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Edited version of private advice
Authorisation Number: 1012640827349
Ruling
Subject: CGT - disposal and family law court
Questions and answers
1. Will there be a capital gains tax A1 event to the taxpayer as a result of the transfer of assets?
Yes.
2. Will the market value substitution rule under subsection 116-30(1) of the Income Tax Assessment Act 1997 apply?
Yes.
3. If the market value substitution rules apply to the assessable capital gain, is the taxpayer entitled to a capital loss from the forgiveness of the loan to spouse 1's new company?
Not applicable
This ruling applies for the following period
29 July 2013 to 30 June 2014
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
The shareholders are involved in a family law dispute and are seeking to finalise settlement orders.
The company along with the other entities haven joined to the proceedings.
The group structure is as follows;
The company
spouse 1 - A class shares, C class shares
spouse 2 - B class shares, D class shares
child 1 - E class shares
child 2 - E class shares
The E class shares have no voting or dividend rights.
Trustee R for the P Unit Trust (the trust)
The company- x units
Spouse 1 - x units
Spouse 2 - x units
company 2
The trust - A class shares, B class shares, C class shares
Spouse 1 - C class shares
The company - C class shares
The C class shares entitle the shareholder to participate in dividend surplus
funds on windup.
Trustee S for the Q Unit Trust (trust 2)
The company - x units
Under the settlement orders, in exchange for spouse 1's interest in the company transferring to spouse 2, the company will transfer its shares and units in the trust and company 2 to a newly incorporated company (new company) owned by spouse 1.
There will be no capital proceeds received by the company for the disposal of the various shares to spouse 1's new company.
The remaining interest in these related entities that are owned directly by spouse 2 will be transferred from spouse 2 to spouse 1 under Binding Financial Agreement.
The value of spouse 1 interests in the company is approximately equal to the value of the shares and units to be transferred to them and to their newly incorporated company.
No consideration will be paid by spouse 1's company for the shares/units. This will be offset as no consideration will be paid when the shares owned by spouse 1 in the company are transferred to the wife.
In the settlement orders there is no reference to a loan; however, in the event the parties were deemed not to be acting at arm's length, the company would transfer the shares and units to the new company at their market value resulting in a loan owing from the new company.
The company would later forgive the loan owing from the new company.
The terms of the loan and any potential waiving of the debt have not been discussed in detail by the parties.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 subsection 116-30(1)
Reasons for decision
Question 1 and 2
Under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) Capital Gains Tax (CGT) A1 event happens if you dispose of a CGT asset; the time of the event is when you enter into the contract for the disposal or if there is no contract when change of 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.
Capital proceeds is the term used to describe the amount of money or the value of any asset you received or are entitled to receive as a result of a CGT event happening.
There are special CGT rules that apply if a person receives no capital proceeds from a CGT event; you are taken to have received the market value of the asset at the time of the event.
Where no capital proceeds are received from a CGT event, the market value substitution rule in subsection 116-30(1) ITAA 1997 applies to substitute the market value of the CGT asset as the capital proceeds.
Application to your circumstances
A CGT A1 event will occur when, under the settlement orders, the company transfers its shares and units in the trust and company 2 to a new company owned by spouse 1.
No consideration will be paid by the new company for the shares/units it receives from the company; therefore the market value substitution rules in subsection
116-30(1) ITAA 1997 applies.
Question 3
From the information you have provided there is no 'loan' created under the facts you have set out in your ruling application as any terms of the 'loan' and any potential waiving of the debt has not been discussed in detail, by the parties, the Commissioner is not able to provide a response.
Further, it is unlikely that any amount described as a loan would be considered to be a loan if there was never any intention for it to be repaid.