ATO Interpretative Decision

ATO ID 2003/87 (Withdrawn)

Capital Gains Tax

• This ATO ID is withdrawn as the ATO view on this matter is now dealt with in the Guide to capital gains tax 2005.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

When did a taxpayer who acquired shares by subscription in Telstra's first public share offer incur expenditure in relation to the second instalment of the purchase price for the purposes of section 114-1 and subsection 960-275(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

For the purposes of section 114-1 and subsection 960-275(2) of the ITAA 1997, the taxpayer incurred the expenditure in relation to the second instalment of the purchase price of their Telstra shares in November 1997 (when the instalment receipts were allocated to the taxpayer). The expenditure was not incurred in December 1998 when the taxpayer was required to pay that instalment to the trustee.

Facts

The taxpayer applied for shares in the first Telstra public share offer in September 1997.

Despite the requirement that the offer to purchase shares be accompanied by the first instalment of $1.95 per share, no obligation to pay this amount arose prior to creation of a contractual relationship between the taxpayer and the Commonwealth. This occurred when the taxpayer's offer was accepted and shares were allocated by the Commonwealth.

The contract was made on 15 November 1997 and the taxpayer was allocated 2 500 instalment receipts.

The taxpayer paid the second instalment on their Telstra shares in November 1998. As an original instalment receipt holder, the taxpayer was required to pay $1.30 per share.

In December 2000 the taxpayer disposed of their Telstra shares and made a capital gain. The taxpayer chose to use the indexation method to calculate their capital gain.

In accordance with Taxation Determination TD 98/11 the taxpayer used the index number for the December 1998 quarter (121.9) to calculate the indexation factor for the second instalment of the purchase price of their Telstra Limited shares.

Taxation Determination TD 98/11 was withdrawn in December 2002 as a result of the decision in Dolby v FC of T 2002 ATC 4976; (2002) 51 ATR 272; (Dolby's Case).

The taxpayer seeks to amend their income tax assessment for the income year ended 30 June 2001.

Reasons for Decision

Section 114-1 of the ITAA 1997 provides that in working out the cost base of a CGT asset acquired at or before 11.45am (by legal time in the Australian Capital Territory) on 21 September 1999, expenditure incurred at or before that time in each element of the cost base of an asset can be indexed.

Subsection 960-275(2) of the ITAA 1997 states:

For indexation of the cost base of a CGT asset (except the first element of the cost base of an asset covered by subsection (3)), the indexation factor for expenditure in an element of the cost base is:

Index number for the quarter ending on 30 September 1999 (123.4) / Index number for the quarter in which the expenditure was incurred


The expenditure can include giving property: see section 103-5. ...

The time when the taxpayer incurred the second instalment of the purchase price of their Telstra shares will therefore determine the index number to be used in the denominator of this fraction.

In Dolby's Case Spender J held that the liability to pay the amount of the final instalment arose on the formation of the contract and allocation of shares in November 1997. On allocation of the instalment receipts, the taxpayer became the owner of the beneficial interest in the shares and became entitled to voting rights and dividends pending payment of the final instalment. The taxpayer was legally bound at this time to pay the final instalment when it became due.

Spender J held:

'The expenditure in respect of the final instalment in my view, was incurred in November 1997, even though not actually paid until November 1998. It follows that the indexation factor for the December 1997 quarter must be used to calculate the capital gain'.

Accordingly, the taxpayer is considered to have incurred the expenditure in relation to the second instalment of the purchase price of their Telstra shares in November 1997. The index number for the December 1997 quarter (120.0) should therefore be used rather than the index number for the December 1998 quarter (121.9) to calculate the taxpayer's indexation factor for the second instalment of the purchase price.

The taxpayer is therefore entitled to amend their income tax assessment for the year ended 30 June 2001. In this case the effect of the amendment will be to increase the cost base of each of the taxpayer's Telstra shares by two cents as indicated below:

Second instalment of purchase price indexed as per Taxation Determination TD 98/11

$1.30 x 1.012 (123.4*/121.9) = $1.32


Second instalment of purchase price indexed as per Dolby decision

$1.30 x 1.028 (123.4*/120.0) = $1.34


*Note: If the shares were sold in the December 1998, March 1999 or June 1999 quarters the relevant index number for the appropriate quarter should be used as the numerator.

Year of income:  Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1997
   section 114-1
   subsection 960-275(2)

Case References:
Dolby v Federal Commissioner of Taxation
   2002 ATC 4976
   51 ATR 272
   2002 FCA 1065

Related Public Rulings (including Determinations)
Taxation Determination TD 98/11
Taxation Determination TD 98/11

Keywords
Capital gains
Capital gains tax
CGT cost base
CGT indexation
CGT indexed cost base
Incurred
Self amendment of assessments

Business Line:  Losses & CGT Centre of Expertise

Date of publication:  15 March 2003

ISSN: 1445-2782