Edited version of private advice

Authorisation Number: 1052207925366

Date of advice: 7 May 2024

Ruling

Subject: CGT - shares

Question 1

Pursuant to section 106-5 of the Income Tax Assessment Act 1997 (ITAA 1997), when Entity A contributes all of its Company B shares to the capital of the Partnership, are the capital gains made by Entity A determined by reference to the proportionate interest in the shares, which the other partners acquire under the terms of the Partnership Agreement?

Answer

Yes.

Question 2

For the purpose of Division 115 of the ITAA 1997, will the date of acquisition of the proportionate interest in the shares in Company B (theShares) retained by Entity A be the same date (or dates) as immediately before the Shares are contributed to the Partnership?

Answer

Yes.

Question 3

Will the Shares be held on capital account at the time of the contribution such that any amount from a disposal at that time would not be assessable under section 6-5 of the ITAA 1997.

Answer

Yes. If there are no changes to the basis on which the Shares are held up to the time of the contribution, any gain made from a disposal at that time would not be assessable under section 6-5 of the ITAA 1997.

This ruling applies for the following:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

Entity A proposes to contribute its shares in Company B (theShares) to an existing Partnership pursuant to the terms of the Partnership Agreement. The Shares were acquired in the year ended 30 June 20AA pursuant to a series of unbroken replacement-asset roll-overs to which Subdivision 124-M and Division 615 applied.

Assumption

The Shares are currently held on capital account by Entity A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 106-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 112-115

Income Tax Assessment Act 1997 section 115-30

Income Tax Assessment Act 1997 section 115-34

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997, unless otherwise stated.

Question 1

Subdivision 106-A sets out how the CGT provisions apply to partnerships. Under subsection 106-5(1), any capital gain or capital loss from a CGT event happening in relation to a partnership or one of its CGT assets is made by the partners individually. Each partner's gain or loss is calculated by reference to the partnership agreement, or partnership law if there is no agreement. Subsection 106-5(2) further provides that each partner has a separate cost base and reduced cost base for the partner's interest in each CGT asset of the partnership.

In accordance with the Partnership Agreement, the proposed contribution of Entity A's interest in the Shares to the capital of the Partnership will trigger CGT event A1 under section 104-10 for Entity A. This event will happen to the extent that the Partnership Agreement effects a disposal of Entity A's proportionate beneficial interest in each of its Company B shares to the other partners to that Agreement.

Question 2

Subsection 115-30(1) provides the special rules concerning the time of acquisition of certain CGT assets.

Under item 2 of the table in subsection 115-30(1), a CGT asset acquired in a 'replacement-asset roll-over' includes assets acquired in rollovers under Subdivision 124-M and Division 615 (items 14A and 14D of the table in section 112-115).

Entity A acquired its Company B shares in an unbroken series of replacement-asset roll-overs under Subdivision 124-M and Division 615.

Therefore, for Division 115 purposes, the date of acquisition of the proportionate interest in the Company B shares retained by Entity A will be the same date (or dates) as immediately before the Shares are contributed to the Partnership.

Question 3

Ordinary income is defined as income according to ordinary concepts and includes income derived by a resident taxpayer, directly or indirectly, from all sources, whether in or out of Australia, during the income year (subsection 6-5(1)).

Ordinary income includes income derived in the ordinary course of a taxpayer's business. It can also include profits or gains made by a taxpayer not from its ordinary course of business, but from isolated or commercial transactions entered into by the taxpayer with a profit making intention.

Mere realisation of a capital asset

The facts and circumstance of this case support the view that Entity A acquired the Shares as a capital asset and has continued to hold them on capital account.

If there are no changes to the basis on which the Shares are held up to the time of the contribution, any gain made from a disposal at that time would not be assessable under section 6-5. However, if subsequent to the contribution, the intentions of the Partnership change such that some or all of the Shares are held for different purposes as part of a business operation with a profit-making intention, any amount arising from the disposal would be ordinary income.

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).