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Edited version of your written advice
Authorisation Number: 1012813467371
Ruling
Subject: Capital gains tax and cancellation of shares
Question 1
Did a capital gains tax (CGT) event occur when the shares were cancelled?
Answer
Yes.
Question 2
Are you able to record the capital repayment, when you sell your remaining shares, by reducing the cost base?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2014.
The scheme commences on:
1 July 2013.
Relevant facts and circumstances
You acquired shares in ABC Pty Ltd (ABC) several years ago.
In the 2013-14 financial year, ABC announced it proposed to return a large sum of capital to shareholders subject to court approval.
A special resolution was passed at a special meeting of shareholders in the 2013-14 financial year.
Court approval was obtained the following month.
Shareholders were to be paid XX amount per cancelled share.
ABC cancelled one tenth of your shares and made a corresponding capital repayment to you.
You think the payment you received includes a dividend normally paid in the year.
You provided the Direct Credit Payment Advice from ABC, detailing the payment amount.
You provided the Notice of Special Meeting of Shareholders document from ABC.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 102-20.
Income Tax Assessment Act 1997 section 104-25.
Reasons for decision
Cancellation of shares
Under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) you make a capital gain or capital loss as a result of a CGT event.
The cancellation of shares constitutes CGT event C2. Section 104-25 of the ITAA 1997 provides CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being cancelled. The time of the event is:
(a) when you enter into the contract that results in the asset ending; or
(b) if there is no contract - when the asset ends.
You make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. The cancellation of the shares constitutes CGT event C2.
Non-assessable payments from a company
A non-assessable payment from a company is considered CGT event G1. Non-assessable payments to shareholders (that is, a payment that is not a dividend or an amount that is taken to be a dividend for tax purposes), requires you to adjust the cost base of the shares at the time of the payment. These payments will often be referred to as a return of capital. The payment is made to reduce the company's share capital but does not affect the total number of shares held by shareholders.
Subsection 104-135(1) of the ITAA 1997 states that CGT event G1 happens if a company makes a payment to you in respect of a share you own in the company (except for CGT event A1 (sale) or C2 (cancellation) happening in relation to the share).
Cost base
Upon disposal of a CGT asset, the cost base is made up of five elements:
1. The first element is made up of the money paid or required to be paid to acquire the CGT asset.
2. The second element will include incidental costs of acquiring the asset, or costs in relation to the CGT event. Examples are agent's commission, advertising to find a seller or buyer, fees paid to an accountant.
3. The third element consists of non-capital costs incurred in connection with their ownership of a CGT asset. Examples are interest, rates, repairs and insurance premiums. An individual can include non-capital costs of ownership only in the cost base of assets acquired after 21 August 1991.
4. The fourth element includes capital expenditure the individual incurs for the purpose or the expected effect of increasing or preserving the assets' value or that relates to installing or removing the asset.
5. The fifth element includes capital expenditure the individual incurs to preserve or defend their title or rights to the asset (section 110-25 of the ITAA 1997).
Application to your circumstances
One tenth of your shares were cancelled in the 2013-14 financial year and a capital repayment in relation to these shares was paid to you several days later.
CGT event G1 did not occur as a number of your shares were cancelled. You now hold less shares than prior to the payment. Further, CGT event G1 cannot occur where CGT event C2 has taken place.
CGT event C2 occurred on the date the shares were cancelled.
The capital proceeds from the disposal of your shares is the entire capital repayment amount received. This is the amount shareholders were paid per cancelled share multiplied by the number of shares cancelled. The Notice of Special Meeting of Shareholders document from ABC states that the amount that will be paid to shareholders on the share cancellation is not in lieu of the payment of a dividend. The amount received is entirely a capital repayment and no dividends are included in this amount.