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Edited version of your written advice
Authorisation Number: 1013086146099
Date of advice: 7 September 2016
Ruling
Subject: CGT - sale of shares
Question 1
Has capital gains tax (CGT) event C1 happened on the sale of shares in listed companies to a bona fide purchaser as a result of a stockbroker's mistake?
Answer
Yes.
Question 2
Can you apply the CGT roll-over contained in Subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997) to the capital gain resulting from the sale of the shares?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2016
The scheme commences on
1 July 2015
Relevant facts and circumstances
The assets of a deceased estate included shares in listed companies.
The executor of the estate sent paperwork and Standard Transfer Forms to the broker to transfer the original shares to the beneficiary.
The broker erroneously sold the original shares on the market instead.
Once the error was discovered, the same quantities of shares in the same companies were purchased ('the replacement shares').
The replacement shares did not become an item of trading stock for the estate, were not depreciating assets or registered emissions units.
The sale of the original shares resulted in a capital gain.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-20
Income Tax Assessment Act 1997 Subdivision 124-B
Income Tax Assessment Act 1997 Section 124-10
Income Tax Assessment Act 1997 Section 124-70
Income Tax Assessment Act 1997 Section 124-75
Reasons for decision
Summary
CGT event C1 happened as a result of the broker selling the original shares instead of transferring them to the beneficiary. You may choose to apply the roll-over provisions contained within Subdivison 124-B of the ITAA 1997 with respect to the capital gain.
Detailed reasoning
CGT event C1
CGT event C1 happens if a CGT asset you own is lost or destroyed (subsection 104-20(1) of the ITAA 1997).
Shares are intangible CGT assets. Paragraph 7 of Taxation Determination TD 1999/79 states that
CGT event C1 does not distinguish between tangible and intangible assets. Section 104-20 refers to 'CGT' asset and this includes intangible CGT assets.
Paragraph 2 of TD 1999/79 states that
The word 'lost' in its context in subsection 104-20(1) [of ITAA 1997] does not contemplate voluntary actions.
The estate's original shares were erroneously sold to a third party instead of being transferred to the beneficiary as requested by the executor of the estate. In this circumstance, the original shares were 'lost' within the meaning of section 104-20 of the ITAA 1997. Therefore, CGT event C1 happened to the original shares.
CGT event A1 also happened on the sale of the original shares to a third party (disposal of a CGT asset - section 104-10 of the ITAA 1997). Under subsection 102-25(1) of the ITAA 1997, if more than one CGT event can happen to your situation, you use the one that is most specific to your situation. In this case, the most specific event is CGT event C1.
The time of CGT event C1 is when compensation is first received for the loss.
CGT event C1 has happened in respect of the original shares which were erroneously sold instead of being transferred to the beneficiary.
Roll-over relief
Division 124 of the ITAA 1997 allows you to disregard a capital gain from the disposal of a CGT asset ('the original CGT asset') where you acquire a new CGT asset. This is known as a replacement asset roll-over.
You can choose a roll-over where:
• the original CGT asset is lost or destroyed
• you receive money as compensation for the event happening
• you incur expenditure acquiring another CGT asset
• some of the expenditure is incurred no later than one year after the end of the income year in which the event happens
• the new CGT asset cannot become an item of your trading stock nor can it be a depreciating asset or a registered emissions unit.
In your situation, you meet the requirements to choose a roll-over to be applied to the capital gain resulting from the erroneous sale of the original shares. The original shares were lost, you received money as compensation for this (the sale proceeds), you purchased the replacement shares within the same income year in which the event occurred. The replacement shares did not become trading stock nor were they depreciating assets or registered emissions units.
You are entitled to roll-over the capital gain from the disposal of the shares under Subdivision 124-B of the ITAA 1997.
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