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Edited version of private advice
Authorisation Number: 1051713753588
Date of advice: 13 July 2020
Ruling
Subject: Income tax - capital gains tax - CGT events - CGT event A1 - disposal of a CGT asset
Question
Will the transfer of the shares in the Company by Individual A to the Trust result in a CGT event happening under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No. The transfer of the shares in the Company by Individual A to the Trust will not result in a CGT event happening under Part 3-1 of the ITAA 1997.
This ruling applies for the following periods:
Year ending 30 June 2019
Year ending 30 June 2020
Year ending 30 June 2021
Relevant facts and circumstances
1. Individual A is a resident for Australian income tax purposes.
2. Individual A instructed his advisors to set up a new company (the Company).
3. The Company was incorporated during the ruling period and is an Australian-resident proprietary company.
4. It was the intention of the parties at that time that the shares in the Company (the shares) were to be wholly-owned by the Trustee of a related Australian-resident discretionary trust (the Trust).
5. The advisors made a mistake in preparing the documentation for the Company (inclusive of its constitution and ASIC records), whereby Individual A was recorded as the legal and beneficial owner of the shares.
6. This mistake was discovered approximately one year after the Company was incorporated.
7. The advisors will rectify the mistake by correcting the Company's documentation (inclusive of its constitution and ASIC records) to reflect that the shares are held by the Trust on the basis that these documents do not reflect the intention of the parties.
8. The effect of the rectification will be that Individual A was never the legal or beneficial owner of the shares in the Company. This has been acknowledged and confirmed by Individual A.
9. Individual A has received no benefit from the shares (including dividends and capital appreciation).
Relevant legislative provisions
Income Tax Assessment Act 1997 Part 3-1
Reasons for decision
The transfer of the shares in the Company by Individual A to the Trust will not result in a CGT event happening under Part 3-1 of the ITAA 1997.
Detailed reasoning
The assessability of capital gains is set out in Part 3-1 of the ITAA 1997.
A capital gain or capital loss may result if a capital gain tax (CGT) event happens to a CGT asset in which a person has an ownership interest.
Based on the facts you have provided the shares in the Company were mistakenly recorded as being legally and beneficially owned by Individual A, and this mistake will be rectified to reflect the original intention of the parties that the shares in the Company are owned by the Trust. You have advised that the legal effect is that Individual A was never the legal or beneficial owner of the shares in the Company.
Individual A accordingly does not have an ownership interest in the shares (i.e. a CGT asset which a CGT event may happen to). Therefore, the rectification of the Company's documents (including its constitution and ASIC records) to show that the Trust is the true owner of the shares in the Company (i.e. the 'transfer') will not result in a CGT event happening under Part 3-1 of the ITAA 1997.
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