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Edited version of your private ruling
Authorisation Number: 1012021436735
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Subject: capital gains tax - shares - beneficial ownership - acquisition
Question: Did you have beneficial ownership in shares owned by company in which you were a shareholder?
Answer: No.
This ruling applies for the following period
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts and circumstances
Prior to 20 September 1985, you and your spouse jointly formed the company, Company A, in which you both held a number of shares.
The purpose of forming Company A was to hold the shares your spouse owned in Company B, a private family company.
Company A disposed of the shares in Company B prior to 20 September 1985, and the proceeds were used to purchase shares in public companies, with a number of shares being acquired in Company C before 20 September 1985.
Due to a change in circumstances prior to 30 June 1985, you and your spouse agreed to dissolve Company A, and instructed your tax agent to transfer all of Company A's shares into you and your spouse's names, apportioned in accordance with your shareholding in the company.
The dissolution of Company A was effective prior to 20 September 1985, with the shares in Company C being transferred into you and your spouse's names after 20 September 1985.
You provided copies of a number of documents, which should be read in conjunction with, and form part of this private ruling.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 109-5
Income Tax Assessment (Transitional Provisions) Act 1997 Section 102-5
Reasons for decision
Capital gains tax (CGT) applies when certain events or transactions happen. These are referred to as CGT events. The most common CGT event is CGT A1 which occurs when your legal ownership in a CGT asset is transferred to another entity, section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997).
Paragraph 104-10(2)(a) of the ITAA 1997 states that a change in the legal ownership of an asset without a change in the beneficial ownership will not constitute a disposal for CGT purposes.
The legal term 'beneficial ownership' means the right to deal with property as one's own, free of any contractual obligation in respect of it. The person who enjoys the property or who is entitled to the benefit of the property would be considered to be the beneficial owner. Under its ordinary meaning, a shareholder would have no legal or equitable interest in the assets of the company.
The Australian Taxation Office considers that there are extremely limited circumstances where the legal and equitable interests are not the same, and that there is sufficient evidence to establish that the equitable interest is different from the legal title.
Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property in trust for the beneficial owner.
According to the decision in Charles v F. C of T (1954) 90 CLR 598 at page 609, a share does not confer on the holder any legal or equitable interest in the assets of the company. A shareholder in a company has no proprietary interest in the property owned by the company. The property owned by a shareholder in a company is the share itself, but the shareholder has no proprietary interest in any of the company's assets. So where a taxpayer is a shareholder in a company, there is no beneficial interest to be traced through the company.
In your case, you and your spouse were shareholders in Company A, which owned shares in Company C. Company A was dissolved prior to 20 September 1985 and the shares owned by Company A were transferred into you and your spouse's names after 20 September 1985.
While you were a shareholder in Company A, it is viewed that you did not have any beneficial or legal interest in the shares owned by Company A, as Company A was the owner of the Company C shares, and you owned shares in Company A.
Therefore, when the shares were transferred from Company A to you and your spouse after 20 September 1985, CGT event A1 occurred as there was a change in the ownership of the Company C shares.
You and your spouse are viewed as having acquired the Company C shares on the date they were transferred to you. Therefore, the Company C shares are post-CGT assets as they were acquired by you and your spouse after 20 September 1985.