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Ruling

Subject: Capital gains tax - Shares - Disposal

Question 1

Are your shares acquired under a employee share scheme (ESS)?

Answer

No.

Question 2

Is the disposal of your shares subject to the capital gains tax (CGT) provisions?

Answer

Yes.

This ruling applies for the following period:

Year ending 2011.

Relevant facts and circumstances

You entered into an employee loan scheme and received shares which had an issue price equal to the market value of the shares.

Under the employees loan scheme you were loaned money to purchase these shares.

Under the rules of the employee share plan disposal was restricted for one year.

You ceased employment with the employer who granted you the shares.

Shortly after you ceased employment your former employer wrote to you advising: 'In accordance with clause 6.1 of the loan scheme, the company intends to sell your shares on the market on your behalf at the expiry of 30 days if you elect not to repay the outstanding loan relating to the shares within 30 days of this letter. The proceeds of the sale shall be applied:

· in payment of any selling costs

· to pay for the loans outstanding amount

· any balance of proceeds remitted to you.

Your shares incurred brokerage fees on disposal.

You received a letter from your former employer stating that the net share proceeds from the sale of your shares had been remitted to you that day.

You received correspondence from your former employer advising of a five day volume weighted average price for other listed shares held by the applicant.

You held the shares for over 12 months.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 139C(3),

Income Tax Assessment Act 1997 Section 102-20,

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Subsection 110-25(2),

Income Tax Assessment Act 1997 Subsection 110-25(3),

Income Tax Assessment Act 1997 Subsection 110-25(4),

Income Tax Assessment Act 1997 Subsection 110-25(5),

Income Tax Assessment Act 1997 Subsection 110-25(6),

Income Tax Assessment Act 1997 Subsection 110-35(7),

Income Tax Assessment Act 1997 Section 115-10,

Income Tax Assessment Act 1997 Section 115-15,

Income Tax Assessment Act 1997 Section 115-20 and

Income Tax Assessment Act 1997 Section 115-25.

Reasons for decision

ESS

Under ESS legislation you do not acquire a share under ESS if the consideration for the acquisition is equal to or more than the market value of the share at the time that it is acquired.

The amount that you paid for your shares was equal to the market value of the shares at the time they were acquired. Therefore, you have not acquired a share under ESS and any income that you have made is not legislated under ESS provisions.

CGT

You make a capital gain or loss if a CGT event happens to a CGT asset. Your shares are a CGT asset.

CGT event A1 occurs when you dispose of an asset to someone else.

The time of this event is:

(a) when you enter into the contract for the disposal: or

(b) if there is no contract when the change of ownership occurs.

When your former employer sold your shares it resulted in CGT event A1.

You make a capital gain if your capital proceeds are greater than your cost base for example, if you receive more for an asset than you paid for it. You make a capital loss if your capital proceeds are less than your cost base.

Capital proceeds is the term used to describe the amount of money that you receive as a result of a CGT event happening. In your situation the value of the capital proceeds you received was the sum of the cash per share.

The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset.

The cost base of a CGT asset is made up of five elements:

· money or property given for the asset

· incidental costs of acquiring the CGT asset or that relate to that event

· costs of owning the asset

· capital costs to increase or preserve the value of your asset or to install or move it

· capital costs of preserving or defending your ownership of rights to your asset.

You need to work out the amount for each element and then add the amounts together to work out the cost base of your CGT asset. In your case, the amount of the loan that you received from your former employer will form part of the cost base as you used this money to pay for your shares. The brokerage fees will also form part of the cost base as it is an incidental cost that you have incurred.

If the sum of the cash per share is higher than the cost base of the shares you have made a capital gain. If the sum of the cash per share is lower than the cost base of the shares you have made a capital loss.

You can use the discount method to calculate your capital gain if:

· you are an individual, a trust or a complying superannuation entity

· a CGT event happens to an asset you own

· the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999

· you acquired the asset at least 12 months before the CGT event and

· you did not choose to use the indexation method.

In your situation, you are an individual who has had a CGT A1 event happen to the shares that you owned. The CGT event happened after 11.45am on 21 September 1999 and you acquired the shares at least 12 months before the CGT A1 event. If you have not used an indexation method to calculate the cost base of your shares you are eligible to discount any capital gain made on the disposal of your shares by 50%.

The amount of the capital gain or loss that you made will be included under label 18 in your 2010-11 income tax return.