Edited version of your written advice

Authorisation Number: 1012906109413

Date of advice: 4 November 2015

Ruling

Subject: Capital gains tax and shares in a foreign company

Question 1

Will the capital gain made on the disposal of shares in Company A held by Individual A on behalf of Trust A be assessable to Trust A?

Answer

Yes.

Question 2

Will the shares in Company A be considered active assets for the purposes of accessing the small business capital gains tax (CGT) concessions?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2016

The scheme commences on

1 July 2014

Relevant facts and circumstances

You entered into a Nominee Agreement with Individual A to hold shares in Company A (Shares) on your behalf. You have provided a copy of the Nominee Agreement. The Nominee Agreement forms part of the arrangement that is being ruled on.

Both Individual A and Trust A are Australian residents.

Company A does not carry on any business in Australia and is incorporated in a foreign country.

Negotiations are under way for the sale of some shares in Company A to an unrelated third party.

The disposal of the shares will result in a capital gain.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 section 106-50

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 subsection 152-40(3)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Beneficial owner vs. legal owner

CGT is the tax you pay on any capital gain you make. You make a capital gain as a result of a CGT event (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)).

CGT event A1 happens if you dispose of a CGT asset (subsection 104-10(1) of the (ITAA 1997)).

You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner (subsection 104-10(2) of the ITAA 1997).

A beneficial owner is the person or entity who is beneficially entitled to the income and proceeds from the CGT asset. A legal owner is the individual who has their name on the legal documents associated with the asset, such as share registries or certificates. An individual can be the legal owner but have no beneficial ownership in an asset. It is the beneficial owner of a CGT asset that is liable for capital gains tax upon disposal of the asset, not the legal owner.

If a beneficiary of a trust is absolutely entitled to a CGT asset as against the trustee, any act done by the trustee is treated as if it was carried out by the beneficiary (section 106-50 of the ITAA 1997).

In your case, the Nominee Agreement with Individual A provides that:

• Individual A holds the Shares as nominee for and on behalf of you

• Individual A otherwise has no legal or beneficial interest in the Shares, and

• all other attributes of the beneficial ownership of the Shares shall be and remain in you.

The Nominee Agreement with Individual A is considered to have created a bare trust over the Shares with Individual A as trustee and you as the beneficiary. As the beneficiary of a bare trust you are absolutely entitled to the Shares as to Individual A, and therefore any act done by Individual A is treated as if it was carried out by you.

As you are the beneficial owner of the Shares you will be treated as disposing of the Shares when they are sold to the unrelated third party and will be liable for any capital gain made on the disposal.

Whether the shares in Company A are active assets

A share in a company will be an active asset at a given time if:

(a) the company is an Australian resident at that time, for the income year in which that time occurs, and

(b) the total of:

(i) the market values of the active assets of the company, and

(ii) the market value of any financial instrument of the company that are inherently connected with a business that the company carries on, and

(iii) any cash of the company that is inherently connected with such a business,

is 80% or more of the market value of all of the assets of the company (subsection 152-40(3) of the ITAA 1997).

In your case, consideration needs to be given as to whether Company A is an Australian resident.

Australian resident means a person (which includes a company) who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936) (subsection 995-1(1) of the ITAA 1997).

Resident of Australia means a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control (CM&C) in Australia, or its voting power controlled by shareholders who are residents of Australia (paragraph (b) of the definition of resident or resident in Australia in subsection 6(1) of the ITAA 1936).

Taxation Ruling TR 2004/15 Income tax: residence of companies not incorporated in Australia - carrying on business in Australia and central management and control provides guidelines for determining whether a company not incorporated in Australia is a resident of Australia under the second statutory test in paragraph (b) of the definition of resident or resident in Australia in subsection 6(1) of the ITAA 1936.

For a company to be a resident of Australia under the second statutory test two separate requirements must be met. The first is that the company must carry on business in Australia, and the second is that either, the company's CM&C is in Australia, or its voting power is held by Australian resident shareholders.

If the company does not carry on business in Australia it cannot meet the requirements of the second statutory test, and is therefore not a resident of Australia under the second statutory test.

TR 2004/15 provides the following example at paragraphs 71 to 73:

Example 2 - CM&C in Australia with trading outside Australia

71. Trade Co is incorporated in Papua New Guinea, but its board of directors holds the majority of its meetings in Australia where decisions on the major contracts entered into by Trade Co, its finance, major policies and strategic directions are made. Trade Co undertakes all its trading activities in Papua New Guinea.

72. Trade Co is not a resident of Australia under the second statutory test. Although Trade Co has its CM&C in Australia, it is not carrying on business in Australia.

73. The fact that Trade Co has Board related, administrative support in Australia does not change this outcome, as such activity is considered to be part of the activities of the Board, and not the carrying on of a business of the company.

In this case, Company A was incorporated in a foreign country and does not carry on any business in Australia. Therefore, Company A is not a resident of Australia under the second statutory test.

As Company A is not an Australian resident the Shares in it are not active assets for the purposes of accessing the small business CGT concessions.