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Edited version of your private ruling
Authorisation number: 1012539603666
Ruling
Subject: Compulsory acquisition of shares that were leftover trading stock
Question:
Can you treat a compulsory acquisition of your shares from your former business of share trading as a business transaction (on revenue account)?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2011
The scheme commences on:
1 July 2010
Relevant facts and circumstances
For the year ended 30 June 200X, you carried on a business of share trading, for which you made your last sale in certain month 200X. However, you retained a number of shareholdings from this business, which, due to their fall in price, made those shares not worthwhile to sell.
During the year ended 30 June 2011, a compulsory acquisition notice was issued in respect to one of your remaining shareholdings, for which you received an amount for shares that was below the original cost of the shares.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 70-10
Income Tax Assessment Act 1997 Section 70-110
Income Tax Assessment Act 1997 Section 100-40
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 110-55
Reasons for decision
Section 70-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides trading stock includes anything acquired that is held for purposes of sale or exchange in the ordinary course of a business.
Section 70-110 of the ITAA 1997 provides if you stop holding an item as trading stock, but still own it, you are treated as if:
(a) just before it stopped being trading stock, you had sold it to someone else (at arm's length and in the ordinary course of business) for its cost; and
(b) you had immediately bought it back for the same amount.
Section 70-110 of the ITAA 1997 further provides your being treated as having bought the item for the same amount is relevant to working out the item's cost base for CGT purposes under Division 110.
Section 100-40 of the ITAA 1997 provides, for the purpose of working out a capital loss, costs are called the 'reduced cost base' of the asset.
Division 110 of the ITAA 1997, specifically section 110-55, provides the reduced cost base of a CGT asset cannot include interest expense in its third element.
Section 104-10 of the ITAA 1997 provides CGT event A1 happens if you dispose of a CGT asset. It explains you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. It further explains you make a capital loss if the capital proceeds from the ending of the CGT asset are less than the asset's reduced cost base.
Subsection 104-10(6) of the ITAA 1997 provides if the asset was acquired from you by an entity under a power of compulsory acquisition, the time of the event is the earliest of:
(a) when you received compensation from the entity; or
(b) when the entity became the asset's owner; or
(c) when the entity entered it under that power; or
(d) when the entity took possession under that power.
CGT Determination Number 33, which is about individual shares within a holding of identical shares, provides, where 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, the taxpayer will need to decide which particular shares are being disposed of.
In your case, you originally acquired the relevant shares as the trading stock of your business, which ended in certain month 200X, due to the cessation of trading activity. It follows when your business ended, under section 70-10 of the ITAA 1997, it shares ceased to be trading stock and, under section 70-110 of the ITAA 1997, your business sold those shares, to you, at their cost price, which resulted in you acquiring those shares as CGT assets, at their cost price.
The compulsory acquisition of your shares resulted in the happening of CGT event A1 under section 104-10 of the ITAA 1997. Here, a CGT loss was made.
Under subsection 104-10(6) of the ITAA 1997, the disposal occurred during the year ended 30 June 2011, which was when the acquiring entity entered into the compulsory acquisition.
Under section 110-55 of the ITAA 1997, you cannot include interest expense in the reduced cost base of your shares.