Edited version of private ruling

Authorisation Number: 1011717425203

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Ruling

Subject: capital gains tax and shares

Question and answer:

Will any capital gain or capital loss made on the accidental sale of your interest in shares be disregarded?

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You sold some shares which you had originally purchased after September 1985.

The shares were owned jointly with your spouse.

The shares were sold by your financial planner on your behalf.

The sell confirmation contract notes were issued and received by your financial planner.

At this point your financial planners discovered they had accidentally sold all your shares whereas your intension had been to sell only some of them.

You then bought the same number of shares you originally had and subsequently sold some of them.

You did not hold at least 50% of the voting power or the right to at least 50% of any distribution of income and capital that the company makes.

Relevant legislation provisions:

Income Tax Assessment Act 1997 Section 102-5.

Income Tax Assessment Act 1997 Section 102-10.

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Section 118-5.

Income Tax Assessment Act 1997 Section 118-12.

Income Tax Assessment Act 1997 Section 124-70.

Income Tax Assessment Act 1997 Section 124-240.

Income Tax Assessment Act 1997 Section 152-10.

Income Tax Assessment Act 1997 Section 152-50.

Income Tax Assessment Act 1997 Section 152-410.

Reasons for decision

Capital gains tax - general

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss if and only if a CGT event happens. The gain or loss is made at the time of the CGT event and can only be made in respect of a CGT asset.

Shares acquired on or after 20 September 1985 are CGT assets.

An assessable gain will arise when the proceeds of the disposal of a CGT asset are greater than the cost base of the asset.

An assessable gain is included in your tax return, along with your other income, and taxed at your marginal tax rate.

You make a capital loss if the reduced cost base of your CGT asset is greater than the capital proceeds received for the asset.

CGT event A1 - disposal of CGT assets

Section 104-10 of the ITAA 1997 is concerned with CGT event A1. CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.

Section 104-10 of the ITAA 1997 does not distinguish between deliberate and accidental asset disposals. Further, it does not contain provisions that allow you to disregard a capital gain or capital loss when identical replacement assets are purchased soon after disposal.

In your case, the shares that you owned were CGT assets as you purchased them after September 1985 and a CGT event A1 happened when you stop being their owner (that is, when the shares were sold). This is the case even though the shares were sold without your consent and you bought like shares shortly after as a replacement.

Exceptions, exclusions & deferment of CGT liability

There are a number of provisions within the ITAA 1997 that may exempt, exclude or defer a liability for CGT in certain circumstances. These include:

1. Division 118 of the ITAA 1997 sets out various exemptions for many capital gains and capital losses. This division deals with general exemptions such as cars (section 118-5 of the ITAA 1997) and assets used to produce exempt income (section 118-12 of the ITAA 1997).

However, there is no provision in this division that allows any capital gains or capital losses on the sale of shares in your circumstances to be disregarded;

2. Subdivision 124-B of the ITAA 1997 provides replacement-asset roll-over relief where a CGT asset is compulsorily acquired by an Australian government agency or the asset is lost or destroyed (subsection 124-70(1) of the ITAA 1997).

In your case, the shares were neither compulsorily acquired by an Australian government agency nor lost or destroyed, therefore this provision for the replacement-asset roll-over concession will not apply;

3. Subdivision 124-E of the ITAA 1997 provides roll-over relief where a you own shares of a certain class in a company and the company redeems or cancels all shares of that class and issues new shares in substitution for the original shares (section 124-240 of the ITAA 1997).

The replacement shares, which you received, will not be issued by the company in substitution for the company redeeming or cancelling the original shares. Hence, this provision does not apply in your case; and

4. Subdivision 152-E of the ITAA 1997 provides for small business roll-over on a capital gain from a CGT event to be deferred if the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain (section 152-410 of the ITAA 1997). One of the conditions under Subdivision 152-A of the ITAA 1997 requires that, where the CGT asset is a share in a company, there must be a controlling individual just before the CGT event and the individual claiming the concession must be a CGT concession stakeholder in the company (sections 152-10 and 152-50 of the ITAA 1997). An individual is a controlling individual of a company if the individual holds at least 50% of the voting power and the right to at least 50% of any distribution of income and capital that the company may make.

As you did not hold at least 50% of the voting power, or the right to at least 50% of any distribution of income and capital that the company makes, you will not satisfy the controlling individual nor CGT concession stakeholder tests and will not be eligible for the small business asset roll-over relief under Subdivision 152-E of the ITAA 1997.

Commissioner's Discretion

The legislation that covers capital gains and losses (Part 3-1 and 3-3 of the ITAA 1997) does not contain any provision to allow the Commissioner to exercise discretion in the case of accidental or unauthorised disposal.

Accordingly, as there is no discretion the Commissioner is unable to disregard the capital gain or loss on the accidental sale of you shares.

Conclusion

Without specific provisions in the legislation to allow relief in your circumstances, any capital gain or capital loss made in the income year on the sale of your shares cannot be disregarded even though the CGT event which resulted in the capital gain or loss was accidental.

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