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Ruling

Subject: Capital Gains Tax on disposal of shares

Question 1

When the shares were disposed of, did CGT event A1 happen?

Answer

Yes

Question 2

Will the proceeds from the disposal of the shares be taxable in the hands of the Trustee?

Answer

Yes

Question 3

Having regard to the answer to question (a) and (b), if the proceeds from the sale of the shares are taxable in the hands of the Trustee, should the cost base of the shares be calculated using the value paid for shares in the company by the proponent (entrant company) as a proxy for market value?

Answer

Yes

This ruling applies for the following period:

The 2008-09 income year

The scheme commenced on:

1 July 2008

Relevant facts and circumstances

The following facts were set out in your private ruling application:

By resolution of the directors of the company, persons were appointed joint and several voluntary administrators of the company.

At an adjourned second meeting of creditors at a later time, the creditors resolved that the Company enter into a 'holding deed of company arrangement ("DOCA")", the terms of which enabled the Deed Administrators to assess proposals from interested parties to reconstruct and recapitalise the Company.

Later, the Deed Administrators entered into a Deed of Reconstruction with the proponent for the recapitalisation of the Company as a listed public company (the "Reconstruction Deed").

At a meeting of creditors of the Company, the creditors resolved to vary the DOCA approving the proposed restructure of the Company as set out in the Reconstruction Deed. Later, the Deed Administrators entered into a Deed of Variation of Deed of Company Arrangement.

Completion pursuant to the Reconstruction Deed occurred. On which date the DOCA was terminated and the Creditor's Trust commenced. Persons were appointed trustees of the Trust (the "Trustees")

Creation of the Trust

A creditor's trust in a DOCA is a mechanism used to accelerate a company's exit from administration. The Company while it was subject to the administration process was not capable of being relisted on the Australian Stock Exchange ("ASX").

The Deed Administrators caused the creation of the Trust and became the trustees of the Trust in. The Deed Administrators having become Trustees of the Trust retired as Deed Administrators.

The next business day after the creation of the Trust, the following occurred:

- the Deed Administrators held all of the Company's cash (including the amount made available by the proponent), in their capacity as Trustees of the Trust;

- an amount of shares in the recapitalised Company were issued to the Deed Administrators (the Shares), in their capacity as Trustees of the Trust;

- the amended DOCA was completed and came to an end.

On completion of the DOCA, creditors' claims against the Company were extinguished and substituted for an entitlement against the Trust.

Your role as Trustee of the Trust includes:

- adjudication of each creditor of the Company's right to claim as beneficiaries of the Trust;

- distribution of the funds held by the Trust to beneficiaries rateably in accordance with the terms of the Creditors Trust Deed.

When all funds held by the Trust have been fully distributed the Trust will be finalised.

Realisation of the Shares

Under the terms of the Recapitalisation Deed, the Trust obtained shares in the recapitalised Company for the benefit of creditors for nil consideration.

When the average share price was circa X cents per share, the directors of the Company presented to the Trustee an offer to purchase the Shares at a price of X cents per share in a single off- market transaction.

The Trustee agreed to the proposed sale and realised the Shares for an amount, less brokerage fees.

The proceeds from the sale of the Shares form part of the pool of funds available for distribution to Trust Creditors.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 section 99

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the rulee.

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

Question 1

When the shares were disposed of, did CGT event A1 happen?

Answer

Yes

For CGT purposes, shares in a company are treated in the same way as any other CGT asset, therefore when they are disposed of, CGT event A1 happens as per section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

Question 2

Will the proceeds from the disposal of the shares be taxable in the hands of the Trustee?

Answer

Yes

The shares were held by the Trustee for the benefit of the Trust Creditors (beneficiaries), the funds received from the sale of the shares net of costs will be distributed to the beneficiaries.

In order for a trust creditor (beneficiary) to be treated as the relevant taxpayer rather than the trustee with regard to the proceeds from the disposal of the shares the beneficiary would need to be an absolutely entitled beneficiary in respect of the asset for CGT provisions.

Draft Taxation Ruling TR 2004/D25 considers the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee.

The following paragraphs of the draft ruling state;

2. Broadly, an absolutely entitled beneficiary (rather than the trustee) is treated as the relevant taxpayer in respect of the asset for the purposes of the capital gains tax (CGT) provisions.

3. This Ruling only applies in determining whether a beneficiary is absolutely entitled to a trust asset as against the trustee for the purposes of the CGT provisions in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997).

4. References to this Ruling to an 'absolutely entitled' beneficiary are to be read as to a beneficiary who satisfies the criteria for absolute entitlement as that phrase is used in the CGT provisions.

14. Also, a beneficiary with an interest in the trust's assets cannot be absolutely entitled if that interest is contingent or defeasible

73. The interest a beneficiary has in the trust asset or assets must be vested in possession and indefeasible. A trustee would only be obliged to satisfy a demand from a beneficiary with such an interest.

74. A vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession or enjoyment of it.

The Creditors Trust Deed states;

The Trustees may, in their absolute discretion, pay any Admitted Trust Claim in full if they consider it desirable to do so, having regard to (among other things) the interests of the Admitted Trust Creditors.

Payment by the Trustees to an Admitted Trust Creditor of an amount declared by the Trustees to be a final dividend (even if the amount of the payment is nil) will be in full satisfaction of all claims.

The Trustees may make provision from any net income or assets of the Trust Fund for any accounting period for any liability of the Trustees for income or other tax payable in relation to any income or capital of the Trust Fund paid to any Admitted Trust Creditor during the account period.

The above factors indicate that the Trust Creditors do not have an absolute entitlement to a trust asset.

Therefore the proceeds from the disposal of the shares will be taxable in the hands of the Trustee.

Question 3

Having regard to the answer to question (a) and (b), if the proceeds from the sale of the shares are taxable in the hands of the Trustee, should the cost base of the shares be calculated using the value paid for shares in the Company by the proponent as a proxy for market value?

Answer

Yes.

You have advised that;

The shares were granted to the Trustees on behalf of the Trust for nil consideration.

At the time the shares were granted to the Trustees, the trading of the Company's shares on the ASX was suspended as a result of the appointment of the Voluntary Administrators. Accordingly, a market price for the shares on issuance to the Trustee is not readily available.

Not long after the issuance of the shares, the proponent was issued shares in the Company for consideration.

In the event that the proceeds received from the realisation of the shares are taxable in the hands of the Trustee, you believe the cost base of the shares should be taken as the weighted average of the price paid by the proponent for the shares granted to the Trust (less costs).

The next business day after the creation of the Trust, shares in the recapitalised Company were issued to the Deed Administrators in their capacity as Trustees of the Trust.

Taxation Determination TD 33 advises that average cost is not an acceptable method to work out the acquisition cost of shares unless the shares satisfy all of the following requirements:

· they are in the same company

· they are acquired on the same day; and

· they confer identical rights and impose identical obligations.

The Trustee meets the above requirements, therefore the Trustee is entitled to use the weighted average cost of the shares to establish a cost base for the sale of the shares.