Edited version of private advice

Authorisation Number: 1051847874890

Date of advice: 3 June 2021

Ruling

Subject: Early stage innovation company CGT treatment

Question

Would the eligible shareholders in the Company retain the modified Capital Gains Tax (CGT) treatment under section 360-50 of the ITAA 1997 for their shares once they are transferred to a bare trust?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.    The Company was incorporated on Date X.

2.    The Company has assessed that they qualify as an ESIC company.

3.    Several investors have qualified for the ESIC CGT concessions.

4.    These investors will roll their shares into a bare trust arrangement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 360-A

Income Tax Assessment Act 1997 Section 360-50

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise indicated.

Question 1:

Summary

The eligible shareholders in the Company will retain the modified Capital Gains Tax (CGT) treatment under section 360-50 of the Income Tax Assessment Act 1997 ('ITAA 1997') for their shares once they are transferred to a bare trust.

Detailed reasoning

Modified CGT Treatment - section 360-50

1.    An investor that acquires shares in a qualifying ESIC will be taken to hold these shares on capital account and the disposal of these shares would give rise to a capital gain or a capital loss as per paragraph 360-50(2).

2.    The specific CGT consequence arising for these shares depends on:

•         when the investor entity deals with the shares (and the relevant CGT event happens); and

•         whether the investor entity realises a capital gain or a capital loss from that event.

Shares held for more than 12 months and less than ten years

3.    An investor that has continuously held a qualifying share for between 12 months and less than ten years may disregard a capital gain arising from the share however it must disregard any capital loss as per subsections 360-50(3) and (4)

Shares held for 10 years or more

4.    An investor that has continuously held a qualifying share for at least ten years will receive a market value, as determined on the ten year anniversary date, as the first element of the cost base and reduced cost base of the share. This ensures that any incremental gains (or losses) in value after 10 years will be taxable as per subsection 360-50(5).

Application to your circumstances

Entitlement to modified CGT Treatment - section 360-50(1) and (2)

5.    When the shares in the Company are transferred into a bare trust, the original shareholders will no longer be the legal owner of the shares, however as the shares are held in trust for them, they will continue to be the beneficial owners of the shares.

6.    Section 104-10(2) states

You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

7.    As there is no change in ownership of the Company shares the shareholders will be taken to continuously hold their shares and as such will still be entitled to the CGT concessions in section 360-50.

Conclusion

8.    The eligible shareholders in the Company will retain the modified Capital Gains Tax (CGT) treatment under section 360-50 of the Income Tax Assessment Act 1997 ('ITAA 1997') for their shares once they are transferred to a bare trust.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).