above complexities arise again.
- If doubt exists as to whether S.149(1) applies, the concession via the discretion conferred on the Commissioner under s.149(2) should be applied to negate its application based on IT 2340 in the tracing of income and capital distributions , in relation to a pre CGT asset owned by a discretionary trust.
This article was originally published in the Thomson Reuters Weekly Tax Bulletin (Issue 45, 7 November 2025).
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