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Edited version of your written advice
Authorisation Number: 1012708899289
Ruling
Subject: Capital gains tax
Question and answer
1. Is the first payment received by you in the XXXX income year assessable in the XXXX income year?
No.
2. Will the first payment form part of the proceeds for CGT event C2 which occurs in the XXXX+1 income year?
Yes.
3. Does CGT event C2 occur when the liquidation is completed in the XXXX+1 income year?
Yes.
4. Are you entitled to a foreign income tax offset for the company tax paid by the liquidator?
No.
This ruling applies for the following periods:
Year ended 30 June 2014
Year ending 30 June 2015
The scheme commenced on:
1 July 2013
Relevant facts and circumstances
You received a number of shares in a company post 1985.
The company was liquidated.
You received a payment in the previous income year and a payment in the year of liquidation.
The liquidators paid company tax.
Relevant documents show the net book value of the shares as being $XX per share at about the time of acquisition.
Reasons for decision
Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer makes a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985.
A taxpayer makes a capital gain if a their capital proceeds from the sale of a CGT asset are greater than the cost base for the purchase of that asset, for example, if a taxpayer received more for an asset than they paid for it.
A taxpayer makes a capital loss if their reduced cost base for the purchase of that asset is greater than the capital proceeds resulting from the sale of that asset.
Capital gains tax is not a separate tax, it forms part of a taxpayer's assessable income and is taxed at each taxpayer's marginal tax rate.
Taxation Determination TD 2001/27 discusses the treatment of a final distribution made by a liquidator. Paragraph 1 of TD 2001/27 states:
The full amount of a final distribution made by a liquidator on the winding-up of a company constitutes capital proceeds from the ending of the shareholder's shares in the company for the purposes of capital gains or capital losses made on the happening of CGT event C2 (about cancellation, surrender and similar endings) in section 104-25 of the ITAA 1997. After the winding-up of a company, CGT event C2 happens to the shares when the company ceases to exist.
The company was liquidated. You had a number of shares in the company. You received a distribution in one year and a final distribution in the next income year.
There are two events which are applicable to the distributions you received, CGT event C2 and CGT event G1.
CGT event C2 is discussed in section 104-25 of the ITAA 1997 and CGT event G1 is discussed in 104-135 of the ITAA 1997.
Subsection 104-135(6) applies where an interim payment is received less than 18 months prior to the final distribution.
In your case the time between receiving the first payment and the final payment in the next income year is less than 18 months CGT event G1 will not occur.
CGT event C2 was triggered when the company was liquidated and the shares cancelled in the second income year.
You are therefore required to apply the capital gains provisions to the two distributions received by you in the year of final payment and liquidation.
Foreign income tax offset
If you have paid foreign tax in another country, you may be entitled to an Australian foreign income tax offset, which provides relief from double taxation.
These rules apply for income years that start on or after 1 July 2008. Different rules apply for income periods up to 30 June 2008.
To qualify for a foreign income tax offset (FITO) you must meet all of the following criteria:
• You must have paid the foreign tax on the foreign income
• The foreign tax must be a tax which you were personally liable for, and
• The income or gain that the foreign tax was paid must be included in your assessable income for Australian income tax purposes.
The foreign income tax offset is a non-refundable tax offset. The foreign income tax offset is applied to your income tax liability including the Medicare levy and the Medicare levy surcharge where applicable. Any excess is not refunded to you.
The company tax that was paid by the liquidator does not qualify for the FITO as you were not personally liable to pay this tax as per the criteria set out above rather it was the payment of a tax liability of the company.
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