Edited version of private ruling

Authorisation Number: 1011665012474

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Subject: Selective capital reduction

Questions

1. Will CGT event C2 happen at the time the shares are cancelled pursuant to subsection 105-24(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Will the capital proceeds received by the trustee from the CGT event C2 include the market value of the property pursuant to section 116-20 of the ITAA 1997?

3. Will the market value substitution rule in subsection 116-30(1) of the ITAA 1997 apply to the trustee with respect to the CGT event?

4. Will the market value substitution rule in subsection 116-30(2) of the ITAA 1997 apply to the trustee with respect to the CGT event?

5. Will the trustee make a capital loss in connection with the CGT event to the extent the market value of the property is less than the reduced cost base of the shares pursuant to subsection 104-25(3) of the ITAA 1997?

6. Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the transaction?

Answers

1. Yes, CGT event C2 will happen at the time the shares are cancelled pursuant to subsection 104-25(1) of the ITAA 1997.

2. Yes, the capital proceeds received by the trustee from the CGT event C2 will include the market value of the property pursuant to section 116-20 of the ITAA 1997.

3. No, the market value substitution rule in subsection 116-30(1) of the ITAA 1997 will not apply to the trustee with respect to the CGT event.

4. No, the market value substitution rule in subsection 116-30(2) of the ITAA 1997 will not apply to the trustee with respect to the CGT event.

5. Yes, the trustee will make a capital loss in connection with the CGT event to the extent the market value of the property is less than the reduced cost base of the shares pursuant to subsection 104-25(3) of the ITAA 1997.

6. No, Part IVA of the ITAA 1936 will not apply to the transaction.

Relevant facts and circumstances

The trustee of a trust holds shares in a publicly listed company. The company undertakes a selective capital reduction pursuant to subsection 256B(2) of the Corporations Act 2001 (Selective Capital Reduction). This will result in the shares held by the trustee being cancelled.

Before the shares can be cancelled, the selective capital reduction must be approved at a shareholders meeting. Subsequently, the trustee is required to approve the share cancellation by way of special resolution pursuant to paragraph 256(B)(2) of the Corporations Act 2001.

The trustee will not receive any cash consideration with respect to the cancellation of the shares. However, the trustee will receive other property from the company with respect to the selective capital reduction. The cancellation of the shares is contingent upon the property being provided in a form that is acceptable to the Trustee. The share cancellation will not occur but for the trustee agreeing to the form of the property. The property has been valued by an independent valuer.

The trust will be wound up after the selective capital reduction has been effected. Any capital loss made by the Trustee in connection with the selective capital reduction will not be utilised by the Trustee before the Trust is wound up.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 104-25(1)

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Subsection 116-30(1)

Income Tax Assessment Act 1997 Subsection 116-30(2)

Income Tax Assessment Act 1997 Subsection 104-25(3)

Income Tax Assessment Act 1997 Division 230

Income Tax Assessment Act 1936 Part IVA

Reasons for decision

Issue 1

Pursuant to paragraph 104-25(1)(a) of the ITAA 1997, CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being redeemed or cancelled.

The company will undertake a selective capital reduction pursuant to the subsection 256B(2) of the Corporations Act 2001, which will result in the shares remaining in the Trust being cancelled.

Pursuant to subsection 104-25(2) of the ITAA 1997, if there is no contract the time of the event is when the asset ends.

CGT event C2 will happen to the trustee pursuant to subsection 104-25(1) of the ITAA 1997 at the time the shares are cancelled.

Issue 2

Subsection 116-20(1) of the ITAA 1997 states that:

The capital proceeds from a *CGT event are the total of:

a) the money you have received, or are entitled to receive, in respect of the event happening; and

b) the *market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event).

Under the transaction, the trustee will not receive or be entitled to receive any money in respect of the cancellation of the shares.

Based on the information provided, the property is received by the trustee in respect of the shares being cancelled. The market value of the property will constitute capital proceeds of CGT event C2 under section 116-20 of the ITAA 1997.

Issue 3

The market value substitution rule under subsection 116-30(1) of the ITAA 1997 applies if there is no capital proceeds from a CGT event.

In the present case, the capital proceeds from the CGT event C2 is the market value of the property received by the trustee.

Therefore, the market value substitution rule in subsection 116-30(1) of the ITAA 1997 will not apply to the trustee with respect to the CGT event C2.

Issue 4

Subsection 116-30(2) of the ITAA 1997 provides that:

The *capital proceeds from a *CGT event are replaced with the *market value of the *CGT asset that is the subject of the event if:

a) some or all of those proceeds cannot be valued; or

b) those capital proceeds are more or less than the market value of the asset and:

I. you and the entity that *acquired the asset from you did not deal with each other at arm's length in connection with the event; or

II. the CGT event is CGT event C2 (about cancellation, surrender and similar endings).

The capital proceeds received by the trustee in relation to the cancellation of the shares are the market value of the property. As the capital proceeds can be valued, paragraph (a) will not apply.

The market value of the shares to be cancelled is greater than the market value of the capital proceeds.

However, subsection 116-30(2B) of the ITAA 1997 provides that subsection 116-30(2) of the ITAA 1997 does not apply to a situation that would otherwise be covered by paragraph 116-20(2)(b) if the CGT event is CGT event C2 and the CGT asset that is the subject of the event is a share in a company that has at least 300 members and is not a company that is covered by section 116-35 of the ITAA 1997.

Based on the information provided, all of the requirements under subsection 116-30(2B) of the ITAA 1997 are satisfied. Therefore, the market value substitution rule in subsection 116-30(2) of the ITAA 1997 will not apply to the trustee with respect to the CGT event C2.

Issue 5

Subsection 104-25(3) of the ITAA 1997 provides that:

You make a capital gain if the *capital proceeds from the ending are more than the asset's *cost base. You make a capital loss if those capital proceeds are less than the asset's *reduced cost base.

As the capital proceeds are less than the reduced cost base of the shares, the trustee will make a capital loss in connection with the CGT event to the extent the market value of the property is less than the reduced cost base of the shares pursuant to subsection 104-25(3) of the ITAA 1997.

Issue 6

Part IVA of the ITAA 1936 may apply to transactions if it is reasonable to conclude that a scheme was entered into by a person for the dominant purpose of obtaining a tax benefit.

Based on the facts presented, there will be no application of Part IVA of the ITAA 1936 to the transaction.