ATO Interpretative Decision
ATO ID 2001/308
Income Tax
Sale of Company via Share CancellationFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Whether an amount received or receivable from a 'third party' in respect of a share cancellation (i.e., not from the company in which the shares are being cancelled), is capital proceeds in respect of CGT event C2 contained in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Depending on the facts, an amount received or receivable from a third party may be capital proceeds in respect of CGT event C2. If the amount is not capital proceeds in respect of CGT event C2, it may constitute capital proceeds in respect of CGT events D1 or H2.
Facts
The taxpayer sought to sell its shares in a wholly owned subsidiary company. However, the 'sale' was not effected by a disposal of the shares held by the taxpayer to the purchaser. The terms of the Sale Agreement provided that the purchaser would pay the taxpayer the market value of the shares held in the subsidiary and that the taxpayer would agree to all of the shares it held in the subsidiary being cancelled.
Although the subsidiary was not a party to the agreement, under the terms of the Sale Agreement, the taxpayer was required to ensure that the relevant director and shareholder meetings in the subsidiary were held to give effect to the cancellation of shares.
Reasons for Decision
Paragraph 104-25(1)(a) of the ITAA 1997 provides that CGT event C2 happens if a taxpayer's ownership of an intangible CGT asset ends because it is redeemed or cancelled. The cancellation of shares will trigger CGT event C2. A CGT gain/loss from CGT event C2 is determined by calculating the difference between the capital proceeds received or to be received on the happening of the CGT event and the cost base/reduced cost base of the CGT asset - subsection 104-25(3) of the ITAA 1997.
Subsection 116-20(1) of the ITAA 1997 provides the general rules for determining the capital proceeds from a CGT event. It provides that capital proceeds includes the total of the money you have received, or are entitled to receive, in respect of the event happening.
In this case the Sale Agreement establishes a nexus between the payment of the money and the cancellation of the shares. Accordingly, the amount received, or receivable, from the purchaser is capital proceeds in respect of CGT event C2.
Is any other CGT event relevant?
In this situation, it could be argued that CGT events D1 or H2, sections 104-35 and 104-155 respectively of the ITAA 1997, may happen at the time of cancellation of the shares.
However, in accordance with section 102-25 of the ITAA 1997, those events will only apply if no other CGT event applies. As previously outlined, the money received in this case will constitute capital proceeds in respect of CGT event C2. Therefore, it is unnecessary to consider whether the money gives rise to a capital gain from any other CGT event.
Date of decision: 28 May 2001
Legislative References:
Income Tax Assessment Act 1997
Section 102-25
Section 104-25
Subsection 104-25(3)
Paragraph 104-25(1)(a)
Section 104-35
Section 104-155
Subsection 116-20(1)
Keywords
Return of capital on shares
Disposal of business
Cancellation of shares
Capital reductions
Issue of shares
ISSN: 1445-2782
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