Edited version of private ruling

Authorisation Number: 1011465188235

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Ruling

Subject: Capital gains tax - transfer of shares into joint account

Question 1

Did a CGT event occur when you transferred your shares into the joint account?

Answer

Yes.

Question 2

Will the capital gains provisions allow you to apply the capital losses you made on the transfer of your shares into the joint account against capital gains you made in the same income year and carry forward any excess capital losses?

Answer

Yes.

Question 3

To the extent that you make a capital loss from the transfer of your shares into the joint account, will Part IVA of the Income Tax Assessment Act 1936 apply to deny any part of the loss?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Your spouse and you each individually own a number of shares and trade shares regularly.

For some time, your spouse and you considered setting up a Joint Margin Lending Account for the purpose of being able to borrow more collectively. Both you and your spouse will be listed as the account holders.

In your eyes, you will both benefit equally from combining your shares and cash into one margin loan account as by coming together you have been granted a higher loan limit than either of you would have individually received from your broker.

It is unlikely that your spouse would have qualified for this type of loan in their name alone as they are currently on extended leave.

To do this, you both needed to move shares into this account to be used as collateral for the new purchases under the new Margin Lending Account.

In 2010, the stock market fell significantly and you felt that you would lose opportunities the longer you waited. So you took advice from your tax agent and implemented your plan.

Your spouse contributed cash toward the joint loan. As all their shares were trading at prices lower than what they had paid for them when the loan was initiated, they allowed your broker to place a lien on them. Shortly afterward, one of their shares started to trade at a higher price than what they had paid for it. They then sold this share and applied its proceeds to the loan.

You transferred some of your individually owned shares into the joint account via off market transfers and they were to be used as collateral to purchase new shares under the new Margin Lending Account.

As an example, before the move, you owned certain shares that they had paid more than the market value (at that time) to acquire.

You moved some of these shares into the new Joint Margin Lending Account to be used as collateral against a new margin loan your spouse and you have taken out.

You will make an overall capital loss from this transfer (if we rule that a CGT event happened due to the transfer).

The market value of these shares fell further.

Subsequently, your spouse and you decided to 'de-risk' the LVR margin in your loan portfolio by selling these shares. The attributes of this stock meant that holding it in your portfolio was making you more susceptible to getting a margin call.

You will also transfer other shares into the joint account. You will make capital gains from some of these transfers (if we rule that a CGT event happens due to the transfer) and you will make capital losses from others.

You subsequently completed your first purchase under the joint margin loan. You are planning to trade shares under this joint margin account until around the end of the year at which point you may leave the share market and use your joint equity toward buying a home. (The outcome will depend upon how your search for a house goes.)

Your spouse has spent the bulk of this income year on extended leave, so their income this year is significantly lower than yours. You have calculated that your family will actually be paying more income tax as a result of the sale than you would have been liable for if you had just sold the shares in your own name.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-10

Income Tax Assessment Act 1997 Section 102-15

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 116-30.

Income Tax Assessment Act 1997 Section 116-20.

Income Tax Assessment Act 1936 Section 177A.

Income Tax Assessment Act 1936 Section 177C.

Reasons for decision

Question 1

Summary

A CGT event happened when you transferred your shares into the joint account.

Detailed reasoning

CGT event A1 happens if there is a change of ownership to a CGT asset from you to another entity. You may make a capital gain or a capital loss due to this change of ownership.

When determining what that means in a particular transaction, you must consider:

· What you owned before the transaction

· What you own after the transaction

· What the other entity owned before the transaction, and

· What the other entity owns after the transaction.

The capital gains provisions use a 'look-through' approach to work this out and consider joint owners to personally own interests in jointly owned assets.

You have transferred certain shares into the joint account.

Before the transfer, you owned these shares outright. After the transfer, you own a one-half interest in these shares and your spouse owns the other one-half interest in them.

There has been a change of ownership to the one-half interest in the shares that you owned before the transfer, but that your spouse owned after the transfer. CGT event A1 happens to this change of ownership, but not to the one-half interest that you continued to own after the transfer.

Note: Each share you owned is a separate and distinct asset for capital gains purposes. You will need to decide which of your shares in this company were transferred to the joint account so that you can work out your capital loss due to the transfer.

Question 2

Summary

The capital gains provisions will allow you to apply the capital losses you made on the transfer of shares into the joint account against capital gains you made in the same income year and to carry forward any excess capital losses.

Detailed reasoning

You made an overall capital loss from the transfer of the shares to the joint account. (The amount of the capital loss will depend on which of your shares in the company were transferred.)

You apply this capital loss (and your other capital losses) against your capital gains for the 2009-10 income year to determine whether you have made a net capital gain or a net capital loss for the year.

You will have made a net capital loss for the 2009-10 income year if your capital losses exceed your capital gains for the year. You carry this net capital loss forward to the next year.

If your capital gains exceed your capital losses, then you reduce your capital gains by these capital losses as part of the process of working out your net capital gain (if any).

The capital gains provisions don't prevent you from applying your capital losses from the transfer in the manner described above.

Question 3

Summary

To the extent that you make a capital loss from the transfer of the shares into the joint account, Part IVA of the Income Tax Assessment Act 1936 will not apply to deny any part of the loss

Detailed reasoning

Part IVA of the ITAA 1936 is a general anti-avoidance provision that can apply in certain circumstances if a tax benefit is obtained in connection with a scheme, and it can be concluded that the scheme, or any part of it, was entered into for the dominant purpose of enabling a tax benefit to be obtained.

The application of Part IVA of the ITAA 1936 depends on the facts of the particular case. In order for the Commissioner to exercise the discretion in subsection 177F(1) of the ITAA 1936, the requirements of Part IVA of the ITAA 1936 must be satisfied. These requirements are that:

(i) a 'tax benefit' as defined in section 177C of the ITAA 1936, was or would, but for subsection 177F(1) of the ITAA 1936 have been obtained;

(ii) the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A of the ITAA 1936; and

(iii) having regard to section 177D of the ITAA 1936, it would be concluded that the main or dominant purpose of entering into the scheme was to obtain the tax benefit.

The definition of scheme in subsection 177A(1) of the ITAA 1936 is very broad and applies to any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and any scheme, plan, proposal, action, course of action or course of conduct.

In your case, the following steps comprise a scheme as defined in section 177A of the ITAA 1936:

1. You established a Joint Margin Lending Account with your spouse.

2. You transferred certain shares to the joint account generating a capital loss.

Tax benefit is defined in subsection 177C(1) of the ITAA 1936.

Paragraph 177C(1)(a) of the ITAA 1936 provides that a taxpayer may be found to have obtained a tax benefit if they entered into or carried out a scheme that results in an amount not being included in their assessable income where that amount would have been included, or might reasonably be expected to have been included in the assessable income of the taxpayer in relation to a year of income if the scheme had not been entered into or carried out.

Paragraph 177C(1)(ba) of the ITAA 1936 provides that a taxpayer may be found to have obtained a tax benefit if they entered into or carried out a scheme that generates a capital loss that would not have been incurred, or might reasonably be expected not to have been incurred by the taxpayer in relation to a year of income if the scheme had not been entered into or carried out.

An alternate postulate is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out, that is, what the taxpayer would have done absent the scheme.

In identifying a reasonable alternate postulate, the following factors are taken into account:

· the most straightforward and usual way of achieving the commercial and practical outcome of the scheme,

· commercial and social norms,

· behaviour of relevant parties before and after the scheme, and

· the actual cash flow.

A tax benefit will not arise for a particular taxpayer in connection with a scheme if:

· there is a reasonable alternate postulate that shows how the taxpayer would have undertaken or might reasonably be expected to have undertaken a particular arrangement absent the scheme, and

· the alternate postulate would or might reasonably be expected to have resulted in a capital loss of the same kind as the capital loss claimed by the taxpayer under the scheme.

In your case, the scheme results in a capital loss under subsection 104-10(4) of the ITAA 1997 due to the transfer of these shares to the joint account. Had you not entered into or carried out this scheme, you have stated that you would have still sold these shares and generated a larger capital loss for yourself. Under this alternate postulate, the larger capital loss would also be claimable.

The alternate postulate is a plausible alternate transaction which does not raise doubt as to what you would have done in the absence of the identified scheme. In your circumstances it is a comparable way of achieving the practical outcome, is considered to be within commercial and social norms and it is reasonable to conclude that the capital loss would have been made absent the scheme. The fact that you are dealing with a related party under the scheme does not of itself deny the capital loss or compel the application of Part IVA of the ITAA 1936 particularly where there are capital gains provisions capable of countering any dealings that you have with each other that are not at arm's length (and, in fact, apply to the scheme).

The Commissioner accepts that there are a number of ways of doing a transaction or organising your affairs. In this matter, the Commissioner accepts that there is no tax benefit as defined in section 177C of the ITAA 1936, having regard to the alternate postulate and the manner in which the scheme is implemented. Therefore, Part IVA of the ITAA 1936 will not apply to deny the capital loss made in the arrangement that is the subject of this Ruling Application.