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Edited version of your written advice
Authorisation Number: 1012884670451
Date of advice: 25 September 2015
Ruling
Subject: Capital gains tax
Question 1
Were the shares you held a post capital gains tax (CGT) asset?
Answer
Yes.
Question 2
Was the first element of the cost base equal to the market value of the shares they replaced?
Answer
Yes.
Question 3
If the answer to question 2 is yes, is the final day of trading an acceptable date for determining market value?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2016 to year ended 30 June 2020
The scheme commences on:
1 July 2015
Relevant facts and circumstances
You purchased shares prior to 1985.
After 20 September 1985, the company merged with another company.
In exchange for your original shares you received a number of shares in the new company.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subdivision 110-A
Income Tax Assessment Act 1997 subsection 110-25(2)
Income Tax Assessment Act 1997 section 120-20
Reasons for decision
Under section 120-20 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity will make a capital gain or a capital loss if a CGT event happens to a CGT asset. A capital gain on the disposal of an asset can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997 if it was acquired prior to 20 September 1985.
Cost base
Subdivision 110-A of the ITAA 1997 explains the rules relating to the cost base of a CGT asset. The costs base of a CGT asset consists of 5 elements. Subsection 110-25(2) of the ITAA 1997 states that the first element is the total of:
a) the money you paid, or are required to pay, in respect of acquiring it; and
b) the market value of any other property you gave, or are required to give, in respect of acquiring it (worked out at the time of the acquisition).
Taxation Determination TD 2002/4 considers the first element of the cost base (and reduced cost base) of a share in a company you acquire in exchange for a share in another company in a takeover or merger. It provides the following example:
Aaron owns 100 shares in XYZ Ltd. ABC Ltd makes an unconditional takeover offer to acquire XYZ Ltd, exchanging 2 shares in XYZ Ltd for each share in ABC Ltd. Each share in XYZ Ltd is worth $4.50 at the time of the offer. Aaron accepts the offer. At the time Aaron accepts the offer the market value of an XYZ Ltd share is $4.40. The first element of the cost base and reduced cost base of each ABC Ltd share is $8.80 (that is 2 x $4.40). If the market value of an XYZ Ltd share was $4.60 at the time Aaron accepted the offer, the first element of the cost base and reduced cost base for each ABC Ltd share would have been $9.20
Application to your circumstances
In this case, to acquire the shares in the new company you were required to give your shares in the original company. Therefore, the cost base of your new shares should be worked out using the market value of the old shares at the time of the acquisition. The Commissioner accepts that it would be acceptable to use the market value of the shares on the final day of trading prior to the merger.
As you acquired the new shares after 20 September 1985 they are considered post CGT assets.