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Edited version of private ruling
Authorisation Number: 1011918165982
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Ruling
Subject: capital gains tax
Issue 1
Will A Co make a capital gain from the disposal of the shares and the shareholder loan?
Question 1
Does the disposal of:
· a part of the share capital of B Co, and
· part of the shareholder loan owing from B Co,
by A Co result in a capital gain being made by A Co under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) from the disposal of each asset?
Answer
No
Issue 2
Where a capital gain is made by A Co from the disposal of the assets will Division 855 of the ITAA 1997 apply such that the capital gain is disregarded?
Question 1
In the event that a capital gain is made by A Co from the disposal of shares and part of the shareholder loan, is the capital gain disregarded under section 855-10 of the ITAA 1997?
Answer
Not applicable
This ruling applies for the following periods:
Year ended 30 June 2008
The scheme commences on:
Year commencing 1 July 2007
Relevant facts and circumstances
1. A Co is a non-resident company for Australian tax purposes.
2. A Co owns ZZ% of the issued share capital of B Co, a resident company for Australian tax purposes.
3. A Co entered into an agreement (the agreement) with X Co to dispose of a specified share of its total share capital in B Co and a part of the balance of a loan owing to A Co from B Co, to X Co.
4. A Co and X Co dealt on an arm's length basis at all times in negotiating the terms of the agreement.
5. The agreement completes on the 'closing day' being a specified number of days after all of the conditions in the agreement are met.
6. Under the agreement the total consideration for both the shares and the shareholder loan is an amount equivalent to A Co's total cost base for all of the assets disposed of, as of the closing day.
7. At the time of the agreement, both the shares and the shareholder loan were held by A Co on capital account, and each continues to be so held.
Relevant legislative provisions
Income Tax Assessment Act 1997
section 104-10
subsection 104-10(1)
subsection 104-10(4)
section 108-5
subsection 116-20(1)
section 116-30
Division 855
section 855-10
Detailed reasoning
All references are to the Income Tax Assessment Act 1997 (ITAA 1997)
Issue 1 Question 1
You make a capital gain under CGT event A1 if the capital proceeds from the disposal of a CGT asset are more than the asset's cost base (subsection 104-10(4)).
A Co's shares in B Co, and its shareholder loan to B Co, are CGT assets (section 108-5 of the ITAA 1997).
When the conditions precedent in the agreement are met, and the B Co shares and part of the loan are subsequently disposed of by A Co, CGT event A1 will happen (subsection 104-10(1)).
A Co will make a capital gain under CGT event A1 if the capital proceeds from the disposal of the B Co shares, and the part of the shareholder loan, are more than the sum of A Co's cost bases for the shares, and part of the shareholder loan.
Capital proceeds from a CGT event are the total of the money you receive (or are entitled to receive) and the market value of any other property you receive (or are entitled to receive) in respect of the event happening (subsection 116-20(1)).
The consideration to be received by A Co for the disposal will be an amount equal to the sum of A Co's cost bases for the shares and the part of the shareholder loan disposed of under the agreement. As the total capital proceeds for the disposal will equal the total cost bases for the disposal, there will be, prima facie, no capital gain made under CGT event A1.
Market value substitution rule
In some circumstances the market value substitution rule may apply to modify the amount of capital proceeds from a CGT event (section 116-30).
However, the market value substitution rule will not apply if the entity disposing of the asset and the entity acquiring the asset dealt with each other at arm's length in connection with the event.
A Co and X Co dealt on an arm's length basis at all times in negotiating the terms of the agreement. The market value substitution rule will therefore not apply to modify the capital proceeds from the CGT events.
Issue 2 Question 1
Reasoning
Section 855-10 allows a foreign resident to disregard a capital gain made from a CGT event in certain circumstances. As A Co does not make a capital gain when it disposes of the shares and part of the shareholder loan under the agreement, section 855-10 has no application.