Edited version of your written advice

Authorisation Number: 1012921859709

Date of advice: 3 December 2015

Ruling

Subject: Share transfer and sale

Question 1

Under section 115-30 and section 126-5 of the ITAA 1997, are the first element of the cost base and the time of acquisition for each of the shares you own in a company (the Shares) after the transfer of the Shares to you by your former spouse equal to the cost base and the time of acquisition for each of the Shares currently held by your former spouse?

Answer

Yes

Question 2

If the Shares were to be sold in the course of Schemes 1, 2 or 3, (as described below), would any gain made by you on the disposal of your Shares be assessed solely as statutory income within Parts 3-1 and 3-3 of the ITAA 1997 and not as ordinary income?

Answer

Yes, subject to the following conditions:

• the Shares are not trading stock as you are not, and will not be, holding them as part of a business of buying and selling investments;

• the Shares are not revenue assets (which are assets of which disposal is inherent in, or incidental to, the carrying on of a business, and which do not include trading stock) as you are not, and will not be, carrying on a business where the sale of those Shares would be inherent in, or incidental to, that business;

• you do not sell the Shares as part of a business operation or commercial transaction; and

• the Shares have been, and will continue to be, held as a long-term investment.

This ruling applies for the following periods:

1 July 2015 to 30 June 2016;

1 July 2016 to 30 June 2017;

1 July 2017 to 30 June 2018;

1 July 2018 to 30 June 2019;

1 July 2019 to 30 June 2020;

1 July 2020 to 30 June 2021.

The scheme commences on:

The scheme has already commenced.

Relevant facts and circumstances

• You and your former spouse will have Consent Orders presented to the Family Court where as part of the property settlement between you and your former spouse, your former spouse will transfer a number of Shares to you.

• The Family Court will make the Consent Orders as Orders pursuant to section 79 of the FLA 1975.

• You and your former spouse will enter into an agreement (the Agreement) containing terms that govern the sale of the Shares. The Agreement is to terminate on a stipulated date.

• You have no intention of carrying on any business or commercial endeavour involving the trading of shares or investments. You will not hold the Shares as revenue assets nor sell the Shares as part of a business operation or commercial transaction.

• You will hold the Shares as a long-term investment. 

Relevant legislative provisions

Family Law Act 1975 Section 79

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 70-15

Income Tax Assessment Act 1997 Section 70-25

Income Tax Assessment Act 1997 Section 70-30

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-220

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 115-30

Income Tax Assessment Act 1997 Section 118-25

Income Tax Assessment Act 1997 Section 126-5

Reasons for decision

Question 1

1) Cost base

Section 104-10 describes CGT event A1, which happens when the disposal of a CGT asset occurs; that is, when ownership of a CGT asset changes from you to another entity. Section 108-5 provides the definition of a CGT asset, which includes any kind of property or legal or equitable rights that are not property.

Division 126 provides situations where roll-overs may apply to disregard the capital gains or losses from a CGT event where a CGT asset is transferred from a transferor to a transferee (same-asset roll-overs).

In particular, section 126-5 provides that a same-asset roll-over occurs if CGT event A1 happens between an individual and their spouse because of an Order by the Family Court under the FLA 1975. As a result, the capital gain or loss is disregarded, and the first element of the cost base of the CGT asset in the hands of the transferee is the asset's cost base in the hands of the transferor at the time the transferee acquired it: subsection 126-5(5).

Under section 79 of the FLA 1975, the Family Court may, in property settlement proceedings, make an Order as it considers appropriate with respect to the property of the parties to a marriage to alter their interests in that property.

Section 126-5 applies to you for the following reasons:

• The Shares are CGT assets under section 108-5.

• Under the Consent Orders presented to the Family Court and the Orders issued by the Family Court pursuant to section 79 of the FLA 1975, there will be a change in ownership of some of the Shares from your former spouse to you. Therefore, CGT event A1 will happen under section 104-10.

• However, as the change in ownership occurs as a result of Orders by the Family Court under the FLA 1975, subsection 126-5(5) will apply such that the first element of the cost base to you for each of the transferred Shares will be the cost base of each of the Shares for your former spouse at the time you acquired them.

2) Time of acquisition

Section 115-30 provides that where a same-asset roll-over applies, you are treated as having acquired the CGT asset at the time when the previous owner of the CGT asset acquired the CGT asset: see item 1 in the table in subsection 115-30(1). As mentioned, the same-asset roll-over applies in respect of the transfer under section 126-5.

Consequently, you will be taken to have acquired the Shares at the same time your former spouse acquired them.

Question 2

Your proposed disposal of the Shares may be conducted in accordance with one of the following Schemes:

(a) Scheme 1: You dispose of your shares pursuant to an offer from a third party to acquire the whole of the company;

(b) Scheme 2: You sell some of your Shares on no more than three occasions during the term of the Agreement, with each occasion separated by an interval of no less than one year; or

(c) Scheme 3: You sell a number of Shares in each year the Agreement operates, with only one sale occurring in each year.

General principles

The proceeds from the mere realization of an asset are not income: McClelland v FC of T 70 ATC 4115.

However, proceeds from the realization of an asset conducted as part of carrying on a business would be classed as income. This principle was captured by Lord Justice Clerk in Californian Copper Syndicate v Harris (1904) 5 TC 159 at pp 165-166:

''It is quite a well settled principle, in dealing with questions of assessment of income tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit... assessable to tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on or carrying out of a business ... What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - is the sum of the gain that has been made a mere enhancement of values by realising a security, or is it a gain made in an operation of business in carrying out a scheme of profit-making?''

Proceeds from the sale of shares may be either income or capital, depending on the circumstances surrounding their acquisition and disposal:

• Shares held as 'trading stock' describes the holding of shares as part of a business of buying and selling investments. The proceeds from the sale of these shares are ordinary income: see Hua Wang Bank Berhad & Ors v FCT 2014 ATC 20-480.

• Where shares are not held as trading stock, they could still be revenue assets such that the proceeds from the sale of the shares would be income.

• Where a sale of shares arises from an individual transaction entered into with a profit-making intention and the profit was made in carrying out a business operation or commercial transaction, the proceeds from the sale of those shares would be considered to be assessable as income and not capital.

• Where shares are held as an investment and disposed of in a way that constitutes a 'mere realization' of that asset, the proceeds from the sale of the shares would not be considered ordinary income. For example, if shares were held as a long term investment, the proceeds from the sale of the shares will generally not be income according to ordinary concepts: Case Z3 92 ATC 109.

Disposal under the schemes

A gain made by you on the disposal of the Shares would be assessed as statutory income within Parts 3-1 and 3-3 of the 1997 Act and not as ordinary income.

However, this Ruling is made on the basis of the facts and assumptions provided to us. On the basis of these facts and assumptions, the sale of the Shares will not be considered ordinary income. In this regard, we have taken into account the following considerations:

• The Shares will not be held by you as trading stock. We have considered the following facts to be relevant:

• The Shares are to be transferred to you to allow you to derive future dividend income from the Shares.

• You have indicated that you will not acquire the Shares with the purpose of venturing into a share trading activity.

• The Shares will not be held by you or used as revenue assets. We take into consideration the following in this respect:

• The Shares are to be transferred to you to allow you to derive future dividend income from the shares.

• You have indicated that you will not acquire the Shares with the purpose of resale at a profit.

• You have indicated that you will not engage in a business in which the disposal of the Shares is inherent.

• The Shares will not be sold as part of a business operation or commercial transaction. You have advised that you will not be carrying out a business operation or commercial transaction involving the sale of the Shares.

• You intend to hold on to the Shares as a long-term investment. Your ownership of the Shares is not to enable you to utilise them as trading stock for the purpose of share trading; to be used or held as revenue assets, or to be used for sale as part of a business operation or commercial transaction.

If the factors outlined above continue to exist at the time of the disposals made in accordance with Schemes 1, 2 or 3, the proceeds will be considered statutory income within Parts 3-1 and 3-3 of the 1997 Act, and not ordinary income. Specifically:

• A disposal under Scheme 1 involves the sale of the Shares pursuant to an offer from a third party to acquire the whole of the company.

If you hold the Shares as a long-term investment and not as trading stock or as revenue assets, and you do not sell the Shares as part of a business operation or commercial transaction, the proceeds from a subsequent disposal pursuant to a takeover or scheme of arrangement would not be considered to be ordinary income.

• A disposal under Scheme 2 involves the sale of the Shares on no more than three occasions during the term of the Agreement, with each occasion separated by an interval of at least one year.

While the disposals of the shares might occur on 3 separate occasions, with a parcel of Shares being sold on each, the proceeds from the disposals would not be classified as ordinary income if you had continued to hold the Shares as a long-term investment and not as trading stock or as revenue assets at the time of each disposal, and you do not sell the Shares as part of a business operation or commercial transaction.

• A disposal under Scheme 3 involves the sale of a number of shares in each year the Agreement operates, with only one sale occurring in each year.

The Share sales occur more regularly and more frequently under this scheme. While periodicity, recurrence and regularity may stamp a receipt as ordinary income, the significance of these considerations may be diminished by other considerations regarding the nature of the receipt in question: see FC of T v The Myer Emporium Ltd 87 ATC 4363 at 4370. It is more relevant for the purposes of the characterisation of the receipt in this case that you hold these Shares as a long-term investment, and not as trading stock or revenue assets, and you do not sell the Shares as part of a business operation or commercial transaction. That is, the Share sales under Scheme 3 will be a 'mere realization' of assets.

The regularity and periodicity of the disposals under Scheme 3 do not displace the characterisation, on the basis of the abovementioned considerations, of the receipts as statutory income within Parts 3-1 and 3-3 of the 1997 Act.