The Administrative Review Tribunal (Tribunal) decision in XLZH and Commissioner of Taxation [2025] ARTA 2154 (XLZH) highlights that:
the Australian Taxation Office (ATO) is more closely scrutinising the pre-CGT status of assets held by discretionary trusts for the purposes of Division 149 of the Income Tax Assessment Act 1997; and
the ATO’s views in Income Tax Ruling IT 2340 (IT 2340), which taxpayers frequently rely on to support the pre-CGT status of assets held by a discretionary trust, may have changed.
Division 149 often features in transactions by private groups and, where a discretionary trust is involved, there is not legally binding ATO guidance. However, IT 2340, which discusses former section 160ZZS in the Income Tax Assessment Act 1936, the predecessor to Division 149, is administratively binding on the ATO with respect to section 160ZZS.
Nevertheless, edited private rulings on the ATO database concerning Division 149 often rely on an analogous approach to that in IT 2340 and the Tribunal considered IT 2340 in reaching its decision in XLZH.
Summary
XLZH considered whether shares in Alpha Pty Ltd (Alpha), held since before 20 September 1985 by a discretionary trust (Settlement Trust), ceased to be pre-CGT assets under Division 149.
The central issue was whether there was a change in “majority underlying interests” for the purposes of section 149‑30, and how the expressions “majority underlying interests,” “underlying interest,” “ultimate owner,” and “beneficial interest” work in the context of a discretionary trust.
The Tribunal ultimately agreed with the Applicant (who was a beneficiary of the Settlement Trust) that the Settlement Trust’s shares in Alpha were pre-CGT assets and not subject to Division 149.
What was the factual background?
The Settlement Trust was settled before 20 September 1985. When the Settlement Trust was established, its discretionary beneficiaries included the Applicant and family members of the Applicant and her husband (Husband). The beneficiaries were defined by their name together with a description of their relationship to the Husband. However, the Husband was not a beneficiary and was not permitted to be appointed as a beneficiary.
In the 2020 income year, the Settlement Trust disposed of shares in Alpha and a capital gain of $64.4 million arose.
On 10 June 2011 a new corporate beneficiary, Beta Pty Ltd (Beta), had been appointed as a discretionary object of the Settlement Trust. The Commissioner said that the appointment caused the Alpha shares to stop being a pre‑CGT asset.
Beta was part of the broader family group of the Applicant. The Applicant and the Husband were Beta’s directors. Delta Pty Ltd (Delta), as trustee of the Delta Trust, owned the sole share in Beta. Delta had two ordinary shares held by the Applicant and the Husband, who were also Delta’s directors. The Delta Trust was a hybrid trust in which the Applicant and the Husband were unit holders, and the discretionary objects were family members. The Applicant and the Husband controlled distributions of the Delta Trust.
From 2009 to 2019 Alpha paid dividends to the Settlement Trust. The Settlement Trust distributed between 44% and 75% of those amounts to Beta in the relevant years (63% overall). Beta did not distribute all the income it received to the Delta Trust. Excluding the dividends retained by Beta, the Husband’s share of amounts otherwise distributed across those years averaged 19% (with other family members 81%).
What is Division 149?
Division 149 sets out when a CGT asset stops being a pre‑CGT asset. Section 149‑30 provides that an 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 those interests immediately before 20 September 1985.
Subsection 149‑30(2) allows the Commissioner to be satisfied, or to think it reasonable to assume, that continuity of those interests existed for the relevant period. Tracing to ultimate owners is performed using the hypotheses in subsections 149‑15(4) and 149-15(5).
Section 160ZZS was the predecessor to section 149‑30 and applied before 1 July 1998. Both Division 149 and Section 160ZZS test continuity of majority underlying interests by reference to beneficial interests in the asset and in income that may be derived from it, informed by a look‑through tracing exercise.
By way of paragraph 149-10(b) the Applicant needed to satisfy both tests. However, the Commissioner was satisfied immediately before the start of the 1999 income year the Settlement Trust was not taken to have acquired the Alpha shares on or after 20 September 1985 under section 160ZZS.
What did the parties say?
The Applicant, relying on Gartside v IRC [1967] UKHL 6 and Swishette Pty Ltd v ACCC (2017) 149 FCR 483, contended that discretionary objects do not hold beneficial interests at general law unless and until the trustee exercises a discretion, that Division 149 adopts a statutory tracing hypothesis to be applied sensibly to discretionary trusts, and that continuity within the family group was shown or could be assumed under subsection 149‑30(2).
The Commissioner, conversely, submitted that adding Beta as a discretionary object of the Settlement Trust on 10 June 2011 altered the majority underlying interests in the Alpha shares because the Husband was not previously a direct or indirect beneficiary of the Settlement Trust (and so the shares stopped being a pre‑CGT asset from that date for the purposes of Division 149).
What did the Tribunal say?
The Tribunal accepted that Division 149 must be read as permitting a sensible identification of whether an asset of a discretionary trust has stopped being a pre‑CGT asset, notwithstanding that discretionary objects do not have proprietary beneficial interests at general law before an appointment. Subsections 149‑15(4) and (5) use conditional language that supports a nontechnical meaning of beneficial interests for tracing, consistent with IT 2340.
As to the change on 10 June 2011, the Tribunal found that the mere appointment of Beta as a discretionary object did not itself establish a change in majority underlying interests under subsection 149‑30(1). An addition of a discretionary object introduces only a possibility of future benefit and does not quantify beneficial interests of ultimate owners for the subsection 149‑30(1) comparison.
Because subsection 149‑30(1) could not be applied with certainty to that change, the Tribunal applied subsection 149‑30(2) as a concessional deeming provision that should be interpreted beneficially to support the continuity of pre-CGT assets held by discretionary trusts (referring to Eichmann v Commissioner of Taxation [2020] FCAFC 155).
Considering the period from immediately before 20 September 1985 to 10 June 2011, the Tribunal was satisfied, or thought it reasonable to assume, that the same ultimate owners held the majority underlying interests throughout. In reaching that state of satisfaction, the Tribunal relied on the pattern of actual distributions within the family group.
The Tribunal linked this outcome to section 160ZZS and IT 2340, noting that both supported a practical, look‑through assessment of continuity of majority underlying interests within a family group.
In the period from 10 June 2011 (when Beta was added as a beneficiary) to the 2020 income year (when the Alpha shares were sold per CGT event A1), the Husband did not receive 50% or more of the income referable to dividends on the Alpha shares.
Ultimately, the Tribunal preferred the Applicant’s construction of Division 149. The appointment of Beta in 2011 did not break continuity of majority underlying interests. The Alpha shares remained a pre‑CGT asset and the capital gain on the 2020 disposal was disregarded.
What are the Commissioner’s views in IT 2340 and what is the position in respect of “IT” rulings?
The Commissioner argued that IT 2340 is not a binding ruling for the purposes of the income tax laws and was not “intended to be an exhaustive description of the operation of the legislation.”
In summary, IT 2340 says that in relation to discretionary trusts that have broad powers to distribute income or property to beneficiaries, the Commissioner’s view is that (emphasis added):
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.
In those circumstances, the Commissioner states that it would be reasonable to assume that majority underlying interest in the trust’s assets have not changed. However, in IT 2340 the Commissioner compares that factual situation to one in which, by exercise of discretionary powers to appoint beneficiaries or amendment of a trust deed, there is “in practical effect a change of 50% or more in the underlying interests in the trust assets”, for example where a new family are substituted in place of person who were formally beneficiaries, section 160ZZS would apply.
The Tribunal, although agreeing that IT 2340 is not a binding public ruling (because it was issued before 1992), concluded:
The ATO’s administrative policy in respect of “IT” rulings 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” (Taxation Ruling TR 2006/10 at paragraph 39); and
IT 2340 is arguably still “administratively binding” on the Commissioner because section 160ZZS expresses the same ideas concerning assets held by discretionary trusts and its purpose was also relevantly identical to Division 149.
So, while XLZH suggests that taxpayers may still find comfort in relying on IT 2340 to administratively bind the ATO in respect of the pre-CGT status of shares held in a discretionary trust (subject to any appeal), XLZH also highlights the ATO’s preparedness to litigate matters that might otherwise constitute “administratively binding advice.”
In Practice Statement Law Administration PSLA 2008/3, the ATO states that a departure from their administrative policy in an “IT” ruling might be warranted when “the ruling is no longer considered appropriate.” Is this now the case for IT 2340? Does the ATO now consider that Division 149 can be enlivened even if the trustee of a discretionary trust continues to administer a trust for the benefit of members of a “particular family” (IT 2340, [6])?
In a different context, is a “particular family” different from a “family” in the family trust distribution tax rules in Schedule 2F to the Income Tax Assessment Act 1936?
Concluding thoughts
Both the Applicant and the Commissioner used senior and junior counsel in XLZH. Given that, and the broader significance of Division 149 to transactions involving discretionary trusts, the Commissioner’s broader focus on succession planning, including “entities failing to review the pre-CGT status of assets”, and his focus on the application of CGT exemptions more generally, one would think the Tribunal decision will not be the last word on this issue.
The decision is a reminder of the complexities involved in advising on the status of pre-CGT assets, particularly in the context of tax planning within private groups. It emphasises the need for careful consideration when appointing new beneficiaries to discretionary trusts, even if the new beneficiaries are owned by the “particular family”, and any subsequent distributions that are made to those new beneficiaries. It also highlights the requirement for record keeping going well beyond any ordinary periods of amendment in respect of a particular CGT event, and any general policy, outside CGT, to retain records for a period of 5 years.
In addition, even if Division 149 does not cause an asset to cease being a pre-CGT asset, discretionary trusts which hold pre-CGT shares or trust interests should also not forget the relevance of CGT event K6 (the ATO has recently updated Taxation Ruling TR 2004/18 on CGT event K6).
For more information please contact:
Neil Brydges
Principal | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au
Kaitilin Lowdon
Principal Lawyer
M +61 402 859 214 | T+61 3 9611 0120
E: klowdon@sladen.com.au
Edward Hennebry
Special Counsel
T +61 3 9611 0113 | M +61 428 439 730
E ehennebry@sladen.com.au
