Edited version of your private ruling

Authorisation Number: 1012466094531

Ruling

Subject: Assessability of shares and cost base

Question 1

Is the value of the shares received as a gift in 2003 considered exempt income?

Answer: No

Question 2

Is the profit or loss made on the disposal of the gifted shares assessable under the capital gains tax provisions?

Answer: Yes

Question 3

Is the first element of the cost base of the gifted shares the market value of the shares on the day that you acquired them?

Answer: Yes

Question 4

Is the profit made on disposal of the gifted shares assessable or exempt under any other provisions of the Income Tax Assessment Act 1936 or 1997?

Answer: Not applicable

Question 5

Is the profit made on disposal of the gifted shares assessable or exempt by virtue of the double tax agreement between Australia and the United States?

Answer: Not applicable

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2002

Relevant facts and circumstances

You are an Australian resident for tax purposes.

In the 2002-03 financial year, your parent (a U.S. resident for tax purposes), gifted you some shares in a publicly listed U.S. company.

The last sale price, on the day of the gift, was US$XX per share. The total value of the gift at that time was US$XX.

The exchange rate on the date you received the gifted shares was 0.6678, making the value of the gift in Australian dollars as $XX.

The gifting was not from a deceased estate.

In the 2011-12 financial year, you sold some of the shares.

You state that if the shares had a cost base (applying the market value substitution rule) you would make a capital loss.

You state that if the shares have a nil cost base, the gain would qualify for the 50% discount and you would make a capital gain.

You state that if the income is exempt, then no amount would be included in the taxpayer's 2012 income tax return.

Your 2012 income tax return has been lodged, reporting a capital loss. No business income has been reported.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-20

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 112-20

Reasons for decision

Detailed reasoning

Residency

Residency is a central concept in taxation. It determines what income you need to declare in your tax return. It also determines what tax rates apply to your taxable income to determine how much tax you need to pay.

Australian residents, for tax purposes, need to declare income they have earned from anywhere in the world in their tax return. Foreign residents need only declare income they derived in Australia.

Exempt income

Often, family members give (or gift) shares to relatives - for example, a parent gives shares to their child. Generally speaking, a 'gift' will not be considered income unless you receive it as part of a business-like activity or in relation to your income-earning activities as an employee or contractor.

Section 6-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that an amount of ordinary income or statutory income is exempt income if it is made exempt from tax by a provision of this Act or another Commonwealth law.

Based on the information provided, the receipt of the shares was not part of a business-like activity nor was it in relation to your income-earning activity, consequently, the receipt of the gift is not considered income.

As the gift is not considered income (of any sort) it cannot be made exempt from tax by a provision of the Act or Commonwealth law. Accordingly, the receipt of the shares as a gift is not exempt income.

Further, as the receipt of the gifted shares is not exempt income, it follows that any profit made from the disposal of the shares is also not exempt income.

Assessable under the capital gains tax provisions

Section 108-5 of the ITAA 1997 provides that a CGT asset is:

· any kind of property; or

· a legal or equitable right that is not property.

· Shares in a company and units in a unit trust are examples of CGT assets.

A share investor invests in shares with the intention of earning income from dividends and capital growth, but does not carry on business activities. The shares of an investor are held on capital account. Accordingly, a share investor will account for any gains and losses on the disposal of shares as either capital gains or capital losses.

Section 104-10 of the ITAA 1997 explains that CGT event A1 occurs when your ownership in a CGT asset (e.g. shares) is transferred to another entity. The time of the event is when you enter into a contract for the disposal, or, if there is no contract, the time of disposal is taken to be the time when the change in ownership occurs. You make a capital gain if the capital proceeds from the disposal 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.

In your case, you are considered a share investor as you do not carry on a business of share trading, therefore, any profit or loss made on the disposal of the shares will be on capital account and consequently, will be assessed under the capital gains tax provisions.

Cost base of the shares

Subsection 112-20(1) of the ITAA 1997 states 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 incur expenditure to acquire it, except where your acquisition of the asset resulted from:

· CGT event D1 happening; or

· another entity doing something that did not constitute a CGT event happening; or

· some or all of the expenditure you incurred to acquire it cannot be valued; or

· you did not deal at arm's length with the other entity in connection with the acquisition.

· Subsection 112-20(2) of the ITAA 1997 provides that despite paragraph (1)(c), if:

· you did not deal at arm's length with the other entity; and

· 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).

A situation in which your acquisition of an asset resulted from another entity doing something that did not constitute a CGT event happening include where a company issues you a share. This is not a CGT event for the company and therefore if you did not pay or give anything to acquire the share the market value substitution rule would not apply (section 112-20(3) of the ITAA 1997).

However, when a change in ownership of a CGT asset from one entity to another occurs, a CGT event happens (CGT event A1). It is irrelevant that the asset is transferred from a foreign resident to a resident of Australia and that Australia has no taxing rights for the foreign resident disposing of an asset that is not Australian taxable property. What is important is that a change of ownership has occurred which constitutes a CGT event happening.

In your case, you acquired some shares from your parent for no consideration and your acquisition resulted from a CGT event happening (that is, the transfer of ownership to another entity) accordingly, the market value substitution rule applies.

As such, the first element of your cost base and reduced cost base of the CGT asset (the shares) is the market value of the shares at the time of acquisition.

Further, as you have disposed of the shares for less than their reduced cost base, you will make a capital loss on the transaction.

Assessable or exempt under any other provision of the ITAA 1936 or ITAA 1997?

Based on the information provided, it has been established that you hold the shares (CGT assets) on capital account and therefore any gain or loss made on disposal of the shares will be assessable under the capital gains tax provisions. Accordingly, there is no need to consider whether the transaction is assessable under any other provision of the Income Tax Assessment Acts.

Effect of the double tax agreement

Based on the information provided, it has been established that you will make a capital loss on disposal of the shares in question. Accordingly, there is no need to consider the effects of the double tax agreement between Australia and the United States as there will be no tax payable on the transaction.