Edited version of private ruling

Authorisation Number: 1011617600766

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Ruling

Subject: Capital Gains Tax

Question 1

Will the transfer of certain assets to a nominee company result in a CGT event A1 or any other CGT event?

Answer

No. A CGT event A1, or any other CGT event, will not happen when the shares are transferred to a nominee company.

This ruling applies for the following period:

1 July 2010 - 30 June 2015

Facts

The taxpayer currently owns a significant number of fully paid ordinary shares in two major financial institutions, as well as a number of other listed and unlisted shares and securities.

The taxpayer is attempting to enter into a loan agreement whereby dividends received on the shares will be used as security for any money borrowed under the loan agreement. In order to obtain proper security over the dividend payments, it is necessary that the share registry be properly directed as to the place where the dividend payment will be made.

It has been proposed by the lender that the taxpayer transfer custody of the shares to a nominee company to act as bare trustee / custodian in accordance with the terms of the Client Nominee Agreement. A particular clause states that subject to completion by or on behalf of the client of the relevant application form, Financial Services Co will arrange for Nominee Co to hold the financial products as bare trustee and nominee for the client in accordance with the following terms and conditions.

Reasons for decision

Disposal of a CGT asset

Under section 104-10 of the Income Tax Assessment Act 1997 ('ITAA 1997'), a CGT event A1 happens if a taxpayer disposes of a CGT asset. A taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity, whether because of some act or event or by operation of law. However a CGT event A1 will not happen if there is no change in the beneficial ownership of the asset, even though there may be a change in the legal ownership.

The concept of 'beneficial ownership' is not defined for the purposes of the ITAA 1997. However it is generally accepted that it denotes absolute entitlement to the benefit of the relevant property. A fundamental aspect of general property law is that it is possible for legal ownership to be separated from beneficial ownership, as where a trustee of a bare trust holds the legal title to an asset while the benefits arising from that asset flow to another. In J Sainsbury v O'Connor (HMIT) [1991] STC 318; [1991] BTC 181, Lord Justice Nourse defined 'beneficial ownership' as:

ownership for your own benefit as opposed to ownership as trustee for another. It exists where there is no division of legal and beneficial ownership or where legal ownership is vested in one person and the beneficial ownership, or which is the same thing, the equitable interest in the property in another. Thus, to take the simplest case of divided ownership to which section 532(3) can apply, if company A is the registered holder of shares in company B as nominee, i.e. as bare trustee, for company C, the beneficial ownership of the shares or the equitable interest in them is vested in company C.

Disposal of a CGT asset to provide or redeem security

Paragraph 104-10(7)(a) of the ITAA 1997 states that a CGT event A1 will not happen if a taxpayer disposes of a CGT asset to provide or redeem a security. Furthermore, section 109-15 of the ITAA 1997 states that there is no acquisition of an asset if it was disposed of to the taxpayer to provide or redeem a security.

The meaning of the expression 'by way of security' was considered in Aspden v Hildesley (1982) 2 All ER 53:

'….the expression 'by way of security' is used in its conventional legal sense. It is talking about a conveyance or transfer of property to secure compliance with an obligation, on performance of which the property reverts to the transferor.'

A common example of providing or redeeming a security is where the title to a property is held by the mortgagee of the property until such time as the loan is discharged. The transfers of the property by the mortgagor to the mortgagee and back again are not a disposal which will result in a CGT event A1 happening.

The arrangement between the taxpayer and Nominee Co

The 'Nominee Services Agreement' sets out the conditions under which the shares are to be held:

· This agreement contains the terms on which Nominee Co agrees to arrange for the provision to the Client of nominee services in respect of various securities and other financial products owned and nominated by the Client from time to time (Financial Products) and the holding on the Client's behalf all certificates and other documents or evidence of title relating to the Financial Products.

· Subject to completion by or on behalf of the Client of the relevant application form, Finance Co will arrange for Nominee co to hold the Financial Products as bare trustee and nominee for the Client in accordance with the following terms and conditions.

….

· The Client acknowledges that, in the case of Financial Products which may be held in a CHESS holding sponsored by a controlling participant under the ASTC Settlement Rules, the Financial Products may be held in the same CHESS holding under which Nominee Co holds securities for other persons

· Where Nominee Co acts as nominee for any of the Client's Financial Products

o Nominee Co will be registered as the holder of the Financial Products

o all certificates and other documents or evidence of title relating to the Financial Products held in custody will be retained by Nominee Co

o Nominee Co will, on the Client's behalf, collect or otherwise receive all principal, dividends, interests, other amounts and entitlements relating to the Financial Products held in custody and will account to the Client for the same; and

o Unless Finance Co is instructed otherwise by the Client, Nominee Co will deposit into Finance Co's trust account to be held for the Client any moneys received by Nominee Co on the Client's behalf.

Application to your circumstances

Under the Nominee Services Agreement the shares owned by you will be held under a bare trustee / nominee arrangement as a security for money borrowed under a loan agreement. For ASX purposes, Nominee Co will be registered as the holder of the shares and will receive any dividends etc on your behalf. Nominee Co will also hold all certificates and other documents which are evidence of your ownership of the shares.

While Nominee Co may hold documents which are evidence of your ownership of the shares, this does not amount to a change in the legal or beneficial ownership of the shares. If there is no change in the beneficial ownership of the shares a disposal does not occur as described in subsection 104-10(2) of the ITAA 1997. Therefore a CGT event A1 will not happen under the proposed arrangement.

Paragraph 104-10(7)(a) of the ITAA 1997 also states that a CGT event A1 will not happen if an asset is disposed of to provide or redeem a security. However as there will not be a disposal the paragraph will not apply to the arrangement.