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Edited version of your written advice
Authorisation Number: 1012782738814
Ruling
Subject: CGT capital proceeds
Question 1
Is the repayment of your share of $X made to another entity an adjustment to the capital proceeds received from the sale of your shares in a company?
Answer
Yes.
Question 2
If applicable, can the beneficiaries that were distributed the gain made on sale of the shares adjust the amount of capital gain included in their assessable income?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2007
Year ended 30 June 2008
Year ended 30 June 2009
Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
The scheme commences on:
1 July 2006
Relevant facts and circumstances
You and the other shareholder previously owned all shares in the company.
Prior to a few years ago, you disposed of a % of your interests in the company to another entity (an overseas company) for $X. As part of the sale the parties entered into a Shareholders Agreement which conferred upon another entity an irrevocable option to acquire the remainder of shares in the company.
At a date, it was agreed that the Shareholders Agreement would be amended so as to require another entity to acquire the balance of the shares in the company and that $X should be invested into the company to increase its production capacity. If the loan investment was funded by a shareholder loan, another entity would repay the loan plus interest when it acquired the balance of the shares in the company.
You state that the accounts of the Trust show loans made to the company in years prior.
At a later date another entity agreed to acquire the remaining shares in the company.
The trust made a loan of $Y prior to 30 June 2006. Prior to selling your shares in the company, the loan made to the company had been fully repaid.
At a second later date, after partially resolving a dispute concerning some breaches of duties and agreement (the 1st claim), you transferred your shares to another entity. In return you and the other shareholder were paid a total of:
• $Z (the balance of the agreed purchase price)
• $X (representing the repayment of the loan)
• $A (representing interest on the loan)
Your agent has stated he believes that only one cheque (covering the above amounts) was received. In preparing your return, the payment of $X was discussed with your agent. As you could not attribute this amount to anything else, the amount was treated as 'additional compensation'. The proceeds were split according to the previous shareholding %. All of the above amounts were included in a CGT calculation, and in the case of the Trust were distributed to beneficiaries in equal shares.
At a third later date, a statement of claim was issued by another entity which included claims for misleading and deceptive conduct, and disputing the validity of the $X to the company (the 2nd claim). Another entity sought relief by an order that the parties refund the sum of $X plus $A plus interest, or pay damages/compensation. The misleading and deceptive conduct related to a purported loan which did not exist. Another entity alleged it agreed to include in the agreement, various clauses agreeing to repay the purported loan principal and interest.
In 20XX, a 3rd proceeding was initiated by another entity (the 3rd claim). This claim related to breaches of restrictive covenants, agreements, duties and a misappropriation of funds (specifically that an amount had been taken from the company as repayment of a purported loan).
You decided that due to personal issues and ongoing legal costs, that the matter should be settled with another entity. When the Settlement Agreement was entered into:
• Part of the 1st claim had been resolved, the remainder is in abeyance;
• 2nd claim had been set down for trial;
• 3rd claim stayed pending the determination of trial.
You paid another entity an amount of $X in accordance with the Settlement Agreement.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 114-10
Income Tax Assessment Act 1997 Section 116-50
Income Tax Assessment Act 1997 Subdivision 115-C
Reasons for decision
Capital Gains Tax (CGT) Event A1
Under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) CGT event A1 happens if you dispose of a capital gains tax (CGT) asset to another entity. The time of the event is when you enter into the contract for disposal. You make a capital gain if the capital proceeds from the disposal are more than the assets cost base.
In your case, there was a CGT event A1 when you disposed of the remainder of your shares in the company, and showed a capital gain in your tax return.
Repayment of capital proceeds
Section 116-50(1) of the ITAA 1997 states:
The capital proceeds from a CGT event are reduced by:
(a) any part of them that you repay; or …
In your case, an amount of $X was included in the capital proceeds from the sale of your remaining the company shares as 'additional consideration'. You and the other shareholder have since repaid a total amount of $X to the purchaser of the company shares.
As you have repaid an amount to the purchaser of your shares that can be identified as part of the capital proceeds, your capital proceeds can be reduced by your share of the $X that you repaid.
Beneficiaries' distribution
Subdivision 115-C of the ITAA 1997 sets out rules for dealing with the net income of a trust that has a net capital gain. The rules treat the parts of the net income attributable to the trust's net capital gain as capital gains made by the beneficiary entitled to those parts.
In your case, the Trust's capital gain from the sale of the company shares was distributed to beneficiaries. As a result of a repayment of capital proceeds, the amount of distributable capital gain has been reduced under section 116-50(1) of the ITAA 1997. As the amount of the distribution from the sale of the Trust has reduced, the beneficiaries' individual assessable income can be amended to reflect the correct amount of distributions.