Edited version of private advice

Authorisation Number: 1052008688339

Date of advice: 21 July 2022

Ruling

Subject: CGT - involuntary sale of shares

Question1

Did CGT event C1 in section 104-20 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to you on the sale of shares in Company X at market without your consent as the result of your financial adviser's mistake?

Answer

Yes. The sale of Company X shares at market without your consent as a result of your financial adviser's mistake would mean that the shares which you owned were lost and CGT event C1 happened to you.

Your circumstances are considered similar to the facts described in ATO Interpretative Decision ATO ID 2010/124 which can be found on our Legal database ato.gov.au/law.

Question 2

Are you entitled to choose the replacement asset roll-over in Subdivision 124-B of the ITAA 1997 to disregard the capital gain made from the disposal of Company X shares at market without your consent, as a result of your financial adviser's mistake?

Answer

Yes. You are entitled to choose the rollover as the Company X shares you owned were considered lost when they were sold at market without your consent as the result of your financial adviser's mistake (paragraph 124-70(1)(b) of the ITAA 1997).

You received another asset (the replacement shares), and the shares did not become items of your trading stock just after you acquired them; and they're not depreciating assets whose decline in value is worked out under Division 40 of the ITAA 1997 (subsection 124-80(2) of the ITAA 1997). The market value of the replacement shares when you acquired them was more than the cost base of the original asset (original Company X shares), just before the event happened (subsection 124-80(3) of the ITAA 1997).

Therefore, as all of the requirements for the rollover are satisfied, you are entitled to choose the rollover to disregard the capital gain you made from the disposal of the original Company X shares at market as the result of your financial adviser's mistake.

If the original Company X shares were acquired post-CGT, the cost base and reduced cost base of the replacement Company X shares will be the same as that of the original Company X shares at the time of their disposal (subsection 124-90(3) of the ITAA 1997). If the original Company X shares were acquired pre-CGT, you are taken to have acquired the replacement Company X shares also pre-CGT (subsection 124-90(4) of the ITAA 1997).

This private ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You both operate various investment accounts with a wealth management group.

One of the accounts is a jointly operated investment account (Joint Investment Account). Various investments are held in the Joint Investment Account including Company X shares.

You obtained a Record of Advice (ROA) from your financial adviser (FA) in September 20XX.

The ROA is to align the asset allocation of your investment accounts with that of your Growth investor risk profile. To facilitate this, the FA recommended selling and buying investments in your various investment accounts.

The ROA shows the FA recommended selling Company X shares from your individual accounts. There was no recommendation to sell Company X shares from your Joint Investment Account.

In October 20XX, in the course of implementing the advice, the FA sold a certain number of Company X shares in the Joint Investment Account by mistake, instead of selling Company X shares in your individual accounts.

The mistake by your FA in the sale of the Company X shares resulted in a taxable gain after the 50% capital gains tax (CGT) discount.

The capital gain amounts are confirmed in the wealth management group's Annual Tax Statement for the period ended 30 June 20XX.

The error was immediately realised by the FA and wealth management group were contacted in an attempt to reverse the sell trade. However, owing to the nature of the Joint Investment Account trading system, this could not be done.

In order to re-establish the correct Company X holding, the FA purchased the same number of Company X shares in the Joint Investment Account.

A wealth management group Transaction List for the relevant period confirmed the sale and subsequent purchase of Company X shares in the Joint Investment Account.

The purchase cost of the replacement Company X shares was more than the cost base of the original Company X shares that were mistakenly sold.

The replacement Company X shares are not your trading stock and they're not depreciating assets.

The capital gain resulting from the sale of the original Company X shares was declared in your individual income tax returns for the relevant income year.

You were advised to include the capital gain and lodge the income tax returns before applying for the private ruling so all the events can be considered in the private ruling application process.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Section 104-20

Income Tax Assessment Act 1997 Subdivision 124-B

Income Tax Assessment Act 1997 Section 124-70

Income Tax Assessment Act 1997 Section 124-80

Income Tax Assessment Act 1997 Section 124-90

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