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Ruling
Subject: Capital gains tax
Questions and answers:
1. Did you make a capital gain due to the merger of companies A and B in the 2011 income year?
Yes.
2. Are you required to include a capital gain in your tax return?
Yes.
This ruling applies for the following period:
1 July 2010 to 30 June 2011.
The scheme commenced on:
1 July 2010.
Relevant facts
You owned shares in company A.
There was a merger (the merger) between company A and company B.
You received a number of shares in company B as well as an amount of cash in exchange for your company A shares.
Relevant legislation
Income Tax Assessment Act 1997 Section 102-5.
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.
Income Tax Assessment Act 1997 Section 115-10.
Income Tax Assessment Act 1997 Section 115-15.
Income Tax Assessment Act 1997 Section 115-20.
Income Tax Assessment Act 1997 Section 115-25.
Income Tax Assessment Act 1997 Section 116-20.
Income Tax Assessment Act 1997 Subdivision 124.
Reasons for decision
You can only make a capital gain or loss when a CGT event happens to a CGT asset you own.
Shares acquired on or after 20 September 1985 are CGT assets.
Generally, the gain or loss is made at the time a CGT event happens to the asset.
The most common CGT event is event A1 which happens when a CGT asset you own is disposed of to another person or entity.
The time of the event is when the contract for the disposal is entered into, or when the change of ownership takes place if there is no contract.
If the capital proceeds from the disposal of a CGT asset are greater than the asset's cost base you make a capital gain. A capital loss is made if the reduced cost base of the asset is greater than the capital proceeds.
The capital proceeds from the disposal of a CGT asset includes the sum of any money, as well as the value of any other property you receive from the disposal.
The cost base of a CGT asset is made up of the following five elements:
· The first element: money or property given for the asset.
· The second element: incidental costs of acquiring the asset or that relate to the CGT event.
· The third element: costs of owning the asset.
· The fourth element: capital costs to increase or preserve the value of your asset or to install or move it.
· The fifth element: capital costs of preserving or defending your ownership of or rights to the asset.
The reduced cost base of a CGT asset has the same five elements as the cost base, except for the third element. The third element of the reduced cost base relates to balancing adjustments which do not apply to shares.
Generally, any assessable gain you make from a CGT event is included in your assessable income in the year in which the event happens. However, in some cases an exemption or rollover may apply which allows you to disregard, or reduce any capital gain made from a CGT event. One such rollover is known as the scrip for scrip rollover.
Where the conditions for scrip for scrip rollover are met, a capital gain made on the exchange of shares in one company for shares in another company, usually as part of a takeover or merger, is deferred until the disposal of the new shares. Scrip for scrip rollover cannot be applied to a capital loss and is not available on the cash component of any consideration received for the exchange of shares in one company for shares in another company.
Provided they have not used the indexation method to determine the cost base of a CGT asset, a 50% CGT discount can be applied to a capital gain made by an individual if:
· the CGT event that gives rise to the gain happens after 11.45am (by legal time in the ACT) on 21 September 1999 to a CGT asset they own, and
· they acquired the asset at least 12 months before the CGT event happened.
The day of acquisition of the asset and the day of the CGT event are excluded from the calculation to determine the period of time the asset was owned.
CGT implications of the takeover of company A by company B
CGT event A1 happened when you disposed of your company A shares under the merger.
The total capital proceeds you received from the disposal of your company A shares under the merger was $ XXXX, comprising:
· the cash component of $ XXXX, and
· the company B share component valued at $ XXXX.
The cost base of your company A shares was $ XXXX.
Accordingly, your capital gain from the disposal of your company A shares under the merger was
$ XXXX, determined as follows:
Total consideration received |
$ XXXX |
Less cost base of company A shares |
$ XXXX |
Capital gain |
$ XXXX |
Scrip-for-scrip rollover is available to participants in the merger. and as discussed below, there are different taxation consequences for choosing, or not choosing, scrip for scrip rollover.
Consequences of not choosing scrip for scrip rollover
Company A shareholders who choose not to apply scrip for scrip rollover cannot disregard any portion of the capital gain made on the disposal of their company A shares.
Accordingly, if you choose not to apply scrip for scrip rollover, no part of your capital gain can be disregarded. However, you are entitled to apply the 50% CGT discount to the gain made on the disposal of your company A shares. Therefore, the amount of capital gain that would be included in your assessable income if you do not choose scrip for scrip rollover is $ XXXX.
Consequences of not choosing scrip for scrip rollover
Company A shareholders who choose to apply scrip for scrip rollover on the disposal of their company A shares are able to disregard (that is, not include in their assessable income) the portion of their capital gain that relates to the replacement company B shares received. The portion of their gain relating to the cash component cannot be disregarded and will be included in their assessable income.
Where scrip for scrip rollover is chosen, it is therefore necessary to determine the cost base of both the company B share component and the cash component received in exchange for company A shares.
If you choose scrip for scrip rollover, the amount of the cost base of your company A shares that is attributable to the cash component of the capital proceeds is calculated using the following formula:
Cost base of company A shares exchanged |
x |
Cash component |
The capital gain on the cash component is determined using the following formula:
Cash component - cost base of company A shares exchanged for cash component
You are entitled to apply the 50% CGT discount to your gain, therefore, the amount that would be included in your assessable income if you choose scrip for scrip rollover is $ XXXX.
Conclusion
If you do not choose scrip for scrip rollover, your assessable income will include a capital gain of
$ XXXX.
If you do choose scrip for scrip rollover, your assessable income will include a capital gain of
$ XXXX.