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Edited version of your written advice
Authorisation Number: 1012985030266
Date of advice: 16 March 2016
Ruling
Subject: CGT status of shares
Question 1
Are the shares which X owns in the Company taken to be acquired prior to 20 September 1985 (that is, have they retained their pre-CGT status)?
Answer
Yes. X's shares in the Company are deemed to have been acquired before 20 September 1985.
This ruling applies for the following period:
1 July 2015 to 30 June 2016.
Relevant facts and circumstances
Background
X owns 100% of the shares in the Company.
The Company was incorporated some 40 years ago and operates a business which commenced prior to 20 September 1985. A significant asset of the business is pre-CGT goodwill.
X intends to transfer their shares in the year ended 30 June 2016, and needs certainty that the shares are taken to have been acquired prior to 20 September 1985.
Facts
Below is a summary of the relevant dates setting out the timeline of events in relation to the share ownership of the Company.
Date |
Event |
Pre 20 September 1985 |
The Company, as trustee for the X Family Trust, commenced business operations |
Post 20 September 1985 |
Rollover of business from X Family Trust to its trustee Company |
Post 20 September 1985 |
X & X appointed as trustees for the X Family Trust |
Post 20 September 1985 |
Company share allotment to X Family Trust as part of rollover |
Post 20 September 1985 |
Signed section 160ZZN(4) election |
Post 20 September 1985 |
Removal of X from the Company and as trustee of the X Family Trust as a result of divorce. |
Post 20 September 1985 |
Transfer of share to X's parent to maintain less than five shareholders (per Corporations Act requirements) with a signed declaration of trust nominating X as the beneficial holder |
Post 20 September 1985 |
Company amends constitution to become one director/one member company (per Corporations Act changes of that year permitting single shareholder/single director companies). |
Post 20 September 1985 |
X's parent's Company share is transferred to X on their passing away. |
Further explanation of events:
Pre 20 September 1985 event:
The Company was formed to act as trustee for the X Family Trust with less than five shares on issue. In turn, this trust commenced running the business operations.
Post 20 September 1985 events:
Trust to Company rollover. The business assets were rolled over from the Company (in its capacity as trustee of the X Family Trust) to the Company holding the assets in its own capacity. This occurred under the company to trust rollover that existed at the time. The rollover involved issuing shares to the X Family Trust as consideration for the transfer of the business assets. The initial shares on issue in the Company had a declaration of trust placed over them so that they were held on trust for the X Family Trust. All shares were held on trust for the X Family Trust on completion of the rollover.
X & X divorced and entered into a property settlement. Under the terms of the Family Court orders all of the shares which were held by the X Family Trust were transferred to X. Due to the Corporations Act requirements of the time, the Company had to have at least two shareholders. This meant that despite all the shares being beneficially owned by X, one of the shares was held in trust by X's parent.
On the death of X's parent, the share held beneficially for X was formally transferred to X. This change also involved the Company converting to a single shareholder and director by amending its constitution on that same date. The changes to the Corporations Act allowing a company to operate with one shareholder and director were legislated in 1995. This meant that X could be the legal owner of all the shares.
X has continued to hold all the shares in the Company since that time until the present day.
Relevant legislative provisions
Income Tax Assessment Act 1997
Part 3-1
Section 100-25
Section 104-10
Section 108-5
Section 109-5
Division 149
Section 149-10
Section 149-15
Section 149-30
Income Tax Assessment Act 1936
Section 160ZZM
Section 160ZZMA
Section 160ZZN
Reasons for decision
CGT status of the Company shares
The Company was registered prior to 20 September 1985. The original shares were held by X and X (1 share each and 1 share jointly). These shares were acquired before 20 September 1985.
A trust to company roll-over (section 160ZZN of the ITAA 1936) occurred which resulted in the issue of more than 200,000 new shares in the Company in return for the transfer of plant and goodwill to the Company. As the plant and goodwill were acquired before 20 September 1985, the shares were deemed by subsection 160ZZN(7) of the ITAA 1936 to be pre-CGT shares.
Subsequently there was a transfer (roll-over) of shares to X as a result of divorce proceedings. The transfer was pursuant to an order of a court under the Family Law Act 1975 (paragraph 160ZZM(1)(b)(i) of the ITAA 1936). Under subsection 160ZZMA(2)(a) of the ITAA 1936 the roll-over asset will be deemed to still be a pre-CGT asset if that asset was acquired before 20 September 1985.
As the shares still maintained their pre-CGT status under the previous rollover, they will still be deemed to be acquired before 20 September 1985.