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Ruling

Subject: Capital gains tax - Deceased estate

Issue 1:

Question 1:

Immediately following a conversion of each of the A Class and B Class shares of Company A into multiple shares in accordance with section 254H of the Corporations Act 2001 (Corporations Act), will the Commissioner accept that, for the purposes of section 128-15 of the Income Tax Assessment Act 1997¹, these shares will be assets that were owned by the Deceased just before dying?

Answer:

Yes. Please see our 'Reasons for decision'.

Question 2:

Immediately following a conversion of each of the Ordinary shares of Company B into multiple shares in accordance with section 254H of the Corporations Act, will the Commissioner accept that, for the purposes of section 128-15, these shares will be assets that were owned by the Deceased just before dying?

Answer:

Yes. Please see our 'Reasons for decision'.

Issue 2:

Question 1:

On the basis that the A Class and B Class shares of Company A are converted, will the Commissioner also accept that for the purposes of section 128-15, following a variation of the rights attached to each of the converted shares, the resulting U Class, V Class, W Class, X Class, Y Class and Z Class shares are assets that were owned by the Deceased just before dying?

Answer:

Yes. Please see our 'Reasons for decision'.

Question 2:

On the basis that the Ordinary shares of Company B are converted, will the Commissioner also accept that for the purposes of section 128-15, following a variation of the rights attached to each of the converted shares, the resulting U Class, V Class, W Class, X Class, Y Class and Z Class shares are assets that were owned by the Deceased just before dying?

Answer:

Yes. Please see our 'Reasons for decision'.

Issue 3:

Question 1:

Will the Commissioner apply Law Administration Practice Statement PS LA 2003/12 and treat the trustee of the Testamentary Trust in the same manner a legal personal representative is treated for the purposes of Division 128 at such times as a beneficiary becomes absolutely entitled to a class of Company A and Company B shares on issue?

Answer:

Yes. Please see our 'Reasons for decision'.

Issue 4:

Question 1:

Does section 118-60 apply to disregard a capital gain arising under section 104-215 upon the transfer of ownership of the U Class shares in Company A and Company B to the Charitable Foundation?

Answer:

Yes. Please see our 'Reasons for decision'.

This ruling applies for the following period:

Start date: The event that will determine the start date will be the conversion of A Class and B Class shares in Company A into multiple A Class and B Class shares, and the conversion of Ordinary shares in Company B into multiple Ordinary shares.

End date: The event that will determine the end date will be the transfer of multiple U Class shares in Company A and Company B to the Charitable Foundation.

The scheme commences on:

The date when the conversion of A Class and B Class shares in Company A into multiple A Class and B Class shares, and the conversion of Ordinary shares in Company B into multiple Ordinary shares occurs.

Relevant facts and circumstances:

The Deceased died in the income year ended 30 June 2010.

After certain assets are bequeathed to specific beneficiaries of the Estate, the balance of the Estate was to be distributed allowing its remaining assets to be held by a Charitable Foundation and a Testamentary Trust.

Prior to any distribution taking place, the Charitable Foundation will seek endorsement from the Commissioner as a Deductible Gift Recipient.

Each beneficiary of the testamentary trust will have a proportionate entitlement to its income and capital.

The Will provides for certain restrictions regarding the timing of distributions of capital to all beneficiaries of the Testamentary Trust.

At the time of death, assets of significant value owned by the Deceased included the following:

· A Class shares in Company A, representing 100% of the A Class shares on issue.

· B Class shares in Company A, representing 100% of the B Class shares on issue.

· Ordinary Shares in Company B, representing 100% of the share capital on issue.

Both Company A and Company B are Australian resident private companies.

The only asset beneficially owned by Company B is E Class shares in Company A, representing 100% of the E Class shares on issue.

The trustee of the Estate holds all of the remaining share capital of Company A on issue, consisting of C Class and D Class shares beneficially owned by certain beneficiaries at the time of Deceased's death.

Company A continues to operate as a private investment vehicle and holds investments in both listed and unlisted Australian and foreign companies.

To enable the trustee of the Estate to fulfil their responsibilities as the trustee of the Estate and trustee of the Testamentary Trust, the directors of Company A and Company B are proposing to undertake a restructure of the share capital of these entities in accordance with the steps outlined below ('the restructure').

Company A would convert each of the A Class, B Class and E Class shares on issue into multiple shares in accordance with section 254H of the Corporations Act, meaning there will be multiple A Class, B Class shares and E Class shares.

Company B would also convert each of the Ordinary shares on issue into multiple shares in accordance with section 254H of the Corporations Act, meaning there will multiple Ordinary shares.

The shareholders of Company A would approve amendments to the constitution of Company A, conversion of the existing share classes and variation of class rights as follows:

· The Company A constitution would be amended to set out the terms of 6 classes of shares which for the purposes of this ruling request are referred to as U Class, V Class, W Class, X Class, Y Class and Z Class shares.

The proposed terms of the U Class, V Class, W Class, X Class, Y Class and Z Class shares are summarised as follows:

· Each class of shares will rank equally with each other, except to the extent of the determination and payment of dividends by Company A's board.

· Each class of shares will only be entitled to participate in the earnings and assets of the investment pool allocated to that class of shares.

· If Company A's board wishes to distribute an amount to the holders of a class of shares which is greater than the earnings of that class of shares, then the excess must take the form of either a return of capital or a share buy-back.

· If there is a return of capital on the winding up of Company A, then each class of shares will be entitled to receive the surplus assets or profits of the investment pool allocated to that class of shares.

· Each share will entitle its holder to one vote at a meeting of shareholders of Company A.

Decisions such as the amendment of Company A's constitution, the amendment or abolishment of rights attached to any class of shares, and the commencement of wind up proceedings, can only be approved by more than 85% of the shares of those holders present at the meeting.

All classes of shares will be subject to transfer restrictions, and the decision to amend the restrictions on the transfers of shares must be approved by 100% of the shares of those holders present at the meeting.

The multiple A Class shares, multiple B Class shares and multiple E Class shares now on issue would be converted and the rights attaching to each varied such that these shares are converted into specified numbers of U Class, V Class, W Class, X Class, Y Class and Z Class shares, and the rights attaching to these shares are varied to accord with the terms of the U Class, V Class, W Class, X Class, Y Class and Z Class shares set out in the amended constitution.

The shareholders of Company B would approve amendments to the constitution of Company B, conversion of existing share classes and variation of share rights as follows:

· The Company B constitution would be amended to set out the terms of 6 classes of shares, which for the purposes of the ruling request are referred to as U Class, V Class, W Class, X Class, Y Class and Z Class shares.

The proposed terms of the U Class, V Class, W Class, X Class, Y Class and Z Class shares are summarised as follows:

· Each class of shares will rank equally with each other, except to the extent of the determination and payment of dividends by Company B's board.

· Each class of shares will only be entitled to participate in the income and capital that Company B receives as a holder of that class of shares in Company A.

· If the number of Company B's shares in a particular class of shares in Company A is reduced as a result of a distribution by Company A, the distribution by Company B board to holders of that class of shares in Company B must take the form of either a return of capital or a share buy-back.

· If there is a return of capital on the winding up of Company B, then each class of shares will be entitled to receive that class of shares held by Company B in Company A and any income or assets received by Company B as a holder of that class of shares in Company A.

· Each share will entitle its holder to one vote at a meeting of shareholders of Company B.

· Decisions such as the amendment of Company B's constitution, the amendment or abolishment of rights attached to any class of shares, and the commencement of wind up proceedings, can only be approved by more than 85% of the shares of those holders present at the meeting.

· All classes of shares will be subject to transfer restrictions, and the decision to amend the restrictions on the transfers of shares must be approved by 100% of the shares of those holders present at the meeting.

· The multiple Ordinary shares now on issue would be converted and the rights attaching to each varied such that these shares are converted into specified numbers of U Class, V Class, W Class, X Class, Y Class and Z Class shares, and the rights attaching to these shares are varied to accord with the terms of the U Class, V Class, W Class, X Class, Y Class and Z Class shares set out in the amended constitution.

· Ownership of the V Class, X Class, W Class, Y Class and Z Class shares of Company A and Company B directly held by the trustee of the Estate will be subsequently transferred to the Testamentary Trust in satisfaction of its entitlement to the assets of the Estate.

· Ownership of the U Class shares of Company A and Company B directly held by the trustee of the Estate will be subsequently transferred to the Charitable Foundation in satisfaction of its entitlement to the assets of the Estate.

Relevant legislative provisions

Corporations Act 2001 Section 254H,

Income Tax Assessment Act 1997 Section 11-5,

Income Tax Assessment Act 1997 Subdivision 30-BA,

Income Tax Assessment Act 1997 Division 50,

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Section 104-215,

Income Tax Assessment Act 1997 Section 109-5,

Income Tax Assessment Act 1997 Section 118-60,

Income Tax Assessment Act 1997 Division 128,

Income Tax Assessment Act 1997 Section 128-15,

Income Tax Assessment Act 1997 Subsection 128-15(3) and

Income Tax Assessment Act 1997 Subsection 995-1(1).

ATO view documents:

Taxation Determination TD 2000/10

Taxation Ruling TR 94/30

Other references (non ATO view, such as court cases):

Law Administration Practice Statement PS LA 2003/12

Reasons for decision:

Issue 1:

Question 1:

Summary

The Commissioner accepts that for the purposes of section 128-15 that the converted multiple A Class and B Class shares in Company A will be assets that were owned by the Deceased just before dying.

Detailed reasoning

As per paragraph 1 of Taxation Determination TD 2000/10, if a company converts its shares into a larger number of shares ('the converted shares') in accordance with section 254H of the Corporations Act in that:

· the original shares are not cancelled or redeemed in terms of the Corporations Act;

· there is no change in the total amount allocated to the share capital account of the company; and

· the proportion of equity owned by each share holding in the share capital account is maintained;

· no CGT event happens to the shareholder's original shares for capital gains purposes. While there is a change in the form of the original shares, there is no change in their beneficial ownership.

Paragraph 2 of TD 2000/10 then provides that the converted shares have the same date of acquisition as the original shares to which they relate.

As per the facts provided, the Deceased owned the A Class and B Class shares in Company A just before dying, and each of these A Class and B Class shares will be converted by Company A's directors into multiple shares in accordance with section 254H of the Corporations Act.

Therefore no CGT event will happen, and the converted multiple A Class and B Class shares in Company A will have the same date of acquisition as the original A Class and B Class shares to which they relate.

In conclusion, the Commissioner accepts that for the purposes of section 128-15 that the converted multiple A Class and B Class shares in Company A will be assets that were owned by the Deceased just before dying.

Issue 1:

Question 2:

Summary

The Commissioner accepts that for the purposes of section 128-15 that the converted multiple Ordinary shares in Company B will be assets that were owned by the Deceased just before dying.

Detailed reasoning

As per paragraph 1 of TD 2000/10, if a company converts its shares into a larger number of shares ('the converted shares') in accordance with section 254H of the Corporations Act in that:

· the original shares are not cancelled or redeemed in terms of the Corporations Act;

· there is no change in the total amount allocated to the share capital account of the company; and

· the proportion of equity owned by each share holding in the share capital account is maintained;

· no CGT event happens to the shareholder's original shares for capital gains purposes. While there is a change in the form of the original shares, there is no change in their beneficial ownership.

Paragraph 2 of TD 2000/10 then provides that the converted shares have the same date of acquisition as the original shares to which they relate.

As per the facts provided, the Deceased owned the Ordinary shares in Company B just before dying, and each of these Ordinary shares will be converted by Company B's directors into multiple shares in accordance with section 254H of the Corporations Act.

Therefore no CGT event will happen, the converted multiple Ordinary shares in Company B will have the same date of acquisition as the original Ordinary shares to which they relate.

In conclusion, the Commissioner accepts that for the purposes of section 128-15 that the converted multiple Ordinary shares in Company B will be assets that were owned by the Deceased just before dying.

Issue 2:

Question 1:

Summary

The Commissioner accepts that for the purposes of section 128-15, following the variation of the rights attached to each of the converted multiple A Class and B Class shares in Company A, the resulting specified numbers of U Class, V Class, W Class, X Class, Y Class and Z Class shares in Company A will be assets that were owned by the Deceased just before dying.

Detailed reasoning

As per paragraph 8 of Taxation Ruling TR 94/30, a variation in rights attaching to a share does not result in a full disposal of an asset under section 104-10, unless there is a cancellation or redemption of the share.

Paragraph 16 of TR 94/30 states that the cancellation of a share means that the share ceases to exist, and is to be distinguished from the mere cancellation of a share certificate.

Paragraph 17 of TR 94/30 states that the redemption of a share means that the company has bought back that share out of its share capital.

As per the facts provided, the rights of the converted multiple A Class and B Class shares in Company A will be varied upon these shares being then converted into specified numbers of U Class, V Class, W Class, X Class, Y Class and Z Class shares.

Therefore, the variation in rights attached to the converted multiple A Class and B Class shares will not result in any cancellation or redemption of those shares, and as such there will be:

· no disposal of those converted multiple A Class and B Class shares under section 104-10, and

· no corresponding acquisition of the resulting specified numbers of U Class, V Class, W Class, X Class, Y Class and Z Class shares under section 109-5.

In conclusion, the Commissioner accepts that for the purposes of section 128-15, following the variation of the rights attached to each of the converted multiple A Class and B Class shares in Company A, the resulting specified numbers of U Class, V Class, W Class, X Class, Y Class and Z Class shares in Company A will be assets that were owned by the Deceased just before dying.

Issue 2:

Question 2:

Summary

The Commissioner accepts that for the purposes of section 128-15, following the variation of the rights attached to each of the converted multiple Ordinary shares in Company B, the resulting specified numbers of U Class, V Class, W Class, X Class, Y Class and Z Class shares in Company B will be assets that were owned by the Deceased just before dying.

Detailed reasoning

As per paragraph 8 of TR 94/30, a variation in rights attaching to a share does not result in a full disposal of an asset under section 104-10, unless there is a cancellation or redemption of the share.

Paragraph 16 of TR 94/30 states that the cancellation of a share means that the share ceases to exist, and is to be distinguished from the mere cancellation of a share certificate.

Paragraph 17 of TR 94/30 states that the redemption of a share means that the company has bought back that share out of its share capital.

As per the facts provided, the rights of the converted multiple Ordinary shares in Company B will be varied upon these shares being then converted into specified numbers of U Class, V Class, W Class, X Class, Y Class and Z Class shares.

Therefore, the variation in rights attached to the converted Ordinary shares will not result in any cancellation or redemption of those shares, and as such there will be:

· no disposal of those converted Ordinary shares under section 104-10, and

· no corresponding acquisition of the resulting specified numbers of U Class, V Class, W Class, X Class, Y Class and Z Class shares under section 109-5.

In conclusion, the Commissioner accepts that for the purposes of section 128-15, following the variation of the rights attached to each of the converted Ordinary shares in Company B, the resulting specified numbers of U Class, V Class, W Class, X Class, Y Class and Z Class shares in Company B will be assets that were owned by the Deceased just before dying.

Issue 3:

Question 1:

Summary

Provided that section 104-215 does not apply, the Commissioner will treat the trustee of the Testamentary Trust as a legal personal representative for the purposes of Division 128 at such times as a beneficiary becomes absolutely entitled to a class of Company A and Company B shares on issue.

Detailed reasoning

A capital gain or capital loss made by a legal personal representative when the asset passes to a beneficiary of the deceased estate is disregarded under subsection 128-15(3), unless CGT event K3 in section 104-215 happens as a result of the asset passing to a tax-advantaged beneficiary.

As per the facts provided, the Testamentary Trust is a testamentary trust that will be established, and its trustee will hold the various classes of Company A and Company B shares on issue (except U Class shares, which will be held by the Charitable Foundation) on behalf of the beneficiaries.

As the trustee of the Testamentary Trust does not meet the definition of legal personal representative under subsection 995-1(1), it would not be able to disregard the capital gain or capital loss it makes at such times as a beneficiary becomes absolutely entitled to their respective interest in the capital of the trust. In other words, the taxing point would occur at each of these earlier stages as opposed to when each beneficiary ultimately disposes their respective capital interest.

PS LA 2003/12 however provides that the Commissioner will not depart from the ATO's long-standing administrative practice of treating the trustee of a testamentary trust in the same way that a legal personal representative is treated for the purposes of Division 128, in particular subsection 128-15(3). Accordingly, subject to the operation of section 104-215, any capital gain or capital loss that arises when an asset owned by a deceased person passes to the ultimate beneficiary of a trust created under the deceased's will is disregarded.

In conclusion, provided that section 104-215 does not apply, the Commissioner will treat the trustee of the Testamentary Trust as a legal personal representative for the purposes of Division 128 at such times as a beneficiary becomes absolutely entitled to a class of Company A and Company B shares on issue.

Issue 4:

Question 1:

Summary

Provided that the Charitable Foundation is endorsed as a deductible gift recipient in accordance with Subdivision 30-BA, the Commissioner accepts that section 118-60 will apply to disregard a capital gain arising under section 104-215 upon the transfer of ownership of the U Class shares in Company A and Company B to the Charitable Foundation.

Detailed reasoning

CGT event K3 in section 104-215 happens if a CGT asset owned by a deceased person just before they died passes to a beneficiary in their estate that is an exempt entity when the asset passes.

Subsection 995-1(1) defines an exempt entity to mean an entity whose ordinary income and statutory income is exempt from tax. Section 11-5 provides that an exempt entity will include a charitable institution for the purposes of Division 50.

As per the facts provided, a charitable institution called the Charitable Foundation will be established and have the U Class shares in Company A and Company B transferred to it from the Estate.

Under section 104-215, the trustee of the Estate as the legal personal representative would make either a capital gain or capital loss on the transfer of these shares to the Charitable Foundation.

Section 118-60 however will disregard any capital gain or capital loss made by the trustee of the Estate if the Charitable Foundation is a deductible gift recipient under Subdivision 30-BA.

In conclusion, provided that the Charitable Foundation is endorsed as a deductible gift recipient in accordance with Subdivision 30-BA, the Commissioner accepts that section 118-60 will apply to disregard a capital gain arising under section 104-215 upon the transfer of ownership of the U Class shares in Company A and Company B to the Charitable Foundation.