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Ruling

Subject: Final shareholder dividend from company wind up

Questions and Answers:

1. In the course of the Company being liquidated, will the liquidator's final distribution to you (the shareholder), relating to the proceeds arising from the sale or in specie transfer of the pre-CGT property, if paid within three years prior to the liquidation, represent assessable income derived by you within the meaning of section 47 of the Income Tax Assessment Act 1936 (ITAA 1936)?

No.

2. In the course of the Company being liquidated, will the amount of the liquidator's final distribution to you (the shareholder), relating to the proceeds arising from the sale or in specie transfer of the pre-CGT property, represent capital proceeds derived by you as a consequence of a CGT event C2 happening in respect of your C class shares?

Yes.

3. Is the CGT cost base of the C class share in the Company acquired by you equal to its market value at the date that it was acquired by you as a consequence of the vesting of the Trust?

Yes.

4. Is the capital gain you make as a consequence of CGT event C2 occurring to your C class share calculated by the method under subsection 104-25(3) and then discountable under Division 115 of the ITAA 1997?

Yes.

5. Is the CGT cost base of the one A class and one B class shares in the Company acquired by you in the relevant year equal to their issue price?

Yes.

6. Is the CGT cost base of three of your A and three of your B class shares in the Company, acquired by you on 30 June 200X, equal to their market value on 30 June 200Y and is the cost base of the other three A and three B class shares in the Company, acquired by you on 30 June 200X, equal to their market value on 30 June 200X?

Yes.

7. Are the capital proceeds you derive from when the A and B class shares are redeemed equal to $Y?

Yes.

8. Will you made a capital loss, from $Y in capital proceeds less their CGT cost base, when you A and B class shares are redeemed?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The Company was incorporated before 1980, with your parents being the shareholders.

Three classes of shares were issued for $X per share, being; (i) six A-class redeemable preference shares; (ii) six B-class redeemable preference shares; and (iii) one C-class ordinary share issued to the Family Trust, vesting in you on 30 June 199Z.

On 30 June 199W, one A-class redeemable preference share and one B-class redeemable preference share were issued to you, in the Company, for $X each.

Only the C-class ordinary share had a right to the capital of the Company upon wind up.

On 30 June 200Y, your parent passed away, resulting in your other parent inheriting one parent's shares.

On 30 June 200X, the other parent passed away, resulting in you inheriting a number of shares.

You now intend to wind up the Company, which owns pre-CGT property.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 47

Income Tax Assessment Act 1997 Section 11-5

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 104-75

Income Tax Assessment Act 1997 Section 112-20

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 118-20

Income Tax Assessment Act 1997 Section 128-15

Reasons for decision

Liquidator's final distribution

Subsection 47(1) of the Income Tax Assessment Act 1936 (ITAA 1936) states distributions to shareholders of a company by a liquidator, in the course of winding up the company, to the extent to which they represent income derived by the company, other than income which has been properly applied to replace a loss of paid-up share capital, shall be deemed to be dividends paid to the shareholders by the company out of profits derived by it.

Subsection 47(1A) of the ITAA 1936 explains the term 'income derived by the company' in subsection (1) as:

(a) an amount (except a net capital gain) included in the company's assessable income for a year of income; or

(b) a net capital gain that would be included in the company's assessable income for a year of income if the Income Tax Assessment Act 1997 (ITAA 1997) applied.

In the event of an informal winding up of a company, subsection 47(2A) of the ITAA 1936 deems distributions to shareholders are treated in the same way as distributions to shareholders from a formal winding up of a company by a liquidator.

However, subsection 47(2B) of the ITAA 1936 states where the company does not cease to exist within a period of three years after the distribution or within such further period as the Commissioner allows, then subsection (2A) shall not apply and shall be deemed never to have applied and those moneys or other property so distributed shall be deemed to be dividends paid by the company to the shareholders out of profits derived by it.

In your case, subject to subsection 47(2B) of the ITAA 1936, a distribution to you, including in specie, relating to the proceeds arising from the disposal of the pre-CGT property of the Company will not be assessable income under subsection 47(1A) of the ITAA 1936. This is because your personal capital gain, from the distribution, will be treated the same as the Company's capital gain.

As subsection 104-10(5) of the ITAA 1997 states that a capital gain or loss made on an asset that was acquired before 20 September 1985 is to be disregarded, the capital gain you receive with your distribution is also disregarded.

CGT event C2: C-class share

CGT event C2 under section 104-25 of the ITAA 1997 happens when the ownership of a CGT asset ends by cancellation, surrender, release or similar endings.

Subsection 104-25(3) of the ITAA 1997 states you make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

Section 115-25 of the ITAA 1997 provides to be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event.

Subsection 115-25(3) of the ITAA 1997 does not exclude CGT event C2 from discount capital gain.

Taxation Determination TD 2001/27 provides the full amount of a final distribution made by a liquidator on the winding-up of a company constitutes capital proceeds from the ending of the shareholder's shares in the company for the purposes of capital gains or capital losses made on the happening of CGT event C2 in section 104-25 of the ITAA 1997.

Subsection 118-20(1), when read with subsection 118-20(1A) of the ITAA 1997, ensures that no part of the final liquidator's distribution is taxed both as a dividend and as a capital gain, where the dividend is assessable income or exempt income.

Division 11 of the ITAA 1997, which is a guide, lists classes of exempt income and does not include disregarded capital gains therein. No provision in the ITAA 1997, which disregards a capital gain, has the effect of making the disregarded amount 'exempt income' (see ATO ID 2004/120).

In your case, the full amount of a final distribution made by the liquidator on the winding-up of the Company constitutes capital proceeds from the ending of the your C-class shares in the Company, for the purposes of the happening of CGT event C2 in section 104-25 of the ITAA 1997.

The capital gain or loss you make as a consequence of CGT event C2 occurring to your C-class share will be calculated by the method under subsection 104-25(3) and then discountable under section Division 115 of the ITAA 1997.

Cost base: C-class share

Section 104-75 of the ITAA 1997 states CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (disregarding any legal disability the beneficiary is under).

The acquisition rule in subsection 109-5(2) of the ITAA 1997 about CGT event E5 provides a beneficiary acquires the trust asset when they become absolutely entitled.

Paragraph 104-75(6)(a) of the ITAA 1997 provides, for the beneficiary, a capital gain or loss from CGT event E5 is disregarded if the beneficiary acquired the CGT asset that is the trust interest for no expenditure.

Paragraph 112-20(1)(c) of the ITAA 1997 provides the first element of your cost base and reduced cost base of a CGT asset you acquire from another entity is its market value (at the time of acquisition) if you did not deal at arm's length with the other entity in connection with the acquisition.

However, subsection 112-20(2) of the ITTA 1997 provides if your acquisition of the CGT asset resulted from another entity doing something that did not constitute a CGT event happening; the market value is substituted only if what you paid to acquire the CGT asset was more than its market value (at the time of acquisition).

In your case, you acquired your C-class share when the Trust vested on or about 30 June 199X and you, as capital beneficiary under the Trust, became absolutely entitled to the one C-class share in the Company. You did not incur expenditure to acquire your C-class share. Also, CGT event E5 happened to both the Trust and you, the beneficiary. It follows subsection 112-20(2) of the ITTA 1997 does not apply and, thus, the market substitution rule under paragraph 112-20(1)(c) of the ITAA 1997 did apply. The first element of the cost base or reduced cost base of your C-class share is the market value of the asset at the time of acquisition.

Cost base: A & B class shares

Paragraph 112-20(1)(c) of the ITAA 1997 provides the first element of your cost base and reduced cost base of a CGT asset you acquire from another entity is its market value (at the time of acquisition) if you did not deal at arm's length with the other entity in connection with the acquisition.

However, subsection 112-20(2) of the ITTA 1997 provides if your acquisition of the CGT asset resulted from another entity doing something that did not constitute a CGT event happening; the market value is substituted only if what you paid to acquire the CGT asset was more than its market value (at the time of acquisition).

Item 1 of subsection 128-15(4) of the ITAA 1997 provides if a deceased person acquired an asset on or after 20 September 1985, a beneficiary who inherits that asset is taken to have acquired it at the cost base of the asset on the day of the deceased person's death.

Item 4 of subsection 128-15(4) of the ITAA 1997 provides if a deceased person acquired an asset before 20 September 1985, a beneficiary who inherits that asset is taken to have acquired it at market value on the day the deceased person died.

In your case, on or about 30 June 199X, one A class share and one B class share was issued to you for $X each. Under subsection 112-20(2) of the ITTA 1997, as the shares issued to you did not constitute a CGT event happening to the company (see ATO ID 2003/235), the market value substitution rule did not apply. Thus the cost base of your one A class share and one B class share is $X each.

On 30 June 200X, you inherited all remaining A class and B class shares in the company, a number of which your parent inherited on 30 June 200Z. Thus, under Item 1 of subsection 128-15(4) of the ITAA 1997, your cost base of the shares is their market value on 30 June 200Y, being the day your parent inherited the shares. The cost base of the other shares, under Item 4 of subsection 128-15(4) of the ITAA 1997, is the market value on 30 June 200X.

Your respective cost bases for the above mentioned shares are summarised in the following table:

Working out your net capital gain

CGT event C2 under section 104-25 of the ITAA 1997 happens when the ownership of a CGT asset ends by cancellation, surrender, release or similar endings.

Subsection 104-25(3) of the ITAA 1997 states you make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

You work out your net capital gain following the method statement found in section 102-5 of the ITAA 1997.

Your capital gain from the cancellation of your C-class share will first be reduced by the capital loss you make on the cancellation of your A and B-class shares before applying the discount.