Edited version of private ruling

Authorisation Number: 1011874325042

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Capital gains tax - reduced cost base - capital loss

Questions and Answers

1. Is the first element of the cost base and reduced cost base of your shares the market value of the shares on the day that they ceased to be in the Pooled Development Fund (PDF)?

Yes.

2. Did you make a capital loss on the sale of your shares?

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Some time after 20 September 1985, you acquired shares in a company's (company A) development fund (PDF).

The shares were subsequently split.

Company A subsequently changed it name to company B (maintaining the PDF status).

Company B was purchased by an overseas company (company C) some time later under a scheme of arrangement whereby company C was required to obtain a listing on the relevant Stock market as soon as possible.

The deal converted your company B shares into a higher amount of company C shares at a certain market value.

A further component of the company C takeover agreement of company B was the issue of an additional entitlement of shares if listing did not occur by a certain date and a further entitlement of shares if listing did not occur by a later date.

The process of listing was delayed which triggered the first additional entitlement.

The directors of company C determined that a faster and more advantageous way for listing to occur was via a reverse takeover by an existing listed company (company D) rather than via a capital raising IPO by company C.

The decision to implement a reverse takeover rather than an IPO meant legally that the second tranche of additional shares was likely to become due, exposing the company D original shareholders to a potential litigation liability down the track. Company D shareholders therefore insisted that there be a commercial resolution between the original company B shareholders and company C which was settled by discounting the second additional tranche.

Accordingly, an amount of additional shares were issued to you.

The reverse takeover then occurred resulting in you being issued a higher amount of shares in company D.

Company D then changed its name to the same name as company C.

The average value of the shares over the five first days of trading from the date of listing was a certain amount.

The shares were held in escrow for 12 months which meant that they could not be sold.

Over the three years after listing a number of unsuccessful strategies were implemented by the management and board in the overseas country to improve the operating performance of company C.

Finally, company C changed its name to company E and raised more capital from other investors.

Some time later, you sold all of your company E shares on the market.

You incurred an amount in brokerage costs at the time of sale.

You have provided many documents that relate to all of the abovementioned events and transactions. These documents are to be read in conjunction with, and form part of, this private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 124ZR,
Income Tax Assessment Act 1997 Section 102-10,
Income Tax Assessment Act 1997 Section 104-10,
Income Tax Assessment Act 1997 Section 110-25 and
Income Tax Assessment Act 1997 Section 110-55.

Reasons for decision

Section 124ZR of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where a taxpayer holds shares in company that ceases to be a PDF, the taxpayer is taken to:

· have sold the shares immediately before the company ceased to be a PDF; and

· have repurchased the shares immediately after the company so ceased;

· for the market value of the shares immediately after the company ceased.

The capital gains tax (CGT) provisions apply as if the taxpayer:

· had disposed of the CGT asset, being the shares, and had done so immediately before the company ceased to be a PDF; and

· had reacquired those assets immediately afterwards;

· for the market value of the shares immediately after the company ceased.

In other words you are taken to have acquired the shares on the date that they ceased to be in the PDF for their market value on that day.

Accordingly, the market value will be the first element of the newly acquired shares cost base and reduced cost base.

In your situation, the sale of company B to company C was formally completed on a specific date. The market value of the company C shares on this date was a certain amount.

The company B shares that you held at the time were converted into a higher amount of company C shares.

Therefore the first element of the cost base and reduced cost base of your company C (later to become company E) shares is the market value on the date the sale was completed.

After company C changed its name to company E, you sold your company E shares and incurred brokerage costs.

The cost base and reduced cost base of your company E shares is the market value, as specified above, plus the brokerage costs.

Accordingly, you have made a capital loss.