Edited version of private advice

Authorisation Number: 1052065321106

Date of advice: 30 March 2023

Ruling

Subject: Pre-CGT status of bonus shares

Question 1

Immediately prior to the bonus share issue, are the xxx ordinary class shares in Company A allocated prior to 20 September 1985 and xxx ordinary shares transferred prior to 20 September 1985 from two estates to Individual A, pre-CGT assets under section 149-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are the xxx bonus shares issued post 20 September 1985 taken to have been acquired by Individual A under subsection 130-20(3) of the ITAA 1997 when they acquired the original shares prior to 20 September 1985?

Answer

Yes.

Question 3

In relation to the xxx shares passed to Individual A as a beneficiary of Individual E's estate (comprising both bonus shares and ordinary shares), is Individual A's first element cost base of these shares the market value of the shares on the day of Individual E's death under subsection 128-15(4) of the ITAA 1997?

Answer

Yes.

Question 4

In relation to the xxx shares passed to Individual A as a beneficiary of Individual E's estate, is Individual A taken to have acquired these shares on the date of Individual E's death under subsection 128-15(2) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commenced on:

1 July 19XX

Relevant facts and circumstances

1.    Company A was incorporated prior to 20 September 1985.

2.    All the shares of Company A have been and remain fully paid ordinary class shares.

3.    All the shares of Company A's shareholders (past and present) are as follows:

•         Individual A is the applicant in this ruling

•         Individual B is Individual A's sibling.

•         Individual C is Individual A and Individual B's father.

•         Individual D is Individual A and Individual B's uncle.

•         Individual E is Individual A and Individual B's mother.

4.    On its incorporation date, Company A had xxx ordinary class shares which were allotted to Individual C and Individual D in equal shares.

5.    Subsequent to incorporation but prior to 20 September 1985, Company A allotted a further xxx ordinary class shares to Individual E and Individual A.

6.    Subsequent to incorporation but prior to 20 September 1985, Individual C died and Individual C's shares were transferred from the estate of Individual C to Individual A (in accordance with their will).

7.    Subsequent to incorporation but prior to 20 September 1985, Individual D died and Individual D's shares were transferred from the estate of Individual D to Individual A (in accordance with their will).

8.    In 1987, Company A resolved to allot additional fully paid shares to the shareholders as a 'bonus share issue from reserves'. In this regard:

•         Prior to the issue of bonus shares, Company A owned farming land.

•         Company A revalued the farming land and credited the increase in value to its asset revaluation reserve.

•         Company A then resolved to issue further shares from its asset revaluation reserve to each of the existing shareholder at the time, pro-rated to their shareholding at the time.

•         The share issue was done to equate the number of issued shares with the market value of the land at the time.

9.    Post 20 September 1985, Individual E died, and her shares were held in Individual A's name as trustee for Individual E's estate.

10.  A number of years later, Individual E's shares were transferred from the estate of Individual E and allocated to the beneficiaries: xxx shares to Individual A and xxx shares to Individual B.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 Section 149-10

Income Tax Assessment Act 1997 Section 149-30

Income Tax Assessment Act 1997 Subsection 130-20(3)

Income Tax (Transitional Provisions) Act 1997 Subdivision 130-A

Income Tax Assessment Act 1997 Section 128-15

Reasons for decision

Question 1

Section 149-10 of the ITAA 1997 provides that a CGT asset that an entity owns is a pre-CGT asset if and only if 3 conditions have been satisfied.

Each of the conditions under section 149-10 is considered in turn below.

•         Subparagraph 149-10(a) requires that the entity last acquired the asset before 20 September 1985.

Individual A was allocated the ordinary shares prior to 20 September 1985.

Individual A inherited further shares from Individual C and Individual D via their respective wills prior to 20 September 1985.

•         Subparagraph 149-10(b)(i) requires that the entity was not, immediately before the start of the 1998-99 income year, taken under former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 (ITAA 1936) or Subdivision C of Division 20 of former Part IIIA of ITAA 1936 to have acquired the asset on or after 20 September 1985.

In this case, the relevant 'assets' are the shares in question. Former subsection 160ZZS(1) did not deem Individual A to have acquired the shares on or after 20 September 1985 as they had continuously owned 100% of the shares from dates occurring before 20 September 1985 i.e., the majority underlying interest test is satisfied here.

Subdivision C of the former Part IIIA of the ITAA 1936 applies to public entities. Since Individual A is not a public entity, this Subdivision did not apply to them.

•         Paragraph 149-10(c) requires that the asset has not stopped being a pre-CGT asset of the entity because of this Division.

Within Division 149 of the ITAA 1997, subsection 149-30(1) has relevance in this case. It provides:

149-30(1)

The asset stops being a *pre-CGT asset at the earliest time when *majority underlying interests in the asset were not had by *ultimate owners who had *majority underlying interests in the asset immediately before 20 September 1985.

In this case, Individual A had 100% ownership in the shares immediately before 20 September 1985 and continues to be the sole owner of those shares to the present day. Hence, the majority underlying ownership of these shares have been the same and Division 149 does not apply.

In conclusion, immediately prior to the bonus share issue, the ordinary class shares (which were allocated prior to 20 September 1985) and the ordinary class shares (which were transferred prior to 20 September 1985 from two estates to Individual A) are pre-CGT assets under section 149-10 of the ITAA 1997.

Question 2

Subdivision 130-A of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) was inserted by Tax Law Improvement Act (No. 1) 1998 (46 of 1998) and applies from 22 June 1998.

Subsections 130-20(1) and subsection 130-20(2) of the ITTPA 1997 apply in this case given that Individual A owned pre-CGT shares in Company A (the 'original equities'), by virtue of which further bonus shares were issued to them in 1987.

The effect of the application of subsection 130-20(2) of the ITTPA 1997 is that subsection 130-20(3) of the ITAA 1997 is taken to apply to the bonus shares, irrespective of whether they are considered to be dividends.

Item 3 of the table in subsection 130-20(3) of ITAA 1997 applies where the taxpayer acquired the original shares before 20 September 1985 and the bonus shares are fully paid.

In this case, Individual A acquired the original shares before 20 September 1985 and the bonus shares issued to them were fully paid, pursuant to the resolution of Company A.

As a result, Individual A is taken to have acquired the bonus shares on the dates their original shares were acquired, being a date occurring before 20 September 1985.

Question 3

Section 128-15 of the ITAA 1997 provides for what happens to the CGT asset in the hands of the legal personal representative or beneficiary when someone dies and passes a CGT asset they owned to a beneficiary in their estate.

Individual E died on a date after 20 September 1985, and their shares were held in Individual A's name as trustee for their estate. The shares were transferred to the beneficiaries of the estate, Individual A and Individual B.

The shares were pre-CGT assets in Individual E's hands before their death.

Item 4 of the table under subsection 128-15(4) of the ITAA 1997 provides for the cost base or reduced cost base of the pre-CGT asset in the hands of the legal personal representative or beneficiary, and states that if the deceased person acquired the CGT asset before 20 September 1985, the first element of the CGT asset's cost base or reduced cost base is the market value of the asset on the day the person died.

Hence, the first element of the cost base of those shares for Individual A is the market value of those shares on the day Individual E died.

Question 4

Subsection 128-15(2) of the ITAA 1997 provides as follows:

128-15(2)

The *legal personal representative, or beneficiary, is taken to have *acquired the asset on the day you died.

Accordingly, Individual A is taken to have acquired the shares from Individual E on the day Individual E died. These shares will be post CGT assets in Individual A's hands.

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