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Edited version of private ruling
Authorisation Number: 1011733199388
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Ruling
Subject: Shares and capital gains tax
Question:
Can you disregard any capital gain or capital loss you make when you dispose of your shares in X Company Ltd and your units in X Company Trust?
Answer: No.
This ruling applies for the following periods:
Income year ending 30 June 2011
Income year ending 30 June 2012
The scheme commenced on:
1 July 2010
Relevant facts and circumstances
Prior to 20 September 1985 you purchased shares in Y Company Ltd.
Over several years, your shareholding increased due to the issuing of bonus shares.
In the income year ended 30 June 1998 Y Company Ltd merged with Z Company Ltd.
As a result of the merger, you received shares in Z Company Ltd and a cash component, in return for the shares you held in Y Company Ltd.
In 2004 Z Company Ltd became X Company Group, comprising of two stapled entities, X Company Ltd and X Company Trust.
You are considering selling the shares.
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 108-5.
Income Tax Assessment Act 1997 Section 110-25.
Income Tax Assessment Act 1997 Section 110-55.
Reasons for decision
A capital gains tax (CGT) asset is any kind of property or a legal or equitable right that is not property (subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)).
You make a capital gain or capital loss if and only if a CGT event happens. CGT events are the different types of transactions or happenings which may result in a capital gain or a capital loss (section 102-20 of the ITAA 1997).
The disposal of a CGT asset is the most common CGT event and is referred to as CGT event A1 (section 104-10 of the ITAA 1997). A taxpayer disposes of a CGT asset if a change of ownership occurs from the taxpayer to another entity.
The time of the event is either when the taxpayer enters into a contract for the 'disposal', or if there is no contract - when the change of ownership occurs (subsection 104-10(3) of the ITAA 1997).
In your case you disposed of your shares in Y Company Ltd when they merged with Z Company Ltd before 1 July 1998.
In some cases, a roll-over may be available when a taxpayer disposes of shares and receives shares in a new company as a result of a merger. The effect of a roll-over is that any capital gain or loss made because a CGT event happens to a CGT asset is disregarded. However, a capital gain or loss may later arise when a CGT event happens to the same asset or a replacement asset in respect of which the roll-over is made.
In your case, a roll-over is not available to you when you disposed of your shares in Y Company Ltd as the relevant legislation relating to roll-overs did not come into effect until 1 July 1998.
Therefore, for CGT purposes, the acquisition date of the Z Company Ltd shares is the date you actually received them, rather than the date you received the original shares in Y Company Ltd. As you received the shares in Z Company Ltd after 20 September 1985, any capital gain or capital loss you make when you dispose of the shares cannot be disregarded.
Disposal of Y Company Ltd shares
CGT event A1 happened when you disposed of your shares in Y Company Ltd, however, any capital gain or capital loss you made as a result of this disposal is disregarded as the shares were acquired before 20 September 1985 (subsection 104-10(5) of the ITAA 1997).
Cost base of X Company shares on original acquisition date
As a roll-over cannot be chosen, the cost base of each X Company share received is equal to the market value of the part of the Y Company Ltd shares given in exchange for the X Company shares (subsections 110-25(2) and 110-55(2) of the ITAA 1997).
The Commissioner accepts the following method for working out the relevant part of the Y Company Ltd shares given in exchange for X Company shares:
Market value of Y Company Ltd shares |
x |
Market value of X Company shares |
(Market value of X Company shares + Cash consideration) |
Cost base of shares when X Company Group became X Company Ltd and X Company Trust
According to an ATO Public Ruling, when the X Company Group became X Company Ltd and X Company Trust, the cost base of each of your X Company Group shares was reduced by a certain amount.
Therefore, you should reduce the cost base of each share you own (as calculated using the formula above) by that amount.
Cost base of X Company Trust units
According an ATO Public Ruling, the cost base of each X Company Trust unit is a certain amount.