ATO Interpretative Decision
ATO ID 2003/774
Income Tax
Capital Gains Tax: capital proceeds - shares held in escrowFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Are shares received for the sale of a CGT asset included in the capital proceeds for the sale under subsection 116-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997) if the shares are subject to a deed of escrow which imposed a restriction on dealing in the shares?
Decision
Yes. The restrictions on dealing in the shares imposed by the deed of escrow do not prevent them being property received in respect of the sale and therefore capital proceeds under paragraph 116-20(1)(b) of the ITAA 1997.
This means the value of the shares at the time of the sale must be taken into account in working out whether the sale resulted in a capital gain or capital loss.
Facts
The taxpayer sold the assets of their business in the 1999-2000 income year.
Consideration received by the taxpayer for the sale included shares in the company that purchased the business. On settlement the shares were registered in the taxpayer's name.
However, it was a condition of the issue of the shares to the taxpayer that the taxpayer would not sell them during the 12 month period starting at the date of the sale agreement (that is, the escrow period).
The taxpayer's holding of the shares during the escrow period was not subject to any other restrictions.
Reasons for Decision
The sale of the taxpayer's business caused CGT event A1 in section 104-10 of the ITAA 1997 to happen. The capital proceeds from a CGT event are the total of the money and the market value of other property received in respect of the event: subsection 116-20(1) of the ITAA 1997. The market value of other property is to be worked out at the time of the event (paragraph 116-20(1)(b)).
The restrictions on dealing in the shares imposed by the deed of escrow do not prevent them being property received in respect of the sale, that is, in respect of the CGT event. The taxpayer received the shares, albeit with a restriction attached. While the taxpayer could not sell the shares for 12 months, they were entitled to all the other benefits of a shareholder.
Therefore, the market value of the shares at the time of the sale is included in the taxpayer's capital proceeds (paragraph 116-20(1)(b) of the ITAA 1997). The taxpayer cannot use the value of the shares at the end of the escrow period for this purpose.
Date of decision: 24 July 2003Year of income: Year ended 30 June 2000
Legislative References:
Income Tax Assessment Act 1997
section 104-10
subsection 116-20(1)
paragraph 116-20(1)(b)
Keywords
Capital gains
Capital gains tax
CGT capital proceeds
Property law
Shares
ISSN: 1445-2782
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