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Edited version of your written advice
Authorisation Number: 1012705157175
Ruling
Subject: Capital gains tax
Question 1
Did a capital gains tax (CGT) event occur when the trust exercised the option?
Answer
Yes, however any capital gain or loss is disregarded.
Question 2
Are you entitled to apply the replacement asset rollover?
Answer
No, as the capital gain or loss is disregarded.
Question 3
Will a CGT event occur when the shares are sold?
Answer
Yes.
This ruling applies for the following period
Year ending 30 June 2014
The scheme commences on
1 July 2013
Relevant facts and circumstances
An individual acquired options in a company.
The individual transferred the options to a trust for consideration. The trust is not a trading trust.
The trust was given the opportunity to exercise the options for shares.
The trust accepted the offer and was issued shares in the company.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 102-20
Income Tax Assessment Act 1997 section 104-25
Income Tax Assessment Act 1997 subsection 108-5
Income Tax Assessment Act 1997 subsection 134-1(4)
Reasons for decision
Question 1
Under section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) an asset for CGT purposes is any form of property or a legal or equitable right that is not property. Under section 102-20 of the ITAA 1997 you make a capital gain or capital loss as a result of a CGT event.
Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if the ownership of an intangible CGT asset ends by the asset:
(a) being redeemed or cancelled
(b) being released, discharged or satisfied
(c) expiring; or
(d) being abandoned, surrendered or forfeited
The time of the event is when you enter into the contract, that results in the asset ending or if there is no contract, when the asset ends.
Exercising an option
However, subsection 134-1(4) of the ITAA 1997 explains that a capital gain or loss the grantee makes from exercising an option is disregarded. However, this rule does not apply if the grantee acquired the option under a trust restructure and, on exercising the option, held the resulting asset as an item of trading stock.
In this case, the trust exercised the option to acquire shares in the company. The exercise of the option triggers CGT event C2 as an asset has come to an end. However, in accordance with subsection 134-1(4) of the ITAA 1997 the capital gain (or loss) can be disregarded by the trust.
Question 2
As the trust can disregard any capital gain it is not necessary to consider the rollover.
Question 3
CGT is the tax that you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event, happening to an asset in which you have an ownership interest.
The time of the CGT event is when you enter into the contract for the disposal, or if there is no contract, when the change of ownership occurs. The shares held by the trust are a CGT asset. When the trust disposes of the shares, a CGT event will occur.