Edited version of private ruling

Authorisation Number: 1011571936089

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Ruling

Subject: Capital gains tax (CGT) - market value substitution rule

1. Does the market value substitution rule apply to the sale of the units to your child?

Yes.

2. To obtain the market value of the units are you required to obtain a detailed valuation from a qualified valuer or compute your own valuation based on reasonably objective and supportable data?

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

In the 2008-09 income year you acquired a sum of units of an ASX listed unit trust.

In the 2009-10 income year the trust was delisted, wound-up and went into liquidation.

The Supreme Court has ordered the winding up of the trust.

The administrator has been quoted in news reports as saying that there is no reasonable likelihood that the suspensions will be lifted. Further, given the insolvency of the schemes, there is no reasonable likelihood that investors will recover anything of their investments.

You have not received anything in writing from the administrators/liquidators.

In the 2009-10 income year you entered into a transaction with your relative to transfer ownership of the units for a small amount of money.

The main reason for transferring these units was to crystallise your loss and for closure.

You have not yet prepared your income tax return for the 2009-10 income year but you believe you may have had some capital gains during the year.

You have not made any other arrangements with regard to the units with your relative.

The only known purchaser of these securities is an organisation that buys worthless shares. The price they offer after fees is effectively negative.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 108-5

Income Tax Assessment Act 1997 Sections 110-25

Income Tax Assessment Act 1997 Section 110-35

Income Tax Assessment Act 1997 Section 110-55

Income Tax Assessment Act 1997 Section 112-20

Income Tax Assessment Act 1997 Subsection 116-30(2)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Please note that all references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Capital gains tax

CGT is the tax you pay on certain gains you make. You make a capital gain or a capital loss only if a CGT event takes place.

The most common CGT event, CGT event A1, occurs whenever there is a change in ownership of an asset from you to someone else, whether by sale or by gift. The time of the event is when you enter into the contract for the disposal of the asset, or if there is no contract, when the change of ownership transpires.

CGT assets include units in a unit trust and when you sold your units to your relative, a CGT event A1 took place.

You make a capital gain if the proceeds from disposing of the asset are greater than the cost base of the asset. The cost base is made up primarily of the amount you paid or the value of any property you were given in exchange for the asset when first acquired, plus incidental costs of acquisition.

Alternatively, you make a capital loss if the proceeds from the event are less than your reduced cost base. Your reduced cost base is the purchase price of the units and also includes incidental costs that relate to the event such as broker fees.

Your capital losses can be applied to any capital gain that you make in the same income year. If you do not have any capital gains, or you have more losses than gains, any unapplied net capital losses can be carried forward and applied against any ensuing capital gains made during the next income years.

Non-arm's length transaction and market value substitution rule

The capital proceeds from a CGT event are substituted with the market value of the CGT asset that is the subject of the event if the asset was disposed of in a non-arm's length dealing.

You are said to be dealing at arm's length with someone if you each act independently and neither of you exercises influence or control over the other in connection with the transaction. For example, where a taxpayer and a supplier of goods are associated, they will be regarded as negotiating at arm's length if the supplier freely makes the same goods available to third parties on the same terms and conditions.

If you do not deal at arm's length, the market value substitution rule specifies that you substitute the proceeds you received with the market value of the asset at the time of the transaction. Your cost base or reduced cost base will therefore be modified accordingly.

Typically, and as you have noted, market value means the price that would be negotiated in an open and unrestricted market between a willing but not anxious buyer and a willing but not anxious seller, acting at arm's length, who are both aware of current market conditions. This is explained in the Tax Office's guidelines published on its website, and a copy of these guidelines is enclosed for your information.

Acceptable valuations for CGT purposes

Taxation Determination TD 10 explains what acceptable valuations for CGT purposes are and states:

1. Where the "market value" of an asset needs to be determined, taxpayers can choose to :

(i)   obtain a detailed valuation from a qualified valuer; or,

(ii)  compute their own valuation based on reasonably objective and supportable data.

Example:

A taxpayer owns a unit in a block of 10 units and needs to obtain its market value for CGT purposes.

The taxpayer chooses not to approach a qualified valuer in this case.

A valuation based on contemporaneous sales of similar units in that block of units would be acceptable.

Note: The ATO may challenge valuations where appropriate.

If you ask the Tax Office to determine the value, or confirm the valuation provided, we would expect to engage a valuer and we will pass on the costs charged by the valuer to you. The Private rulings and valuation fact sheet (NAT 71796) explains what happens where the Tax Office refers a request to a professional valuer and we have enclosed a copy of this fact sheet for your information.

Application to your circumstances

You held units in a trust which is currently in liquidation and has been delisted. The voluntary administrators have been quoted in news reports as saying that there is no reasonable likelihood that the suspensions will be lifted and given the insolvency of the schemes, there is no reasonable likelihood that investors will recover anything of their investments. However, you have not received anything in writing from the administrators.

You located an organisation that purchases worthless shares and they would have paid you a small amount however after relevant fees are charged the price would effectively have been negative. After researching the Tax Office website for advice and considering the definition of market value as stated therein, you and your child considered an amount for the complete bundle of units to be a reasonable estimation of fair value for the minute chance that there may be a return to shareholders.

After carrying out this research, in order to realise a capital loss and to close off your investments with the trust, you sold your units to your child for the considered amount. This arrangement does not meet the requirement stipulated to be considered a transaction completed at arm's length, as the disposal of the units to your child is not an independent transaction between unrelated parties.

Therefore, the market value substitution rule will apply to this CGT event.

In working out the capital proceeds for the market value substitution rule the Commissioner considers that situations where capital proceeds cannot be valued will be rare. It is not sufficient that a valuation is merely difficult, costly or inconvenient. If it is at all possible to value the capital proceeds, the valuation should be done.

Wash sales to crystallise capital losses

The Commissioner's views on the application of Part IVA of the ITAA 1936 to the disposal of CGT assets in order to crystallise capital losses to offset against capital gains are found in Taxation Ruling TR 2008/1. The ruling advises that Part IVA will apply to any disposition of CGT assets by a taxpayer to either a related or unrelated party, in circumstances where there has been no substantive change in the commercial position of the taxpayer (and/or related entities) and where it is established (on an objective basis) that the generation of the loss was a dominant purpose for the transfer. This ruling is available on our website www.ato.gov.au.

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