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Edited version of your private ruling
Authorisation Number: 1012412558000
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Ruling
Subject: Capital gains tax
Question 1
Will the Trust make a capital loss on the disposal of its shares in the Company?
Answer
Yes
Question 2
Will the capital loss from question 1 be available to be offset against future capital gains?
Answer
Yes
This ruling applies for the following periods:
Year ending 30 June 2013
The scheme commences on:
1 July 2012
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.
The Trust currently owns a parcel of shares in the Company. The Company was established several years ago for a specific purpose.
The trustee of the Trust is proposing to dispose of its shares in the Company in consideration for receiving property.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-25
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 section 116-20
Income Tax Assessment Act 1936 section 159GZZZP
Income Tax Assessment Act 1936 section159GZZZQ .
Reasons for decision
Capital gains tax
Capital gains tax (CGT) applies when certain events or transactions happen. These are referred to as CGT events. The most common CGT event is CGT A1 which occurs when your ownership in a CGT asset is transferred to another entity (section 104-10 of the ITAA 1997).
The time of this event is:
a) when you enter into the contract for the disposal: or
b) if there is no contract when the change of ownership occurs.
CGT event C2 will happen, on the other hand, if an asset is cancelled or surrendered (section 104-25 of the ITAA 1997). The time of a CGT event C2 will be when the contract ending the asset is entered into or, if no contract, when the asset ends.
You will make a capital gain if your capital proceeds for the CGT event is greater than your cost base. You make a capital loss if your capital proceeds are less than your cost base.
The capital proceeds from a CGT event are the total of:
a) the money you receive, or are entitled to receive, in respect of the CGT event happening, and
b) the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event) (section 116-20 of the ITAA 1997).
However, see below for the situation where a company decides to buy back its shares.
Capital losses made by a trust cannot be distributed to the trust's beneficiaries. They can be carried forward and applied against capital gains in future years.
Share buy back
Where
a company decides to buy back its shares , and
the company accounts for this buy back in its books by debiting its share capital account by an amount that is less than the market value of the shares at the time of the buy back,
the shareholder will be deemed to have received an assessable dividend of the difference between the market value of the shares and the amount debited to the company's share capital account. (sections 159GZZZP and 159GZZZQ of the ITAA 1936).
In this situation, the capital proceeds received on the disposal of the shares will be reduced by the amount of the assessable dividend received.
Application to your circumstances
The shares that the Trust owns in the Company are CGT assets. Therefore CGT event A1 or C2 will occur at the time that the Trust disposes of those shares. Depending on whether the Company cancels the shares or buys back the shares will determine which CGT event will be applicable. That is, if the Company is buying back its shares, CGT event A1 will happen. If the Company is cancelling the shares, then CGT event C2 will happen.
The capital proceeds received by the Trust on the disposal of the shares will be the market value of the property at the time of the CGT event (reduced by any assessable dividend (if any) if the disposal is by way of a share buy back arrangement).
To the extent that the market value of the property at the time of the CGT event is greater than the cost base of the shares, the Trust will make a capital loss. This capital loss is not available for distribution to beneficiaries of the Trust, but should be carried forward and offset against any future capital gains that the Trust may make.
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