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Edited version of your written advice
Authorisation Number: 1012779234403
Ruling
Subject: Shares
Question 1
Do the employee share scheme provisions apply to your shares in entity A?
Answer
No.
Question 2
Do the capital gains tax (CGT) provisions apply on the sale of your shares in entity A?
Answer
Yes.
Question 3
Will the cost base of the shares be the market value of the shares on the date they were acquired?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts
You resigned from your employment with entity B.
Your previous employer was also a director of entity A.
A couple of years after your resignation, your previous employer gave you a gift of shares in entity A.
Entity A is not connected with entity B apart from having a common director.
You were never employed by entity A.
The shares were not in relation to any services provided. The shares were a gift from a friend who had previously employed you.
You didn't pay anything to have the shares.
The shares were previously owned by entity C before being transferred to you.
You have sold some of your shares.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 83A
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 section 112-20
Reasons for decision
Detailed reasoning
Employee share scheme
An employee share scheme (ESS) is a scheme under which ESS interests such as shares in a company are provided to an employee or their associate (including past or prospective employees) of the company or subsidiaries of the company in relation to the employee's employment (section 83A-10 of the Income Tax Assessment Act 1997 (ITAA 1997).
Shares acquired under an ESS are subject to special rules outlined in Division 83A of the ITAA 1997.
In your case the shares are not in the company that you previously worked with. Furthermore entity B is not a subsidiary of entity A. Your shares were not acquired under an ESS, therefore the provisions outlined in Division 83A of the ITAA 1997 do not apply.
Capital gains tax
A capital gain or capital loss may arise if a capital gains tax (CGT) event happens to a CGT asset. A net capital gain is included in your assessable income.
Shares are a CGT asset. When shares are disposed of, CGT event A1 happens (section 104-10 of the ITAA 1997).
The first element of the cost base of a CGT asset includes the money you paid to acquire the asset. However, where the asset is gifted, the market value substitution rules generally apply as outlined in section 112-20 of the ITAA 1997.
That is, where you acquire a CGT asset from another entity, but do not incur any expenditure to acquire it, the first element of the cost base and reduced cost base of the asset is its market value at the acquisition time.
There are some situations in which the market value substitution rule does not apply, as outlined in subsection 112-20(3) of the ITAA 1997, however these situations are not relevant in your circumstances.
In your case, the market value substitution rule applies and the cost base and reduced cost base of your shares is equal to the market value of the shares on the date they were gifted to you.