Edited version of private ruling

Authorisation Number: 1011839660899

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Ruling

Subject: Capital gains tax and cost base

Question and answers:

Is any gain made on the sale of your shares assessable as ordinary income?

No.

Is any gain or loss made on the sale of your shares assessable as a capital gain or loss?

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You purchased a parcel of company B shares.

Company A initiated a successful takeover of company B.

As a result of the takeover you received company A shares and cash.

You elected partial scrip for scrip roll over.

Company A initiated a successful infrastructure demerger of its existing corporate structure to form company C.

As a result of the demerger you received units in company C Trust, and shares of company C, that were stapled together as one.

You elected partial scrip for scrip roll over.

Company A initiated a successful demerger of company D from the existing corporate structure.

As a result of the demerger you received shares in company D.

The demerger resulted in company A distributing one company D for each company A share held by their shareholders

You sold your company A shares.

You have allowed the use of 3^rd party information in this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 104-5

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-100

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 112-45

Income Tax Assessment Act 1997 Section 112-53

Income Tax Assessment Act 1997 Section 112-54

Income Tax Assessment Act 1997 Section 115-5

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 115-100

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Section 124-10

Income Tax Assessment Act 1997 Section 124-70

Reasons for decision

The assessable income of a resident taxpayer consists of income according to ordinary concepts (ordinary income), and statutory income.

Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

In your case, the proceeds that you have received from the sale of your shares are not for services rendered, are a one off payment, and may be considered to be relied on however could not be said to have an element of periodicity, recurrence or regularity. On the balance the proceeds that you have received are not considered to be ordinary income.

Where income is not considered assessable as ordinary income it may be assessable as statutory income. Statutory income includes net capital gains.

Capital Gains Tax

Capital gains tax (CGT) is the tax you pay on certain capital gains you make. You may make a capital gain or capital loss as a result of a CGT event. The most common event is CGT event A1, which happens when there is a change of ownership of a CGT asset. Shares purchased post 19 September 1985 are CGT assets.

You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base.

You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

CGT forms part of a taxpayer's income tax and in the case of a capital gain, is added to a taxpayer's annual assessable income. The taxpayer is then taxed on this gain at their marginal rate.

Proceeds

The capital proceeds are the money you received (or are entitled to receive) in respect of the CGT event happening or the market value of any property you received in respect of the CGT event happening.

Cost base

The cost base of a CGT asset is made up of five elements:

· money paid (or required to be paid) or property you gave (or required to be given) for the asset,

· incidental costs of acquiring or selling it (for example, brokerage and stamp duty),

· costs of owning it,

· costs associated with increasing or preserving its value or installing or moving it, and

· what it has cost you to preserve or defend your title or rights to it.

A reduced cost base is used where you have not made a capital gain to work out whether you have made a capital loss. The reduced cost base has the same five elements as the cost base except for the third element which is:

a balancing adjustment amount (that is, any amount that is assessable because of a balancing adjustment for the asset or that would be available if certain balancing adjustment relief were not available).

Discounted capital gain

A taxpayer is entitled to apply a discount to a capital gain provided they satisfy the following requirements:

· you are an individual,

· a CGT event happens to an asset you own,

· the CGT event happened after 21 September 1999,

· you owned the asset for 12 months or more

Where a taxpayer satisfies all of the requirements they are entitled reduce any capital gain by 50% after they have applied all the capital losses for the year and any unapplied net capital losses from earlier years.

Takeovers and mergers

If a company in which you own shares is taken over or merges with another company, you may have a CGT obligation if you are required to dispose of your existing shares.

In certain circumstances, if you acquire new shares in the takeover or merged company, you may be able to defer paying CGT until a later CGT event happens (see scrip for scrip roll-over below).

Scrip for scrip roll-over

If a company in which you owned shares was taken over and you received new shares in the takeover company, you may be entitled to scrip for scrip rollover.

The rollover enables a shareholder to disregard a capital gain from a share that is disposed of as part of a corporate takeover or merger if the shareholder receives a replacement share in exchange. In electing scrip for scrip rollover a shareholder defers any capital gain or loss until such time as there is a future CGT event (for example the disposal of the replacement shares).

When electing script for scrip rollover you are taken to have acquired the replacement shares for the cost base of the original interest.

Accordingly, the first element of the cost base of the replacement shares would be the cost base of the original shares.

Return of Capital

CGT event G1 happens if you receive a payment from a company in respect of shares you own in the company, and some or all of the payment is not a dividend.

If you receive a non assessable payment from a company (that is, a payment that is not a dividend or an amount that is taken to be a dividend for tax purposes), you need to adjust the cost base of the shares at the time of the payment. These payments will often be referred to as a return of capital.

If the amount of the non-assessable payment is not more than the cost base of the shares at the time of the payment, you reduce the cost base and reduced cost base by the amount of the payment.

Take over of company B by company A

Company A initiated a successful takeover offer for company B shares.

The offer made by company A was that in exchange for every company B share, a share holder would receive cash and a percentage of a company A share.

Company B shareholders who did not accept the offer before had their shares compulsorily acquired and received the same consideration made in the original offer for every company B share held.

In your case, you purchased company B shares post 19 September 1985. When the takeover of company B was initiated you did not accept the company A takeover offer, therefore you had your company B shares compulsory acquired. When your shares were compulsory acquired by company A you received the same consideration as those who accepted the offer which was in exchange for every company B share you received cash and a percentage of a company A share.

After the completion of the takeover you elected partial scrip for scrip rollover therefore deferring any capital gain or loss that relates to the replacement shares until such time as there was a disposal of your shares.

Company A Demerger and Company C

Company A initiated a successful infrastructure demerger to facilitate a demerging of its existing corporate structure into a Logistics Group and an Infrastructure Group.

Company A provided two Schemes of Arrangement that were approved by company A shareholders to facilitate the demerger. Company A effected this restructure by undertaking the following:

· incorporating a new company, company C;

· establishing a new unit trust, C Trust; and

· transferring infrastructure assets to company C from members of the company A group of companies.

Under the two Schemes of Arrangement that were approved by company A shareholders, company A made two separate and distinct capital reductions and payments of special dividends.

Scheme 1

The first Scheme of Arrangement involved the payment of a fully franked dividend (first special dividend) and a return of capital (first capital reduction amount) for each ordinary company A share. The total amount was compulsorily applied on behalf of company A shareholders to subscribe for a unit in the C Trust. The C Trust units were allotted on the implementation date of the first Scheme of Arrangement.

Scheme 2

The second Scheme of Arrangement involved the payment of an unfranked dividend (second special dividend) and a return of capital (second capital reduction amount) for each ordinary company A share. Those amounts were applied for the issue of company C shares which were allotted to company A shareholders on the implementation date of the second Scheme of Arrangement.

In your case, as a result of the demerger you are required to reduce the cost base of your company A shares by the return of capital payments made in each of the schemes.

After the completion of the demerger you once again elected scrip for scrip rollover therefore deferring any capital gain or loss that relates to the replacement shares until such time as there is a disposal of your shares.

Company A demerger and Company D

Company A initiated a successful infrastructure demerger which resulted in company D being demerged from its existing corporate structure.

To facilitate this demerger company A distributed a in specie dividend of company D whereby company A shareholders received 1 share in company D for each company A share held. The result for shareholders is that they were required to apportion the original cost base of their company A shares between their company A shares and their company D.

In your case, as a result of the demerger of company D from company A, you received 1 share of company D for each company A share that you held. Therefore you will be required to apportion the original cost base of your company A shares between your company A shares and your company D.

Disposal of Company A shares

You disposed of your company A shares. This change of ownership triggered a CGT event A1.

You are therefore required to calculate any capital gain or loss that has resulted from the disposal of your company A shares and include it in your assessable income in the income year that they were sold.

Your capital gain or loss will be the proceeds that you have received, less the cost base or reduced cost base (in the case of a loss), of your shares.

As you have held the shares for a period of greater than 12 months and you satisfy the discounted capital gain requirements you are entitled to apply a 50% discount once you have applied all the capital losses for the year and any unapplied net capital losses from earlier years.

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