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Edited version of your written advice
Authorisation Number: 1013015075250
Date of advice: 12 May 2016
Ruling
Subject: Capital gains tax
Question 1
Can the net capital gain on the sale of the shares that were sold without your consent, be disregarded?
Answer
No.
Question 2
Can the rollover relief apply to the net capital gain made on the sale of the shares which were sold without the trustee's consent?
Answer
No.
Question 3
Can the Commissioner exercise, a discretion, to allow franking credits to be utilised where the 45 day holding rule was not satisfied as a result of the shares being sold without your consent?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
The trust holds an investment portfolio which has been managed by an investment manager.
The trustee of the trust was the subject of identity theft and fraud.
As a result of the fraud, the investment manager sold some of the trust's shares. They believed that this was at the request of the trustee. However, the trustee was unaware of and did not authorise the sale.
Upon realising that the request was fraudulent, the investment manager immediately repurchased the shares.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 102-20,
Income Tax Assessment Act 1997 - Section 104-10 and
Income Tax Assessment Act 1997 - Paragraph 207-145(1)(a).
Reasons for decision
Under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity will make a capital gain or a capital loss if a capital gains tax (CGT) event happens to a CGT asset.
CGT event A1 occurs when you dispose of a CGT asset. You are considered to have disposed of a CGT asset if a change of ownership occurs from you to another entity because of some act or event or by operation of law. The capital gain or capital loss is made at the time of the event (section 104-10 of the ITAA 1997). The shares you own in various companies are considered to be CGT assets. At law, CGT event A1 occurred when the shares were disposed of, even though the shares were sold due to fraud and the sale was unauthorised.
In certain circumstances, the capital gain or capital loss made as a result of a CGT event can be disregarded or deferred until a later time. Some of the exceptions, exemptions and rollovers that can be found in the ITAA 1997 include:
• small business 15-year exemption,
• small business rollover,
• replacement asset rollover where an asset is compulsorily acquired by a government agency or is lost or destroyed,
• scrip for scrip rollover, where shares in one company are replaced with shares in a takeover company.
While we appreciate your circumstances, there is no provision in the ITAA 1997 to allow you to disregard or defer a capital made through an accidental sale of a CGT asset, even where the transaction was unauthorised. We accept that your investment manager purchased the same number of shares in the same companies to replace the ones which were erroneously sold. However the acquisition of the new parcel of shares does not negate the disposal. It will simply result in the acquisition of new CGT assets.
45 day holding rule
Paragraph 207-145(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) states that if an entity to whom a franked distribution is made is not a qualified person in relation to the distribution for the purposes of Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936), they are not entitled to gross up their income for the franking credit received nor claim a tax offset equal to the franking credit.
To be a qualified person in relation to a dividend, the relevant entity must hold the relevant shares or interest at risk for the relevant qualification period of 45 days (or 90 days for preference shares).
While former Division 1A was repealed effective 1 July 2002, Taxation Determination TD 2007/11 Income tax: imputation: franked distributions: qualified persons: does an entity have to be a qualified person within the meaning of Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936 to avoid the application of paragraphs 207-145(1)(a) and 207-150(1)(a) of the Income Tax Assessment Act 1997 in respect of a franked distribution made directly or indirectly to the entity on or after 1 July 2002?, states that it is necessary to continue to have regard to these rules in determining whether an entity is a qualified person for the purposes of section 207-145 of the ITAA 1997.
The taxation legislation does not contain any provisions that grant the Commissioner of Taxation a discretion to depart from the requirements of paragraph 207-145(1)(a) of the ITAA 1997. Accordingly, the 45 day holding rule will apply.