Edited version of your written advice

Authorisation Number: 1012757190055

Ruling

Subject: Capital gains tax

Question 1

Does the payment you received in 2014 in respect of your entitlement under the scheme form part of the capital proceeds from capital gains tax (CGT) event A1 which occurred in 200X?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commences on:

1 July 2013

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

You previously owned a shareholding in a company.

You entered into an agreement to sell the shares.

There was some debate between you (and other vendors) as to the value of the shares.

Under the agreement, in consideration for the sale and transfer of your shares, the purchaser agreed to pay you a sum equivalent to a $X entitlement in a scheme.

The scheme is a right granted by the purchaser to a participant to be paid an amount equal to the appreciation in the value of the purchaser's stock on the day the right is exercised over the value at the time the right was granted.

CGT event A1 occurred on the execution of the Agreement and you elected to use the small business retirement exemption on the amount of the gain assessed at that time, and received some of the proceeds in cash in order to fund a contribution to superannuation to discharge the capital gains tax liability on the sale of the shares.

Your base entitlement under the scheme was reduced to reflect the cash proceeds received.

You were advised in writing that the scheme would be discontinued. As a result, you requested that your entitlement be paid in full as soon as possible.

In 2014 you received your accrued entitlement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 116-20

Reasons for decision

Question 1

Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law.

The time of the event is when you enter into the contract for the disposal or, if there is no contract, when the change of ownership occurs.

It is clear from its use of the phrase 'from you to another entity' that the types of disposals caught by CGT event A1 are limited to the transfer of pre-existing ownership rights from one entity to another.

In this case, CGT event A1 happened when you entered into the contract to dispose of your shares. Under the agreement, the consideration for the sale was a sum equivalent to a $X entitlement in the scheme.

Capital proceeds

The general rules for determining the capital proceeds of a CGT event are set out in section 116-20 of the ITAA 1997.

The capital proceeds from a CGT event are the total of:

• the amount of money a taxpayer has received, or is entitled to receive, in respect of that event happening, and

• the market value of any other property the taxpayer has received, or is entitled to receive, in respect of that event happening (worked out as at the time of the event).

Pursuant to subsection 103-10(1) of the ITAA 1997, section 116-20 will apply to you as if you had received money or other property if it has been applied for your benefit or as you direct.

In this case, the scheme is akin to an investment product that will provide a return based on the appreciation in the value of the purchaser's stock on the day the right is exercised over the value at the time the right was granted.

There is nothing in the agreement that would suggest that the consideration received for the shares was not the agreed value at the time. Therefore, we consider your accrued entitlement under the scheme does not form part of the capital proceeds of CGT event A1 which happened in 200X.

CGT event C2

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.

A taxpayer makes a capital gain as a result of CGT event C2 if the capital proceeds from the cancellation or redemption are more than the cost base of the shares or units.

CGT event C2 does not involve a transfer of an asset from one entity to another as occurs with CGT event A1, rather, the event occurs when an intangible CGT asset comes to an end. There is no acquisition of the asset by another person at that time.

In this case, we consider that CGT event C2 happened when the scheme, an intangible CGT asset, was discontinued.