Edited version of private ruling

Authorisation Number: 1011595767795

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Ruling

Subject: Capital gains tax (CGT) - Disposal of shares

Is the sum you received included in your assessable income as a capital gain?

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You were contacted by a company (the company) who had located some lost or forgotten assets in your name which were valued at approximately $X.

You decided to accept the terms offered by the company to proceed with the recovery of the assets and subsequent disposal.

The lost or forgotten assets were Commonwealth Bank of Australia (CBA) shares.

Neither you nor your spouse could remember purchasing these shares.

You have been able to establish from the Commonwealth Bank that you had a policy with Colonial Mutual.

Colonial Mutual demutualised in December 1996, and shares were issued to all members, your received a specified number of shares.

The embedded value and cost base of these shares was $3.31 per shares, being a total of $X.

On 13 June 2000, the CBA took over Colonial Mutual and for every 20 Colonial Mutual shares held you were entitled to seven CBA shares. You received a specified number of CBA shares.

You have elected scrip-for-scrip rollover.

This made the cost base of your CBA shares equal to the cost base of your Colonial Mutual shares.

CBA had been trying to send dividend cheques to your previous address which you had left prior to 2000.

Two months later the company disposed of your CBA shares.

The CBA have issued replacement cheques for all the dividends received from early 2002 until mid this year, a total of $X.

You received a cheque from the company for the sum of X with additional cheque of $X to follow when received by the company.

You have provided copies of the following documentation to support your application and these documents are to be read with and forms part of the scheme for the purpose of this ruling:

· Correspondence from the company

· Statement from the stockbroker

· Replacement cheques from Commonwealth Bank

· Commonwealth Bank dividend statements

· Email from CBA - Link Market Services Limited

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 109-5.

Income Tax Assessment Act 1997 Section 116-20.

Income Tax Assessment Act 1997 Section 102-22.

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 115-5

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1936 Section 44

Reasons for decision

Summary

The payment you received from the company was made up of capital proceeds from the disposal of shares and dividends. The capital proceeds are used to calculate the capital gain made in the current income tax year. The dividends are assessable in the year the dividends were initially paid to you by the bank.

The Commission you paid to the company needs to apportioned between the dividends and capital proceeds. The proportion that relates to the dividends is an allowable deduction in the current income tax year. The amount that relates to the capital proceeds is included in the cost base of the shares.

Detailed reasons

Income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states ordinary income is assessable income. The term ordinary income is not defined in the taxation legislation however it has been defined by the courts of law. Examples of ordinary income include salaries, wages, rent, interest, dividends and the proceeds of carrying on a business.

Franked Dividends

If an individual receives dividend income, or if you are paid or credited dividends, you are required to include the amount in assessable income on your tax return. Franked dividends carry franking credits, a credit for the tax paid by the company.

The dividends payments of $X0 during the period early 2002 to mid this year are considered to be income and should be included in the relevant income tax year, not in the year of receipt of the payment from the company.

Franking Credits

As a general rule, the tax consequences for an individual receiving a franked distribution for the income year in which the distribution is made, the recipient of a franked dividend:

· includes in their assessable income the amount of the franking credit on the distribution. This is in addition to any other amount included in the recipient's assessable income in relation to the distribution itself, and

· is entitled to a tax offset equal to the franking credit.

From the 2001 income year, franking credits are available as a refund where the tax liability is less than the amount of tax offset.

Deductions

Section 8-1 of the ITAA 1997 allows a deduction for any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income, or

(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

However, under subsection 8-1(2) of the ITAA 1997, you cannot deduct a loss or outgoing to the extent that it is capital or of a capital nature.

Therefore, in order to determine whether the costs you incurred in obtaining your dividend payments are deductible, it is necessary to consider whether it was incurred in gaining or producing assessable income or whether it is capital, private or domestic in nature.

The amount you paid in commissions and GST was to enable you to receive the capital proceeds and arrears of dividend income. As such you need to apportion the cost between the two receipts.

The amount paid in respect of the capital proceeds would be an incidental cost for the disposal of the shares. The amount paid in respect of the arrears of the dividends is considered to be an allowable deduction.

Capital gains tax (CGT)

CGT is the tax you pay on any capital gain you make and included in your annual income tax return. You make a capital gain or a capital loss as a result of a CGT event.

When you disposed of your CBA shares, a CGT event A1 occurred.

Working out your capital gain or capital loss

To work out the capital gain or capital loss made on the disposal of an asset, it is necessary to compare two amounts and determine the difference between them. These amounts are the capital proceeds and cost base.

Where the capital proceeds are greater than the cost base of the asset, a capital gain has been made. Where the capital proceeds are less than the cost base of the asset, a capital loss has been made.

You can use the discount method to calculate your capital gain as you meet all the relevant criterion.

In your case, you disposed of your CBA shares for $X which equates to $X per share. The company service charge of a specified percentage amount plus GST also applied to the disposal of your shares which equates to $X.

We have calculated your capital gain as follows using the discount method.

This amount should be included in your 2009-10 income tax return.

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