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Edited version of your private ruling
Authorisation Number: 1012607897609
Ruling
Subject: Cost base of shares
Question
Will the first element of the cost base for the new "A" or "C" class share (which passed to you under the will of A) be 1/3rd of the total value of:
• the market value of the original "A" class shares on the date of A's death, and
• A's cost base of the original "B" class shares on the date of A's death
Answer:
Yes
This ruling applies for the following period(s)
Year ended 30 June 2013
The scheme commences on
1 July 2012
Relevant facts and circumstances
The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:
• your application for private ruling which we received on dd/mm/yyyy
• certificate of company incorporation
• articles of association of the company
• details of original share issue (on incorporation)
Company A was incorporated prior to 20 September 1985 (pre-CGT).
The capital of the company is divided into;
• 2 "A" class shares
• 2 "B" class shares
• 2 "C" class shares
• 2 "D" class shares
• 2 "E" class shares
• 2 "F" class shares
• X ordinary shares
On incorporation the following shares were issued:
Name |
Date of issue |
Quantity |
Type |
A |
Pre-CGT |
2 |
"A" class |
B |
Pre-CGT |
2 |
"B" class |
C |
Pre-CGT |
2 |
"C" class |
Later, the following additional shares were issued:
Name |
Date of issue |
Quantity |
Type |
D |
Post-CGT |
2 |
"D" class |
E |
Post-CGT |
2 |
"E" class |
No "F" class shares were ever issued.
The rights attaching to each of the "A" to "E" class shares were the same and gave each shareholder;
• the right to vote
• the right to dividends
• the right to a distribution of capital on winding up
The articles of association of the company allow for the issue of ordinary class shares. The ordinary class shares have a right to a distribution of capital on winding up only.
The articles of association identify A as the Governing Director of the company.
In 200X, B died and their 2 "B" class shares transferred to A, in accordance with the provision of their will. A adopted the market value of the shares on the date of B's death as their cost base for the 2 "B" class shares.
In 20XX, A died and so activated a clause of the articles of association which stipulates that on the death of A, all of the A, B, C, D, E and F class shares will be converted to ordinary shares and the rights applicable to the A, B, C, D, E and F class shares shall end.
The provisions of A's will state that their estate shall be divided equally between C, D and E.
As the 10 "A" to "E" class shares will not divide equally between the beneficiaries, Company A intends to cancel the ordinary shares and issue the following:
Name |
Quantity |
Type |
D Trust |
1 |
"A" class |
D |
2 |
Ordinary |
C Trust |
1 |
"B" class |
C |
2 |
Ordinary |
E Trust |
1 |
"C" class |
E |
2 |
Ordinary |
The new "A", "B" and "C" class shares will have equal rights to:
• vote
• dividends
• distribution of capital on winding up
The company intends that the rights attaching to the ordinary shares will be expanded from the present right to participate in the distribution on winding up to also include;
• the right to vote
• the right to dividends
You state that C Trust, D Trust and E Trust are beneficiaries of the deceased estate of A and the newly issued "A", "B" and "C" class shares have passed to the trusts under the will of the deceased.
The cost base of the 2 original "A" class shares will be the market value as at the date of A's death.
The cost base of the 2 original "B" class shares will be the market value as at the date of B's death.
The cost base of the 2 original "C" class shares will be the cost base at the date of issue.
The cost base of the 2 original "D" class shares will be the cost base at the date of issue.
The cost base of the 2 original "E" class shares will be the cost base at the date of issue.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 128-15
Income Tax Assessment Act 1997 Section 128-20
Reasons for decision
Shares acquired from a deceased estate
Subsection 128-15(1) and 128-15(2) of the Income Tax Assessment Act 1997 (ITAA 1997) explain that if a CGT asset you owned just before dying devolves to your legal representative or passes to a beneficiary in your estate, the legal personal representative, or beneficiary, is taken to have acquired the asset on the day you died.
Subsection 128-20(1) of the ITAA 1997 states that a CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset:
a) under your will, or that will as varied by a court order; or
b) by operation of an intestacy law, or such a law as varied by a court order; or
c) because it is appropriated to the beneficiary by your legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate; or
d) under a deed of arrangement if:
i. the beneficiary entered into the deed to settle a claim to participate in the distribution of your estate; and
ii. any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of your estate
Subsection 128-15(4) of the ITAA 1997 provides if the deceased person acquired their asset before 20 September 1985, the first element of your cost base and reduced cost base (that is, the amount taken to have been paid for the asset) is the market value of the asset on the day the person died. If a deceased person acquired their asset on or after 20 September 1985, the first element of your cost base and reduced cost base is taken to be the deceased person's cost base and reduced cost base of the asset on the day the person died
Application to your circumstances
On the date of A's death, they held two "A" class shares which they acquired prior to 20 September 1985 (pre-CGT) and two "B" class shares they acquired after 20 September 1985 (post-CGT) on the death of B.
The first element of the cost base of the original "A" class shares for A's deceased estate is the market value of the shares on the date of A's death, as they had acquired the shares pre-CGT.
The first element of the cost base of the original "B" class shares for A's deceased estate is the deceased's cost base on the date of their death, as A acquired B's "B" class shares post-CGT.
On the death of A, the four original shares they held were cancelled and three new shares were issued as substitutes to their estate. That being, one "A" class, one "B" class and one "C" class share.
Under A's will, you are to receive either one new "A" class or "C" share. The first element of your cost base for the new share will be calculated by adding up the cost bases of the original "A" and "B" class shares (four shares) and dividing by the three new shares issued.
As you have acquired the new "A" or "C" class share post-CGT, you will be liable for any capital gain or loss you make on the subsequent disposal of the share.