ATO Interpretative Decision

ATO ID 2001/376

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Will any capital gain or capital loss made under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) on the sale of shares in a listed public company (the company), without the consent of the taxpayer, be disregarded?

Decision

No. There is no provision in the Income Tax Assessment Act 1936 (ITAA 1936) nor the ITAA 1997 that would allow any capital gain or capital loss made under section 104-10 of the ITAA 1997 on the sale of the taxpayer's shares, without the taxpayer's consent, to be disregarded.

Facts

The taxpayer held shares in a company. These shares were acquired in various stages; all were acquired after 19 September 1985. The taxpayer separated from their spouse. The former spouse sold some of the shares belonging to the taxpayer, without the taxpayer's consent, through their stockbroker with whom they have been dealing for years. The stockbroker was unaware of the separation and was acting in good faith in the belief that the former spouse was acting with the consent of the taxpayer. The taxpayer had no intention of selling the shares because they returned good dividends. The taxpayer intends to buy back those shares. The taxpayer received the capital proceeds from the sale of the shares and the taxpayer did not hold 50% or more shares or interests in the company.

Reasons for Decision

Section 104-10 of the ITAA 1997 specifies that a CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. Further, the capital gain or capital loss is made at the time of the event. A capital gain is made if the amount received (called capital proceeds) from the disposal exceeds the cost base of the CGT asset. A capital loss is made if the capital proceeds are less than the reduced cost base.

The shares that the taxpayer owns are CGT assets and a CGT event A1 happens when the taxpayer stops being their owner.

At law, a CGT event A1 still happens even though the shares are sold without the taxpayer's consent. The sale of the shares at the former spouse's direction has resulted in a CGT event A1 for the taxpayer in the income year in which the shares are sold.

In relation to the taxpayer buying back the shares in the company to replace those disposed of by the former spouse, the acquisition of the new parcel of shares does not negate the disposal. It will result in the acquisition of a new CGT asset.

There are a number of provisions within the ITAA 1997 (discussed below) that may exempt, exclude or defer a liability for CGT in certain circumstances. These include:

(1)

Division 118 sets out various exemptions for many capital gains and capital losses. This division deals with general exemptions such as cars (per section 118-5) and assets used to produce exempt income (per section 118-12).

However, there is no provision in this division that allows any capital gains or capital losses on the sale of shares in the taxpayer's circumstances to be disregarded;

(2)

Subdivision 124-B provides replacement-asset roll-over relief where a CGT asset is compulsorily acquired by an Australian government agency or the asset is lost or destroyed (per subsection 124-70(1)).

In the taxpayer's case, the shares were neither compulsorily acquired by an Australian government agency nor lost or destroyed, therefore this provision for the replacement-asset roll-over concession will not apply;

(3)

Subdivision 124-E provides roll-over relief where a taxpayer owns shares of a certain class in a company and the company redeems or cancels all shares of that class and issues new shares in substitution for the original shares (per section 124-240).

The replacement shares, which the taxpayer intends to buy, will not be issued by the company in substitution for the company redeeming or cancelling the original shares. Hence, this provision will not apply; and

(4)

Subdivision 152-E provides for small business roll-over on a capital gain from a CGT event to be deferred if the basic conditions in Subdivision 152-A are satisfied for the gain (per section 152-410). One of the conditions under Subdivision 152-A requires that, where the CGT asset is a share in a company, there must be a controlling individual just before the CGT event and the individual claiming the concession must be a CGT concession stakeholder in the company (per sections 152-10 and 152-50). An individual is a controlling individual of a company if the individual holds at least 50% of the voting power and the right to at least 50% of any distribution of income and capital that the company may make.

As neither the taxpayer nor the former spouse held at least 50% of the voting power, or the right to at least 50% of any distribution of income and capital that the company makes, the taxpayer will not satisfy the controlling individual nor CGT concession stakeholder tests and will not be eligible for the small business asset roll-over relief under Subdivision 152-E.

Note: There have been changes made to the small business roll-over in Tax Laws Amendment (2006 Measures No 7) Act 2007 so that the description of the law in (4) above is not accurate for a CGT event happening in the 2006-07 or later income year. However these changes do not alter the outcomes for the facts as described.

Without specific provisions in the legislation to allow relief in the taxpayer's circumstances, any capital gain or capital loss made in the income year on the sale of the taxpayer's shares cannot be disregarded.

Legislative References:
Income Tax Assessment Act 1997
   Section 104-10
   Section 118-5
   Section 118-12
   Subsection 124-70(1)
   Section 124-240
   Section 152-10
   Section 152-50
   Section 152-410

Keywords
CGT asset issues
CGT event
Time of CGT event

Business Line:  CGT (CoE)

Date of publication:  29 September 2001

ISSN: 1445-2782