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Edited version of your written advice

Authorisation Number: 1012833266670

Date of advice: 2 July 2015

Ruling

Subject: CGT - sale of shares and event K6

Questions and answers

This ruling applies for the following period

1 July 2012 to 30 June 2013

Relevant facts and circumstances

Prior to 20 September 1985, you commenced work on a project to develop certain devices.

Prior to 20 September 1985 you invented an invention and applications were made for patents, registered designs, and trademarks based upon the work commenced.

Pre-CGT an application for the Trademark in Australia was made by you and was ultimately registered pre-CGT. The patent applications had imbedded within the original product and patent most of the 'know-how' to that point.

Post-CGT a company was incorporated as a 'shelf company' with a number of ordinary shares.

Post-CGT the original ordinary shares in the shelf company were acquired by you and your spouse, but the original shares were beneficially owned by you.

The original share acquired by your spouse was held by them as nominee for you (under a declaration of trust).

The shelf company shortly thereafter changed its name and ultimately came to be called the company.

At all times the products produced by the company were marketed under the brand protected from the outset by the Trademark.

Post-CGT, under an Agreement you agreed to transfer to the company, in exchange for the allotment of ordinary shares ('exchanged shares') to you in your own right beneficially, all of the following items;

Post-CGT an election under former section 160ZZN(2) of the Income Tax Assessment Act 1936 was executed.

Post-CGT you sold or agreed to sell to company P, over half your shares in the company; leaving you with an allotment of the 'exchanged shares' and the original share in the company.

Post-CGT you bought back from company P the sold shares which company P acquired. Your spouse purchased from company P the remaining shares held by company P.

The original trademark (the formal application for which was transferred to the company by you) has been held by the company at all relevant times and the brand is protected by that trademark. Additional trademark registrations have also been made to widen the protected categories.

The original patents (granted under the assigned applications) have since expired and additional patents have been registered in respect of current forms of the device which have been upgraded or enhanced to some degree. The core product which has been produced and marketed and sold by the company is in substance not materially altered from the original invention although some moderate enhancements have facilitated the grant of additional patents.

The market value of the post-CGT property of the company (market value of assets less trading stock less know-how which is not property) is less than 75% net value of the company

Post-CGT a contract was entered into under which all of the shares held in the company (plus some options to acquire unissued shares which had been issued to employees) were sold to a company Q.

Post-CGT the agreement to sell to company Q settled.

Relevant legislative provisions

Income Tax Assessment Act 1936 paragraph 160U(6)(b)

Income Tax Assessment Act 1936 subsection 160ZZN(2)

Income Tax Assessment Act 1936 Section 160ZZS

Income Tax Assessment Act 1936 subsection 160ZZS(1A)

Income Tax Assessment Act 1936 Section 160ZZT

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 Section 104-230

Income Tax Assessment Act 1997 paragraph 104-230(1)(a)

Income Tax Assessment Act 1997 paragraph 104-230(1)(b)

Income Tax Assessment Act 1997 paragraph 104-230(1)(c)

Income Tax Assessment Act 1997 subsection 104-230(2)

Income Tax Assessment Act 1997 Section 108-5

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not considered the application of Part IVA to the arrangement you asked us to rule on.

Reasons for decision

Taxation Ruling IT 2484 on the former paragraph 160U(6)(b) of the Income Tax Assessment Act 1936 (ITAA 1936) states;

Under the former subsection 160ZZN(2) of the ITAA 1936, transfer of asset to a wholly-owned company, it states;

Where-


(a) one of the following subparagraphs applies:


    (i)     a taxpayer (other than a company or a taxpayer in the capacity of a trustee) who is a resident of

    Australia disposes of an asset (in this section called a ``roll-over asset'') to a company that is a

    resident of Australia;

  

(b) subject to subsection (5A), the consideration in respect of the disposal consists only of non-

redeemable shares in the company;

  

(ba) the market value of the shares is substantially the same as the market value of the roll-over

asset, reduced, if the company assumes in connection with the disposal a liability or liabilities

in respect of the roll-over asset, by the amount of the liability or the total of the amounts of

the liabilities;

   

(c) immediately after the disposal the taxpayer is the beneficial owner of all the shares in the

company;

 

(d) the taxpayer has, by notice in writing given to the Commissioner on or before the date of

lodgment of the return of income of the taxpayer for the year of income in which the disposal

took place, or within such further period as the Commissioner allows, elected that this

subsection is to apply in respect of the disposal, this Part (other than this section)

does not apply in respect of the disposal and-

  

(e) if the roll-over asset was acquired by the taxpayer before 20 September 1985 - the

company shall be deemed, for the purposes of this Part, to have acquired the roll-over

asset before that date;

  

Under the former subsection 160ZZS of the ITAA 1936, changes in majority underlying interests in assets of taxpayers other than public entities it states;

Subsection 160ZZS(1A) of the ITAA 1936 provides that;

Former Taxation Ruling IT 2363, paragraph 5, states;

Section 160ZZT of the ITAA 1936 is now covered by section 104-230 of the Income Tax Assessment Act 1997 (ITAA 1997); Capital Gains Tax (CGT) event K6.

Under section 104-10 of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset.

Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property or a legal or equitable right that is not property. A disposal of a CGT asset occurs when there is a change of ownership from one entity to another entity.

Under paragraph 104-10(5)(a) of the ITAA 1997 a capital gain or capital loss from CGT event A1 is disregarded if the relevant asset was acquired before 20 September 1985.

CGT event K6 in section 104-230 of the ITAA 1997 happens if all of the following conditions are satisfied:

Taxation Ruling TD 2000/33 states that know-how is not a CGT asset because it is neither a form of property nor a legal or equitable right. Know-how is knowledge or information rather than a CGT asset.

Application to your circumstances

Pre- CGT you commenced work on an invention and as per Taxation Ruling IT 2484 the asset is deemed a pre-CGT asset.

Post-CGT, under an agreement, you transferred to the company the invention, intellectual property, other property and list of customers, in exchange for an allotment of ordinary shares to you in your own right beneficially,.

You were the beneficial owner of all the shares in the company immediately after disposal of the assets to the company and you executed the election under the former subsection 160ZZN(2) of the ITAA 1936.

Accordingly, the shares acquired by you in exchange for the assets, maintain a pre-CGT status in your hands.

The assets received by the company will also have a pre-CGT status.

Post-CGT you sold to company P more than half your shares in the company. Accordingly, as a result of the application of subsection 160ZZS(1A) of the ITAA 1936 the pre-CGT assets held by the company were deemed to have been acquired by the company after 20 September 1985 and are post-CGT assets in the company.

However, for you, in accordance with Taxation Ruling IT 2363 the operation of 160ZZS of the ITAA 1936 on the assets did not trigger the operation of 160ZZT of the ITAA 1936 on your pre-CGT shares in the company and as a consequence some of your shares maintained their pre-CGT status.

When you disposed of the pre-CGT shares to company Q; for the purpose of calculating CGT event K6, the market value of the assets, which the company acquired on or after 20 September 1985, post-CGT, other than its trading stock, were valued at less than 75% of the company's net value. While the original pre- CGT property held by the company are deemed to be post CGT for its purposes, for the purposes of the K6 calculation upon your sale of pre-CGT shares that property is taken to be pre-CGT property as per IT 2363.

Therefore CGT event K6 in section 104-230 of the ITAA 1997 did not happen when you sold the shares acquired before 20 September 1985 in the company.

As per Taxation Ruling TD 2000/33 know-how is not a CGT asset and therefore for the purpose of the CGT event K6 calculation, when the shares were sold to company Q, no amount of property referable to 'know-how' is included in the market value of the 'property' of the company.

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