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Edited version of your written advice
Authorisation Number: 1013041886525
Date of advice: 28 June 2016
Ruling
Subject: CGT - share split
Question 1
Will the conversion of each A class and each B class share into two shares each give rise to a capital gains tax (CGT) event?
Answer
No.
Question 2
Will the cost base of the converted shares for CGT purposes, be determined by apportioning the cost of the original shares?
Answer
Yes.
Question 3
After converting the original shares, will the transfer of 50% of the jointly held shares to each of you and your sibling give rise to assessable income in your hands?
Answer
No.
This ruling applies for the following period
Year ended 30 June 20bb
Year ended 30 June 20cc
The scheme commences on
1 July 20aa
Relevant facts and circumstances
The deceased owned shares in several companies.
Under the will, you and your sibling were each entitled to half of the abovementioned shares.
The executor instead transferred the shares to you and your sibling as joint owners.
It is proposed that the shares will be split to correct the executor's mistake.
After the share conversion, the jointly held shares will be transferred to you and your sibling respectively such that each will be the sole owner of 50% of the total shares.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 section 120-20
Reasons for decision
Question 1
Taxation Determination TD 2000/10 considers the CGT consequences for a shareholder if a company converts its shares into a larger or smaller number of shares. It states that:
If a company converts its shares into a larger or smaller number of shares ('the converted shares') in accordance with section 254H of the Corporations Law ('C Law') in that:
a) the original shares are not cancelled or redeemed in terms of the C Law;
b) there is no change in the total amount allocated to the share capital account of the company; and
c) the proportion of equity owned by each shareholder in the share capital account is maintained;
no CGT event happens to the shareholder's original shares for capital gains purposes. While there is a change in the form of the original shares, there is no change in their beneficial ownership. The issue of roll-over relief under section 124-240 of the Income Tax Assessment Act 1997 ('the 1997 Act') does not arise because no CGT event happens to the shares.
It follows that the converted shares will have the same date of acquisition as the original shares to which they relate.
In this case, the shares will be split into two. The original shares will not be cancelled or redeemed and there will be no change in the total amount allocated to the share capital account of the company.
The proportion of equity owned by each shareholder will also be maintained. Therefore, no CGT event will occur as a result of the share split. The converted shares will have the same date of acquisition as the original shares to which they relate.
Question 2
TD 2000/10 provides the following example in relation to the cost base of split shares:
Example 1
8. XYZ Ltd's share capital account of $100,000 consists of 100,000 shares. In accordance with section 254H of the C Law, the company converts its share capital into 200,000 ordinary shares on 1 July 1992. The original shares are not cancelled or redeemed under the C Law. Further, the total amounts allocated to the share capital account are unaltered and there is no change in the proportion of equity owned by each shareholder in the share capital account.
9. John acquired 2,000 ordinary shares in XYZ Ltd in September 1984 and 3,000 ordinary shares in XYZ Ltd on 30 April 1988. Before the conversion, the shares John acquired in 1988 had a cost base of $1.00 each.
10. On conversion of XYZ Ltd's share capital, no CGT event happens to any of John's original shares. John, however, now has 4,000 ordinary shares with an acquisition date before 20 September 1985, and 6,000 ordinary shares with a cost base of $0.50 each with an acquisition date on 30 April 1988.
In your situation, each share will be split into two. As discussed above, the converted shares will have the same date of acquisition as the original shares to which they relate. We consider, it would be reasonable to apportion the cost base across the new shares by dividing the cost base (and reduced cost base) of each original share by two.
Question 3
CGT event E5 occurs when a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee. However, subsection 104-75(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides an exception that CGT event E5 will not occur to unit trusts or 'a trust to which Division 128 applies'. Where this exception applies Taxation Ruling TR 2006/14 provides that it is not necessary to consider whether any other CGT event occurred.
Division 128 of the ITAA 1997 applies to the passing of an asset from a deceased individual's legal personal representative to a beneficiary in their estate.
Accordingly, 'a trust to which Division 128 applies' requires more than the identification of the trust as a deceased estate. The Commissioner considers that the words 'a trust to which Division 128 applies' should be interpreted as a deceased estate to the extent that it is a trust over an asset originally owned by a deceased individual and which may pass to the beneficiary in accordance with section 128-20 of the ITAA 1997 (TR 2006/14).
We consider that an asset can 'pass' to a beneficiary within the meaning of section 128-20 of the ITAA 1997 prior to legal transfer if the beneficiary becomes absolutely entitled to the asset as against the trustee (Taxation Determination TD 2004/3).
For the purposes of applying Division 128 of the ITAA 1997, trustees of testamentary trusts are treated in the same way as a legal personal representative (Practice Statement Law Administration PS LA 2003/12)
Application to your circumstances
In this case, we accept that when the assets were transferred by the executor of the deceased estate testamentary trusts were created. The converted shares will be transferred to you and your sibling respectively such that each will be the sole owner of 50% of the total shares. We consider that you will become absolutely entitled to assets of the testamentary trust at this time.
When you became absolutely entitled to the assets they are taken to have 'passed' to you in accordance with section 128-20 of the ITAA 1997. Accordingly, the testamentary trust is a trust to which Division 128 of the ITAA 1997 applies and CGT event E5 will not occur. In accordance with TR 2006/14, it is not necessary to consider whether any other CGT event occurred.
As such you will not derive any assessable income as a result of the transfers.
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