Edited version of your written advice

Authorisation Number: 1012666995944

Ruling

Subject: Capital Gains Tax

Question

When shares are bequeathed to you from a person who had them bequeathed to them, is the first element of cost base the cost on the day of the first person's death when the shares were first acquired after 20 September 1985?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts and circumstances

Your parent X purchased a seat on a State Stock Exchange (SSE) prior to 20 September 1985.

The State Stock Exchanges (SSEs) agreed to form the Australian Stock Exchange (ASX), with the merger taking effect from 1 April 1987.

The ASX demutualised, with shares issued to each member.

Your parent X died after 20 September 1985 and bequeathed the ASX shares to parent Y.

Your parent Y died and bequeathed the ASX shares to you.

Your parent X was issued a circular from the ASX detailing the tax issues for members on demutualisation. This included that the ASX was obtaining an independent valuation for each of the SSEs as at 31 March 1987 and the results of that would be made available to members who joined SSEs prior to 20 September 1985.

Relevant legislative provisions

Division 128 of the Income Tax Assessment Act 1997

Subsection 128-15(2) of the Income Tax Assessment Act 1997

Subsection 128-15(4) of the Income Tax Assessment Act 1997

Schedule 2H of the Income Tax Assessment Act 1936

Division 326 of Schedule 2H of the Income Tax Assessment Act 1936

Subdivision 326-D of Schedule 2H of the Income Tax Assessment Act 1936

Subdivision 326-E of Schedule 2H of the Income Tax Assessment Act 1936

Paragraph 326-90(1)(d) of Schedule 2H of the Income Tax Assessment Act 1936

Subsection 326-120(2) of Schedule 2H of the Income Tax Assessment Act 1936

Reasons for decision

Modifications to cost base

The effect of death on capital gains tax (CGT) is outlined in division 128 of the Income Tax Assessment Act 1997 (ITAA 1997). Subsection 128-15(2) of the ITAA 1997 states that for the CGT asset of a deceased person, a beneficiary is taken to have acquired the asset on the day the deceased died.

There are special rules relating to the first element of cost base of CGT assets acquired from a deceased person; these are outlined in subsection 128-15(4) of the ITAA 1997. For an asset that the deceased acquired prior to 20 September 1985 (pre-CGT assets) the first element of the asset's cost base is the market value on the date the deceased died. For an asset the deceased acquired on or after 20 September 1985 (post-CGT assets), the first element of the asset's cost base is the cost base of the asset on the day the deceased died.

In your case, you acquired CGT assets when your parent Y died. In looking at the date that your parent Y acquired those assets it is the date of death of your parent X. As this date is after 20 September 1985, the first element of the cost base for you will be the cost base of each asset on the day your parent Y died.

As your parent Y had the CGT assets bequeathed to her/him through a will, the cost base for her/him is also calculated through the abovementioned provisions. This means that any pre-CGT assets of your parent X will have the first element of their cost base for your parent Y as their market value on the date of your parent X's death. For your parent X's post-CGT assets, the first element of their cost base for your parent Y is their cost base on the date of your parent X death.

Therefore, the cost base of the pre-CGT assets of your parent X that have passed to your parent Y and then to you will be made up of the market value on the date of your parent X's death as well as any other costs under elements 2 to 5.

The cost base of the post-CGT assets of your parent X that have passed to your parent Y and then to you will be made up of the cost base of them on the date of your parent X's death as well as any other costs under elements 2 to 5.

In your case, your parent X acquired an asset when a State Stock Exchange (SSE) merged with the Australian Stock Exchange (ASX) on 1 April 1987. This means that it is a post-CGT asset. The first element of your parent Y's cost base of this asset is the cost base of the asset on the day your parent X died. The first element of your cost base is the cost base of the asset on the day your parent Y died.

Demutualisation of ASX

It is necessary, therefore, to determine what cost was incurred in acquiring the ASX shares in order to quantify the first element of the cost base for you.

The tax consequences if a mutual non-insurance organisation demutualises are set out in Schedule 2H of the Income Tax Assessment Act 1936 (ITAA 1936).

Division 326 of Schedule 2H of ITAA 1936 addresses the taxation consequences of the disposal by members of their interests in the demutualising organisation and contains rules for determining the cost of acquisition of demutualisation shares issued to members in exchange for the disposal of their interests in the mutual organisation.

Subdivisions 326-D and 326-E of Schedule 2H of ITAA 1936 prescribe the date and cost of acquisition of shares (including bonus shares) acquired by members in a demutualising entity as part of the demutualisation process. Special rules are included which prescribe the date and cost of acquisition of shares where membership rights in the demutualising entity have been obtained by disposing of membership rights in another mutual entity.

In the case of your parent X, demutualisation shares were issued in respect of his membership rights in ASX. These rights were obtained when the SSE merged into the ASX. Your parent X was a member of the SSE prior to 20 September 1985 (a pre-CGT member).

When demutualisation shares acquired in these circumstances are later sold, paragraph 326-90(1)(d) of Schedule 2H of ITAA 1936 provides that, for CGT purposes, the disposer is taken to have paid both amounts for the shares.

(i) Undeducted + Adjusted market value x Share or interest

membership Number of members disposed of

costs Number of disposer's shares

(ii) any amount actually paid for the acquisition.

The amount in (i) above is taken to have been paid on the demutualisation resolution day for ASX. The amount in (ii) is taken to have been paid when it was actually paid.

Your parent X is taken to have acquired the share or interest on the demutualisation resolution day for ASX (paragraph 326-90(1)(g) of Schedule 2H of ITAA 1936).

The adjusted market value in this case is the market value, as determined by a qualified valuer, of the other entity (SSE) just before the membership rights in the entity were disposed of disregarding any franking surplus (subsection 326-120(2) of Schedule 2H of ITAA 1936). This is at 31 March 1987.

The undeducted membership costs (as relevant to this case) are the undeducted amounts of the costs that were incurred by the member in maintaining membership in the demutualising entity (ASX), less any distributions made by ASX that were not included in his assessable income. The costs of maintaining membership would include those costs which, if the member did not incur them, would result in the membership rights ceasing (e.g. membership fees).

The ASX indicated they would commission a qualified valuer to determine a market valuation of the SSE just before it merged into the ASX and provide the result of this to members.