Edited version of your private ruling

Authorisation Number: 1012583062366

Ruling

Subject: Capital gains tax - CGT event A1 disposal of a CGT asset

Question 1

Is the capital gain made by the taxpayer on the disposal of their shares in A Limited to B Ltd to be disregarded under paragraph 104-10(5)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) due to the shares being treated as having been acquired before 20 September 1985?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commences on:

The scheme has commenced.

Relevant facts and circumstances

Before 20 September 1985 the taxpayer acquired shares in a co-operative society limited (the co-operative). At all relevant times they were the beneficial owner of the shares in the co-operative.

A Limited is an Australian resident unlisted public company.

A Limited undertook a series of steps to acquire all the shares in the co-operative.

A Ltd offered to the co-operative's shareholders to purchase all their shares for consideration consisting of cash or ordinary shares in A Ltd or a combination of cash and ordinary shares in A Ltd. The offer was subject to certain conditions including the conversion of the co-operative to a proprietary limited company and the issue of all the shares in that company to A Ltd.

The taxpayer accepted the offer to exchange all their shares in the co-operative for shares in A Ltd. The taxpayer was allotted ordinary shares in A Ltd.

The co-operative was registered as C Pty Limited and all of its shares were issued to A Ltd.

The taxpayer did not elect for the roll-over relief under the former 160ZZPH of the Income Tax Assessment Act 1936 (ITAA 1936).

The ordinary shares in A Ltd were split with each ordinary share being split into a number of ordinary shares. There was no change in the beneficial ownership of the taxpayer's shares as a result of the share split.

There was an off-market takeover of A Ltd and all of its shares were acquired by B Ltd in the year ended 30 June 20XX.

As a result of the takeover, the taxpayer disposed of all of their shares in A Ltd to B Ltd. The taxpayer made a capital gain on disposal of their A Ltd Shares.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Subdivision 124-M and

Reasons for decision

According to subsection 104-10(1) of the ITAA 1997, GCT event A1 happens if you dispose of a CGT asset. 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 (subsection 104-10(4) of the ITAA 1997).

CGT event A1 happened when the taxpayer disposed of the A Ltd Shares to B Ltd (subsections 104-10(1) and 104-10(3) of the ITAA 1997).

A capital gain or capital loss made by the taxpayer is disregarded if they acquired the A Ltd Shares before 20 September 1985 (subsection 104-10(5) of the ITAA 1997).

In this case the taxpayer last acquired their co-operative shares before 20 September 1985, and in the absence of evidence to the contrary, the Commissioner accepts that the co-operative shares were pre-CGT Assets.

If roll-over is available, the A Ltd Shares acquired in exchange for the co-operative shares will be treated as being acquired at the same time as the taxpayer's acquisition of the co-operative shares.

Scrip for Scrip roll-over

The 'scrip for scrip' roll-over under Subdivision 124-M of the ITAA 1997 only became available for CGT events happening from 10 December 1999.

There is no scrip for scrip roll-over available in relation to the disposal of the co-operative shares in exchange for the A Shares in 1988.

Roll-over for conversion of a body to company

At the time of the taxpayer's disposal of their shares in the co-operative in 1988 former section 160ZZPH of the ITAA 1936 provided roll-over relief where a company that is not incorporated becomes incorporated under company law without the creation of a new legal entity.

The roll-over was available to the members of the company not incorporated under company law who became shareholders of the company incorporated under company law.

If the conditions for roll-over where met, including that the taxpayer elected that the section applied, and the member's shares in the original body were acquired before 20 September 1985, it was open to the Commissioner to treat the shares in the new company as having been acquired by the member before 20 September 1985 (see former paragraph 160ZZPH(3)(b) of the ITAA 1936). The election was to be in writing and lodged before the date of lodgement of the taxpayer return of income of the year of income in which the conversion took place or within such later time as the Commissioner allows.

One of the circumstances that must have existed for the section to apply was that the converting shareholder must have issued to them shares in the new company (see former paragraph 160ZZPH(1)(c) of the ITAA 1936).

In this case the taxpayer did not receive shares in the new company, C Pty Limited. The only shareholder in C Pty Limited at the time of its incorporation was A Ltd. Instead, the taxpayer exchanged their shares in the co-operative for shares in A Ltd.

In these circumstances, the roll-over under, now repealed, section 160ZZPH of the ITAA 1936 was not available for the taxpayer to elect.

In circumstances where there was no roll-over available the Commissioner is of the view that the A Ltd Shares cannot be treated as having been acquired before 20 September 1985.

Acquisition time - A Ltd Shares

The acquisition time of the A Ltd Shares is when the taxpayer entered into the contract for their acquisition (section 109-5 of the ITAA 1997).

Splitting of shares

If a CGT asset is split into two or more assets and the beneficial owner of the original asset and of each new asset is the same, the splitting is not a CGT event (subsections 112-25(1) and 112-25(2) of the ITAA 1997).

As no CGT event happens, there is no change in the acquisition date of the shares.

The cost base and reduced cost base of each new share is worked out by apportioning in a reasonable way each element of the cost base and reduced cost base of the original share to each new share (subsection 112-25(3) of the ITAA 1997).

In this case the splitting of the A Ltd Shares is not a CGT event. The date of acquisition of the A Ltd Shares does not change.