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Edited version of your written advice
Authorisation Number: 1013008181509
Date of advice: 24 May 2016
Ruling
Subject: Capital gains tax- disposal of pre-CGT shares
Question 1:
Is the sale of the specified shares subject to capital gains tax (CGT) event K6 under section 104-230 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer:
No.
Question 2:
Are you entitled to disregard the capital gain on the sale of the specified shares under paragraph 104-10(5)(a)of the ITAA 1997?
Answer:
Yes.
Question 3:
Are you required to include the capital gain or loss from the sale of the pre-CGT shares as part of your assessable income?
Answer:
No.
This ruling applies for the following period:
Year ending 30 June 2016
The scheme commenced on:
1 July 2015
Relevant facts
The company was incorporated before 20 September 1985.
The company is an Australian resident company.
Before 20 September 1985 you acquired a number of shares in the company.
Before 20 September 1985 a number of other shares we acquired by another party, in the company.
The company was established to operate the business.
After 20 September 1985 you acquired the other party's shareholding.
You intend to transfer a number of specified pre-CGT shares in the company to a number of entities.
A valuation was undertaken by a registered valuer. Of the total market value of all the property of the company, 70% relates to trading stock and the remaining 30% relates to post-CGT property. The market value of the post-CGT property (excluding trading stock) is approximately 35% of the net value of the company.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Subsection 104-10(5)
Income Tax Assessment Act 1997 Paragraph 104-10(5)(a)
Income Tax Assessment Act 1997 Section 104-230
Reasons for decision
Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital gains tax event A1 occurs when your ownership in a CGT asset (that is shares in a company) is transferred to another entity. The time of the event is when you enter into a contract for the disposal, or, if there is no contract, the time of disposal is taken to be the time when the change in ownership occurs.
Subsection 104-10(5) of the ITAA 1997 provides that a capital gain or capital loss will be disregarded if the asset was acquired before 20 September 1985.
Section 104-230 of the ITAA 1997 deals with the disposal of pre-CGT shares and CGT event K6. CGT event K6 will occur if:
a) a taxpayer owns shares in a company acquired before 20 September 1985; and
b) CGT event A1 occurs happens in relation to the shares; and
c) there is no roll-over in relation to the A1 event; and
d) either:
i. The market value of the property of the company (that is not trading stock) that was acquired on or after 20 September 1985; or
ii. The market value of the property of the company owned through interposed entities (that is not trading stock) that was acquired on or after 20 September 1985,
is at least 75% of the net value of the company just before the disposal of the shares.
If you meet conditions a), b) and c) and, either or both tests described at i) and ii) above, then CGT event K6 will occur and override CGT event A1.
In your case, as the market value of the post-CGT property (excluding trading stock) in the company represents approximately 35% of its net value which is less than the 75% threshold, CGT event K6 will not occur when you transfer the specified shares.
Further, as the specified shares were acquired before 20 September 1985, the shares are considered pre-CGT assets. Therefore if the shares are transferred to the other entities any capital gain or loss is disregarded under paragraph 104-10(5)(a) of the ITAA 1997 and is not included as part of your assessable income.