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Edited version of private ruling
Authorisation Number: 1011527076021
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Ruling
Subject: Sale of shares - administrative error
1. Will the total amount of proceeds that you received be subject to capital gains tax (CGT)?
Yes.
2. Is the cost base of the shares sold the same as the cost base of the original shares acquired on the death of the deceased?
Yes.
This ruling applies for the following periods:
Year ended 30 June 2006
The scheme commences on:
1 July 2005
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.
Some time after 25 September 1985 the deceased purchased shares in an overseas company (Company A).
Some time later another company (Company B) took over company A. Company A shareholders received an amount in cash and a portion of a company B share for each company A share they held. The deceased received a cash amount and some company B shares.
The deceased passed away some time later and Trustees were appointed the executor of their estate.
The Trustee's made enquiries with Computershare (share registry) regarding the deceased's shareholding. Computershare informed the Trustees that the deceased held the same number of shares that they had previously held in company A in company B.
The Trustees then contacted their broker and advised them to sell the company B shares (on the belief that the deceased actually held that amount). The broker proceeded with the sale. The Trustees received the proceeds in good faith and distributed fund to the beneficiaries.
The broker subsequently realised that an error had been made regarding Computershare's advice of the deceased's shareholding. Computershare had failed to properly carry out the corporate takeover that would result in the deceased's shareholding changing from a certain amount of company A shares to a lesser amount of company B shares.
The deceased estate received a significantly higher amount of proceeds than what it should have.
You as trustee of the deceased estate was not required to repay this amount or acquire additional shares in company B.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 116-20.
Reasons for decision
You make a capital gain or capital loss when a CGT event happens to a CGT asset that you own. CGT event A1 happened when you sold the shares.
You make a capital gain if your capital proceeds are more than the assets cost base. You make a capital loss if your capital proceeds are less than the assets reduced cost base.
Section 116-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the capital proceeds from a CGT event are the total of the money you have received, or are entitled to receive in respect of the event happening. You received a total amount that was significantly higher that what you should have received. Therefore, this is the capital proceeds that you received when the shares were sold.
While we accept that an administrative error resulted in you receiving more capital proceeds than you should have, this does not take away from the fact that you physically received the amount and did not repay any of it.
The cost base of the company B shares sold will be the same that was attributed on the death of the deceased as no additional expenditure has been incurred. There is no provision in the ITAA 1997 that allows for any cost base adjustment to be made in your circumstances.