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Ruling

Subject: Capital gains tax - disposal of options

Question 1

Were the options acquired on the date that the contributions were made to the superannuation fund?

Answer

Yes.

Question 2

Did the capital gains tax (CGT) event occur at that time?

Answer

Yes.

Question 3

Was a capital gain or capital loss made at that point in time?

Answer

No.

Question 4

Was a capital loss made on the transfer from the superannuation fund to your spouse?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commences on:

1 July 2006

Relevant facts and circumstances

You are a resident of Australia for tax purposes.

You entered into an employment contract with your employer to act in a senior position.

Your employment commenced in the same year.

You were allotted options as a result of approval at a shareholder's meeting.

As part of the remuneration package under the contract of employment you were to be issued:

A number of unlisted options to acquire shares in the company with an exercise price of X cents vesting after 12 months of service;

A number of unlisted options to acquire shares in the company with an exercise price of X cents vesting after 24 months of service.

You nominated your family's superannuation fund (SF) as your nominee to receive the options.

The SF was unable to accept a significant portion of the options due to contribution limits prescribed by law and as a result, returned some of the options to you.

You resigned from your position with your employer in the year ending 30 June 2010.

The options were granted to you under an employee share scheme of the employer as part of the remuneration contract with you, subject to approval by the shareholders.

You nominated the SF as a nominee to receive the options and the options were issued in the name of the SF by your employer.

The options were considered to be acquired on the date of approval of the grant of options by your employer's shareholders on the basis that such approval was the mandatory requirement for the grant of options. Accordingly, the acquisition of the options was the date of shareholder approval.

The rights were not qualifying rights for the purpose of Division 13A of the Income Tax Assessment Act 1997. As a result, the options were subject to taxation upfront at the date of acquisition.

The market value of the options on the date of shareholder approval was in excess of the contribution limit prescribed by the Superannuation Industry (Supervision) Regulation (SISR) 7.04(3)(a) and section 292-85(2) of the ITAA 1997.

The SF was unable to accept the full contribution as it exceeded the contribution limit allowed to the taxpayer and as a result a limited number of Class A options were retained by the SF as a contribution.

The remaining Class A options and a number of Class B options were returned by the superfund to the taxpayer pursuant to the Superannuation Industry (Supervision) Regulation 7.04(4).

The remaining options were disposed of when the legal title passed from the SF to your spouse.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-75

Income Tax Assessment Act 1997 Section 106-50

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 112-20

Income Tax Assessment Act 1997 Section 130-85

Reasons for decision

Issue 1

Question 1

Summary

The options were acquired on the date that the contributions were made to the superannuation fund.

Detailed reasoning

Draft Taxation Ruling 2004/D25 explains the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against the trustee. Paragraph 21 states:

A beneficiary has all the interests in a trust asset if no other beneficiary has an interest in the asset (even if the trust has other beneficiaries)

The requirement is for the beneficiary to be absolutely entitled to the asset as against the trustee, and not as against the whole world.

As stated in paragraph 61 of the TR 2004/D25, a beneficiary who holds their interest in a trust (the head trust) in their capacity as trustee of another trust (a sub trust), may be absolutely entitled to the asset, even though they could never be absolutely entitled to the asset as against the beneficiaries of the sub trust.

In your case, upon the superannuation fund acquiring the options, they formed an asset of a sub trust that only you as the associate could access. As a result you became absolutely entitled to the options from the day they were first acquired by the SF as your associate, on the day the shareholders approval was received.

Question 2

Summary

The CGT event occurred at the time the contributions were made to the superannuation fund.

Detailed reasoning

Section 104-75 of the ITAA 1997 provides that CGT event E5 occurs if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee. The time of the CGT event is when the beneficiary becomes absolutely entitled to the asset. If an asset is acquired by a trust beneficiary as a result of CGT event E5, it is acquired at the time of that event.

A beneficiary makes a capital gain from CGT event E5 if the market value of the asset at the time of the event is more than the cost base of the beneficiary's interest in the trust to the extent it relates to the asset. If that market value is less than the reduced cost base of that interest, a capital loss is made.

As you became absolutely entitled to the options on the day the shareholder approval was received, CGT event E5 occurred at that time.

Question 3

Summary

No capital loss was made on the day the transfer was made.

Detailed reasoning.

Section 104-75 of the ITAA 1997 provides that CGT event E5 occurs if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee. The time of the event is when the beneficiary becomes absolutely entitled to the asset.

The beneficiary makes a capital gain if the market value of the asset (at the time of the event) is more than the cost base of the beneficiary's interest in the trust capital to the extent it relates to the asset. The beneficiary makes a capital loss if that market value is less that the reduced cost base of that beneficiary's interest in the trust capital to the extent it relates to the asset.

In order to ascertain whether or not you made a capital loss or capital gain when CGT event E5 occurred when you became absolutely entitled to the options, we must establish the cost base. Section 110-25 of the ITAA 1997 defines the cost base as being made of five elements. The first of these elements is the money you paid, or are required to pay in respect of acquiring the CGT asset and the market value of any other property you gave, or are required to give, in respect of acquiring it.

As you did not incur any expenditure in acquiring the options, section 112-20 of the ITAA 1997 requires the market value substitution rule to be applied. This sees the market value at the time of acquisition make up the first element of the cost base. As the market value of the options is the same amount as the cost base, due to the market value substitution rule no capital gain or capital loss is made on the date that you became absolutely entitled to the options.

Question 4

Summary

A capital loss was made on the transfer of the options from the superannuation fund to your spouse.

Detailed reasoning

Section 106-50 of the ITAA 1997 acts to ensure that if you are absolutely entitled to a CGT asset as against the trustee of a trust an act done by the trustee in relation to an asset as if you had done it.

The transfer of the options to your spouse from the SF triggered CGT event A1 due to the disposal of a CGT asset. As you were absolutely entitled to the options transferred to your spouse by the trustee, you are considered to have made the transfer as per section 106-50 of the ITAA 1997. This transfer will trigger a capital loss which you as the absolutely entitled beneficiary will be able to claim.