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Edited version of private advice
Authorisation Number: 1012623100696
Ruling
Subject: Capital gains tax
Question
Will the company make a capital gain or loss if the shares are transferred?
Answer
No
This ruling applies for the following period:
Year ending 30 June 2014
The scheme commenced on:
1 July 2013
Relevant facts and circumstances
X and Y operated a business in partnership under a name that was similar to the company's name.
The partnership acquired shares that were incorrectly registered as being owned by the company.
The funds used to acquire the shares came from the partnership's bank account.
The dividends from the shares have always been reflected in the partnership's tax returns.
It is intended to correct the error in the registered ownership of the shares by way of transfer to the relevant parties.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 100-20(1)
Income Tax Assessment Act 1997 Subsection 104-10(2)
Income Tax Assessment Act 1997 Section 106-50
Reasons for decision
You only make a capital gain or capital loss if a capital gains tax (CGT) event happens to an asset that you own (subsection 100-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997)).
CGT event A1 happens if you dispose of a CGT asset. Subsection 104-10(2) of the ITAA 1997 provides that you dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you maintain beneficial ownership.
Section 106-50 of the ITAA 1997 provides that if you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), then the CGT provisions apply to an act done by the trustee in relation to the asset as if you had done it.
'Trust' is not defined in the Income Tax Assessment Act 1936 or ITAA 1997. French J in Harmer & Ors v. Federal Commissioner of Taxation (1989) 20 ATR 1461; 89 ATC 5180 stated that a trust 'is notably a definition of a relationship by reference to obligations'. He went on to state that the four essential elements of a trust are:
1. the trustee who holds a legal or equitable interest in the trust property
2. the trust property which must be property capable of being held on trust and which includes a chose in action
3. one or more beneficiaries other than the trustee and
4. a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries which obligation is also annexed to the property.
The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call (ignoring any legal disability) for the asset to be transferred to them or to be transferred at their direction. This means that the beneficiary and not the trustee will be liable for any capital gain or loss which arises in relation to the asset.
In this case we accept that the partners of the partnership have always been the beneficial owners of the shares. The funds to purchase the shares came from the partnership and the dividends have always been declared in the partnership tax returns.
It is considered that the partners have been absolutely entitled to the shares since they were acquired and the company has been acting in a trustee capacity. Section 106-50 of the ITAA 1997 would apply to treat the partners as the relevant taxpayers in relation to any CGT event that happens to the shares. Accordingly, the company will not make a capital gain or loss when the shares are transferred.
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