Edited version of your private ruling

Authorisation Number: 1012443015598

Ruling

Subject: CGT- Gifting of Shares

Question 1

Will section 83A-10 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the gifting of shares from one shareholder to the taxpayer under the circumstances described in this application?

Answer

No

Question 2

Will the taxpayer be entitled to a cost base equal to the market value of shares they receive as a gift from another shareholder as per section 112-20 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20AA

The scheme commences on:

1 July 20BB

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The taxpayer currently holds shares in company A which they have held since 1111.

The remaining shares in company A are held by shareholders X and Y.

Shareholders X and Y have also been members of company A since 1111 with shareholder X being a director of company A in the early days.

None of the shareholders are associates as defined by section 318 of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer has been involved in active roles in company A and held a directorship in company A from 2222 to date, including the following:

· in 2222, the taxpayer became an employee of a subsidiary company of company A.

· in 2222, the taxpayer assumed the role of director in company A and is currently the sole director of company A.

· the taxpayer was appointed to another role in another subsidiary of company A around 3333.

In 0000, the taxpayer worked for a company being run by shareholder X and in which shareholder X held shares.

The taxpayer subsequently worked with shareholder X in a trust in which shareholder X was a director and had shareholdings in the trust. The taxpayer resigned from his position in the trust in 2222.

The constitution of company A specifically precludes the transfer of shares to non-members of company A unless they are first offered to existing members. It states that until these rights of pre-emption for existing members have been fully exhausted no transfer can take place.

Shareholder X would now like to transfer their shares in company A to the taxpayer with the only condition that the taxpayer will pay any income tax liability shareholder X will incur in relation to the gifting.

The taxpayer and shareholder X have provided a Statutory Declaration stating that the gifting of the shares from shareholder X to the taxpayer will be in consequence of their long term friendship and investor relationship as shareholders in company A and not because of the taxpayer's employment with company A. It also states that at no stage was there any agreement in place for the provision of shareholder X's shares to the taxpayer on meeting any performance or other employment related criteria with company A.

A valuation of the business has been obtained and the taxpayer agrees to pay any tax liability incurred by shareholder X as a result of the transfer of shareholder X's shareholding in company A to the taxpayer.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83A-1,

Income Tax Assessment Act 1997 section 83A-5,

Income Tax Assessment Act 1997 section 83A-10,

Income Tax Assessment Act 1997 section 112-20 and

Income Tax Assessment Act 1936 section 318.

Reasons for decision

These reasons for decision accompany the Notice of private ruling

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Detailed Reasoning

Subsection 83A-10(1) of the ITAA 1997 provides the meaning of ESS interest in a company as a beneficial interest in either a share in a company or a right to acquire a beneficial interest in a share in a company.

Subsection 83A-(2) of the ITAA 1997 defines an employee share scheme as a scheme under which ESS interests in a company are provided to employees, or associates of employees, which includes past or present employees, of the company or subsidiaries of the company, in relation to the employees' employment.

Section 83A-5 of the ITAA 1997provides that the object of Division 83A is to ensure that the benefits provided to employees under employee share schemes are subject to income tax at the employee's marginal rates under income tax law, instead of the fringe benefits tax law and to increase the extent to which the interests of the employees are aligned with those of their employers, by providing a tax concession to encourage lower and middle income earners to acquire shares under such schemes.

Section 83A-1 of the ITAA 1997 provides that the employees' assessable income includes discounts on shares, rights and stapled securities the employees or their associates acquire under an employee share scheme.

Further, the employees may be entitled to have the amount included in their assessable income reduced or to have the income year in which it is included deferred.

The gifting of shares from shareholder X to the taxpayer does not meet the definition of an employee share scheme as provided for by subsection 83A(2) of the ITAA 1997 as the shareholdings provided to the taxpayer were not in relation to the taxpayer's employment.

Therefore, the discount on shares received by the taxpayer from shareholder X will not be included in the taxpayer's assessable income in the relevant income year as provided for by section 83A-1 of the ITAA 1997.

Question 2

Detailed reasoning

Paragraph 112-20(1) (c) of the ITAA 1997 provides that 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.

The gifting of shares by shareholder X to the taxpayer will result in the taxpayer not paying market value for the shares therefore, they are deemed not to have dealt at arm's length.

Therefore, the first element of the taxpayer's cost base of the shares it acquired from shareholder X will be its market value at the time of acquisition as per paragraph 112-20(1)(c) of the ITAA 1997.