Edited version of your written advice

Authorisation Number: 1051215615669

Date of advice: 21 April 2017

Ruling

Subject: Pre-CGT asset and the acquisition date of shares

Question 1

For the purpose of subsection 104-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997), does the Commissioner accept that, with the exception of the shares acquired by Taxpayer Z on the death of their spouse, the taxpayers (Taxpayer W, Taxpayer X, Taxpayer Y and Taxpayer Z) acquired their shares in Company B prior to 20 September 1985?

Answer

Yes

Question 2

Is the Commissioner satisfied, or does the Commissioner consider it reasonable to assume for the purposes of section 149-30(2) of the ITAA 1997 that, at all times after 19 September 1985 when the asset was held by Company B, majority underlying interest in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset?

Answer

Yes

This ruling applies for the following period:

1 July 20YY to 30 June 20ZZ

The scheme commenced on:

20YY

Relevant facts and circumstances

Allotment and issue of shares in Company B:

Prior to 20 September 1985 Company B was incorporated and shares were issued to two shareholders.

Prior to 20 September 1985, at a meeting of the directors of Company B, it was resolved to issue additional shares in the company.

After 20 September 1985, a Specific Form for the Return of Allotment of Shares was lodged at the Relevant Office in respect of the above allotment of shares. The date of allotment on the Form was recorded as a date after 20 September 1985.

In 19XX the spouse of Taxpayer Z died and their shares were bequeathed to Taxpayer Z.

Taxpayer Z died in 20YY and their Estate is under administration.

There have been no further changes to the beneficial ownership of the shares in Company B.

Acquisition and sale of property by Company B:

Prior to 20 September 1985 Company B entered into a Contract of Sale to purchase a property. Prior to 20 September 1985 the contract became unconditional and exchange of contracts was confirmed.

Company B entered into a contract to purchase an adjoining property in 20WW.

In 20YY, Company B entered into a contract for the sale of both properties.

There has been no change in the majority underlying beneficial ownership since 19 September 1985 of the property that was acquired by Company B prior to 20 September 1985.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 104-10(5)

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Section 109-10

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 Subsection 149-30(1)

Income Tax Assessment Act 1997 Subsection 149-30(2)

Income Tax Assessment Act 1997 Section 149-35

Reasons for decision

Question 1

Summary

For the purpose of subsection 104-10(5) of the ITAA 1997 the Commissioner accepts that, with the exception of the shares acquired by Taxpayer Z on the death of their spouse, the taxpayers (Taxpayer W, Taxpayer X, Taxpayer Y and Taxpayer Z) acquired their shares in Company B prior to 20 September 1985.

Detailed reasoning

In the present case the shares were allotted by way of a resolution passed by the directors of Company B at a meeting of the directors. The meeting of directors took place prior to 20 September 1985, as evidenced by the minutes of meeting held on the company register and by the affidavits of both of the directors of the company that attended the meeting.

Section 113. (1) of the Companies (Victoria) Code 1981 provided as follows:

113. (1) Where a company makes an allotment of its shares, or shares in a company are deemed to have been allotted under sub-section (6), the company shall, within one month after the allotment is made or deemed to have been made, lodge with the Commission a return of the allotment …

The Specific Form for the Return of Allotment of Shares was lodged by Company B after 20 September 1985. The form stated the shares were allotted on a date after 20 September 1985.

It is maintained by the directors of the company that the return of allotment should have been lodged at an earlier date. Failure to lodge by that date would have incurred a late lodgement penalty. As the return was not lodged until a later date a penalty for late lodgement would have been applied had the correct date of allotment been recorded on the form. It is assumed by the directors that the date of allotment was altered by the lodging party after signing by the Secretary so as to avoid the penalty that would otherwise have been imposed.

Share allotment by means of an unconditional resolution

In accordance with the general acquisition rule for capital gains tax purposes, a taxpayer acquires a CGT asset at the time when the taxpayer becomes its owner (section 109-5 of the ITAA 1997). In addition, if there was no CGT event, an entity acquires shares when shares are issued or allotted (section 109-10 (Item 2) of the ITAA97).

The directors of Company B resolved to allot and issue the shares on a date prior to 20 September 1985. The resolution was unconditional. Therefore the date of acquisition of the shares was prior to 20 September 1985.

In the case Fowler v FC of T [2013] the date of issue of options was in dispute. As remuneration for the taxpayer's services, the Board of Directors resolved on 14 September 2006 that options would be issued to the taxpayer, however shareholder approval was required to be obtained before issue. Approval to issue the options was granted at the annual general meeting of shareholders on 30 November 2006.

It was held the options were issued on 30 November 2006 when shareholder approval was obtained. The resolution made by the directors on 14 September 2006 was conditional and as such there was no legally enforceable contract before 30 November 2006.

Besanko J noted at paragraph 86:

The terminology which is used in connection with options to acquire shares is that the options are “granted” or “issued.” In equity at least, I do not understand that that involves a particular act or event such as registration before it can be said that the options are granted or issued.

Applying these principles to the case at hand, the date of the Return of Allotment of Shares should not be determinative of the date the shares were issued. Rather, given an unconditional director's resolution to allot and issue the shares was made on a date prior to 20 September 1985, the shares were acquired by the taxpayers on that date.

Intention of the parties

In Case V156, 88 ATC 1005 the AAT held that the taxpayer had been the beneficial owner of shares since December 1983 notwithstanding that the shares were not registered in the taxpayer's name until November 1986.

A mother gifted her son (the taxpayer) share scrip on 25 December 1983. The son omitted to complete and submit the share transfer form until nearly three years later in November 1986.

The intention of the mother at all times was that the shares were owned by her son, despite still being registered in her name. In 1985 the taxpayer outlaid further capital to ensure the shares were fully paid. In 1986 the taxpayer accepted an offer for a bonus share issue. On both these occasions, the mother received the correspondence from the company, however forwarded the correspondence to her son who she regarded as the owner of the shares to take the necessary action.

The case highlights the importance of the intention of the parties to the transaction.

P.M. Roach (Senior Member) stated at paragraph 24:

The mother at all material times from Christmas Day 1983 clearly intended that her son should be the beneficial owner of the shares; thereafter she always acted as if he were the beneficial owner of the shares; and at all times he acted as if he were the beneficial owner of the shares, even though he was not the registered member of the company.

The principles of this case support the conclusion the shares were issued on the date of the director's resolution. This was the intention of the parties, and the fact the relevant registration form was not completed until a later date should not influence this conclusion.

Question 2

Summary

The Commissioner is satisfied for the purposes of section 149-30(2) of the ITAA 1997 that, at all times after 19 September 1985 when the asset was held by Company B, majority underlying interests in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset.

Detailed reasoning

Division 149 of the ITAA 1997 contains provisions which govern when an asset of an entity stops being a pre-CGT asset and is treated as having been acquired after that date.

An asset stops being a pre-CGT asset when majority underlying interests in the asset were not held by the same ultimate owners who held those interests in the asset immediately before 20 September 1985 (section 149-30(1) ITAA 1997).

In that case, the CGT provisions apply to the asset as if:

● the entity had acquired it at the time when the continuity of majority underlying interests ceased; and

● the first element of the cost base and reduced cost base of the asset is its market value at that time (section 149-30(1); section 149-35 ITAA 1997).

If the Commissioner is satisfied, or thinks it reasonable to assume, that, at all times on and after 20 September 1985 and before a particular time, majority underlying interests in the asset were held by the same ultimate owners who held majority underlying interests in the asset immediately before that day, the asset continues to be a pre-CGT asset (section 149-30(2) ITAA 1997).

In 19XX the spouse of Taxpayer Z died and their shares were bequeathed to Taxpayer Z. There were no further changes to the majority underlying beneficial ownership of the shares in Company B. Therefore, the property that was acquired by Company B on the advised date remained a pre-CGT asset when sold in 20YY.

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