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Edited version of your private ruling
Authorisation Number: 1012453447144
Ruling
Subject: Capital Gains Tax Rollover - Distinguishing between Capital Gains Tax Assets
Question 1
Is there an acceptable method for distinguishing shares in determining which are acquired before 20 September 1985 and which were acquired after 20 September 1985 following a rollover under Subdivision 122-B of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2014
The scheme commences on:
1 July 2012
Relevant facts and circumstances
The partnership is considering a capital gains tax (CGT) rollover of all the assets of the partnership to a wholly-owned company in accordance with the rollover provisions of Subdivision 122-B of the Income Tax Assessment Act 1997 (ITAA 1997).
One of the partners, the taxpayer, holds an interest in the partnership which is comprised of two separate parts:
1. half of the holding of the total interest in the partnership, which was acquired in before 20 September 1985 and is therefore a pre-CGT asset.
2. half of the holding of the total interest in the partnership, which was acquired after 20 September 1985 which they inherited upon the death of another partner.
Upon the transfer of their partnership interest to the company, a certain number of the shares that they receive as a consequence of the roll over will be regarded to have been acquired prior to 20 September 1985 (in accordance with Section 122-190(1) of the ITAA 1997) with the balance of the shares so received being regarded to have been acquired on or after that date.
Relevant legislative provisions
Section 122-125 of the Income Tax Assessment Act 1997
Section 122-170 of the Income Tax Assessment Act 1997
Section 122-190 of the Income Tax Assessment Act 1997
Subsection 122-190(1) of the Income Tax Assessment Act 1997
Reasons for decision
Answer
Yes. CGT Determination TD 33 provides guidance with respect of distinguishing between identical shares for the purposes of identifying which shares are being disposed of and which shares have been retained.
Detailed Reasons
Where partners dispose of all of their interests in the assets of a business carried on by a partnership a CGT Event A1 occurs in respect of those interests.
Subdivision 122-B of the ITAA 1997 provides capital gains tax (CGT) rollover relief in the situation where partners in a partnership dispose of assets to a wholly-owned company.
If the partners choose a rollover for disposing of their interests in all the assets of the company, any capital gain or loss is disregarded (section 122-170 of the ITAA 1997).
In the situation where the interests held by the partner include interests acquired both before and after 20 September 1985, a number (but not all) of the shares received in consideration for the disposal of the interests will be taken to have been acquired before 20 September 1985. The steps for calculating the number of the shares taken to have been acquired before 20 September 1985 are set out in subsection 122-190(1) of the ITAA 1997.
CGT Determination 33 (TD 33) provides guidance in respect of identifying which shares are disposed of and which shares have been retained by a taxpayer. Paragraphs 1 to 4 of this Determination are set out below:
1. Where a disposal of shares occurs and those shares are able to be individually distinguished e.g. by reference to share numbers or other distinctive rights or obligations attached to them, those shares are identifiable; their date of acquisition and cost base will be a matter of fact.
3. However, on the disposal of shares which form part of a holding of identical shares i.e. of the same class and in the same company, which are acquired over a period of time, it may not always be possible for a taxpayer to distinguish or identify the particular shares that have been disposed of.
4. In these circumstances, the taxpayer will need to decide which particular shares are being disposed of. Taxpayers in this situation will need to keep adequate records of the transaction so that the decision can be supported should the income tax return be subject to Tax Office scrutiny at a later date.
5. In the past, where unidentified shares have been disposed of, the Commissioner has accepted 'first-in, first-out' as a reasonable basis of identification. For CGT purposes, the Commissioner will also accept the taxpayer's selection of the identity of shares disposed of.
According to this Determination, each share is a separate asset and therefore can be dealt with separately allowing for the shareholder to select which shares out of a parcel of shares have been disposed of. Clear records for each disposal will need to be retained to ensure that the same share is not incorrectly accounted for twice.
In relation to the shares acquired following the disposal of the partnership interests to a wholly-owned company, to support any contention that some of those shares should be taken to have been acquired before 20 September 1985, it will be necessary for you to keep a record of the number of shares held that relate to the period before 20 September 1985, as well as the underlying calculations performed under section 122-190 of the ITAA 1997.