Edited version of private ruling

Authorisation Number: 1011669712033

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Ruling

Subject: Capital gains tax

Question

Have the units you disposed of in Q Trust to QT Limited, maintained a pre capital gains tax status?

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.

You purchased units in X Trust before 20 September 1985.

X trust failed after 1985 and your units were compulsory acquired by Y Trust in the early 1990s.

You received an amount of both Class A and Class B units.

You later received some bonus units.

Y Trust subsequently merged with Z Trust, acquiring all Z Trust units, resulting in Y Trust changing its name to YZ Trust.

YZ Trust later changed its name to ZZ Trust.

You participated in a rights issue and upon exercising your right you paid an amount to acquire an additional number of fully paid units.

ZZ Trust changed its name to Q Trust.

You received an amount of money as full payout under the cash option scheme.

You have provided unit certificates, holding statements and statements of transactions which are to be read with and form part of the scheme for the purpose of the ruling.

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 104-25

Income Tax Assessment Act 1997 Section 124-785

Income Tax Assessment Act 1997 Section 130-20

Income Tax Assessment Act 1997 Section 130-40

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Capital gains tax

You may make a capital gain or capital loss when a capital gains tax (CGT) event happens to a CGT asset. A CGT asset can be any kind of property or a legal or equitable right, and includes shares and units.

If the capital proceeds from the disposal of a CGT asset are more than the asset's cost base you would make a capital gain. You make a loss if the capital proceeds from the disposal of a CGT asset are more than the asset's reduced cost base. However, if you acquired the asset before 20 September 1985 a capital gain or loss you make is disregarded.

Takeovers and mergers

If a company in which you own shares or units is taken over or merges with another company, you may have a CGT obligation if you are required to dispose of your existing units or they are cancelled.

Where the arrangement involves an exchange of shares, your capital gain or loss is calculated with capital proceeds being the market value of the shares at the time of disposal of your original shares.

However, if the original shares were acquired pre-CGT, any capital gain or loss made on disposal of the shares is disregarded.

In these circumstances, the cost of acquiring the shares in the merged company is the market value of the shares at the time they are acquired. The new shares are no longer classed as pre-CGT shares.

Scrip-for-scrip rollover

In certain circumstances, if you acquire new shares in the takeover or merged company, you may be able to defer paying CGT until a later CGT event happens. You can only choose the rollover if you made a capital gain from an exchange after 10 December 1999 and it does not apply to a capital loss.

If your original units were acquired before 20 September 1985 you are not eligible for a scrip for scrip rollover. You are taken to have acquired the replacement units at the time of the exchange for their market value. These replacement units will no longer be considered to be a pre-CGT asset.

In your situation, the units you held in X Trust were compulsory acquired by Y Trust. As these units were pre-CGT assets, they are not eligible for the scrip for script rollover. However, any capital gain or loss on disposal of the shares is disregarded and you are taken to have acquired the new units in Y Trust at their market value at the time of the exchange.

The units held in Y Trust were no longer deemed to be a pre-CGT asset.

Further issues for you to consider

Bonus units

Bonus units received in relation to units that were acquired on or after 20 September 1985 are taken to have been acquired on the date that you acquired your original units.

In your case, you are taken to have acquired the bonus units at the time you acquired the units in Y Trust.

The cost base of the bonus units is calculated by apportioning the cost base of the original units (the Y units acquired in 19XX) over both the bonus units and original units. Bonus units will take on part of the cost base of the original parcel and they will be subject to CGT provisions.

Rights issue

If, after 20 September 1985, you acquire rights (to buy units) that you paid for and were issued directly to you from a company, special rules apply to calculate the cost base of the units acquired when you exercise the rights. The first element of the cost base and reduced cost base of the units is:

· The amount you paid for the rights or options, plus

· The amount you paid for the units on exercising the rights.

· The acquisition date of these units is the date that you exercised the rights.

In your case, you exercised your rights to participate in a rights issue to acquire additional units in ZZ Trust. The acquisition date for these units is when they were exercised, with the cost base being the amount you paid to for the rights and any amount you paid to exercise them.

Capital proceeds and Cost Base

The capital proceeds from the sale of a CGT asset are the total of the money you have received or are entitled to receive when you dispose of the asset.

In your case, you disposed of your units in the Q Trust, and received an amount as full payout under the cash option scheme. These funds are the capital proceeds from the sale of all your units including the bonus units received and additional units you acquired under the rights issue.

From the information provided you may have been eligible for the scrip for script relief on the subsequent exchange of units until you received a full payout under the cash option scheme.

In this case, the cost base is the market value of the Y Trust shares you received in early 1990s as well as the amount paid under the rights issue.

Calculating your capital gain or capital loss

You make a capital gain from a CGT event, for example, the sale of units, if your capital proceeds which you receive for the event exceed the total costs associated with that event.

You make a capital loss if the total costs associated with the CGT event exceed the capital proceeds you received.

If the proceeds do not exceed the cost base, you need to work out the reduced cost base. If the reduced cost base exceeds the capital proceeds, the difference is your capital loss.

For a full explanation on how to calculate a capital gain or loss, please see our Guide to capital gains tax 2009-10 located on the Australian Taxation Office's internet site www.ato.gov.au.

The discount method

The CGT discount allows individuals to pay tax on only 50% of any capital gain they make on assets owned for at least 12 months.

You can use the discount method to calculate a capital gain if:

· a CGT event happens to an asset you own

· the CGT event happens after 21 September 1999

· you acquired the asset at least 12 months before the CGT event, and

· you did not choose to use the indexation method.

As capital gains are not taxed separately, this gain is then added to your assessable income and taxed at your marginal tax rate in the year in which you incurred the gain.