Edited version of your written advice

Authorisation Number: 1051194628931

Date of advice: 22 February 2017

Ruling

Subject: Interim Dividends

Question 1

Did CGT event G1 occur when you received an interim dividend relating to your shares in a company in the 201Y/1Z income year?

Answer

No

Question 2

Will the interim distribution made in the 201Y/1Z income year reduce the cost base of the shares acquired from a deceased estate?

Answer

No

This ruling applies for the following period:

1 July 201X to 30 June 201Z

The scheme commences on:

1 July 201X

Relevant facts and circumstances

You inherited shares from a deceased estate.

Some of those shares were post CGT shares and some were pre CGT shares.

The company in which you held the shares was placed in liquidation.

The shares transferred from the deceased estate that were acquired pre CGT have a cost base of the value of the shares at the date of death.

In the 201Y/201Z year, the company made interim distributions with respect to the shares owned by you in the 18 months prior to the company ceasing to exist.

The interim distribution with respect to the pre CGT shares is 20% of your holding in the company.

The company was liquidated within 18 months of the interim distribution being made.

You have lodged your tax returns for the year in question and have included this dividend as part of your assessable income.

Relevant legislative provisions

Section 102-20 of the Income Tax Assessment Act 1997(ITAA 1997)

Subsection 104-135 of the ITAA 1997

Subsection 104-135(1) of the ITAA 1997

Subsection 104-135(2) of the ITAA 1997

Subsection 104-135(3) of the ITAA 1997

Subsection 104-135(4) of the ITAA 1997

Subsection 104-135(5) of the ITAA 1997

Subsection 104-135(6) of the ITAA 1997

Section 110-25(2) of the ITAA 1997

Section 110-25(4) of the ITAA 1997

Section 110-25(5) of the ITAA 1997

Section 110-25(6) of the ITAA 1997

Section 110-55 of the ITAA 1997

Subsection 100-25(2) of the ITAA 1997

Section 110-35 of the ITAA 1997

Subsection 112-20(1) of the ITAA 1997

Subsection 128-15(1) of the ITAA 1997

Subsection 128-15(3) of the ITAA 1997

Subsection 128-15(4) of the ITAA 1997

Section 104-5 of the ITAA 1997

Subdivision 110-A of the ITAA 1997

Subdivision 110-B of the ITAA 1997

Section 47 of the Income Tax Assessment Act 1936 (ITAA 1936)

Reasons for decision

Question 1

Summary

CGT event G1 did not occur.

Detailed reasoning

Under section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) you make a capital gain or capital loss as a result of a CGT event. The full list of CGT events can be found in section 104-5 of the ITAA 1997.

Subsection 104-135(1) of the ITAA 1997 states that CGT event G1 happens if:

a) a company makes a payment to you in respect of a share you own in the company (except for CGT event A1 (sale) or C2 (cancellation) happening in relation to the share) and

b) some or all of the payments (the non-assessable part) is not a dividend, or an amount that is taken to be a dividend under section 47 of the Income Tax Assessment Act 1936; and the

c) the payment is not included in your assessable income

If CGT event G1 happens, the consequences include cost base and reduced cost base reductions for the share.

A non-assessable payment from a company is considered a CGT event G1. Non-assessable payments to shareholders (that is, a payment that is not a dividend or an amount that is taken to be a dividend for tax purposes), requires you to adjust the cost base of the shares at the time of the payment. These payments will often be referred to as a return of capital. The payment is made to reduce the company's share capital but does not affect the total number of shares held by shareholders.

The time of the event is when the company makes the payment (subsection 104-135(2) of the ITAA 1997). You make a capital gain if the amount of the non-assessable part is more than the share's cost base. If you make a capital gain, the share's cost base and reduced cost base is reduced to nil (subsection 104-135(3) of the ITAA 1997). You cannot make a capital loss under CGT event G1.

You disregard a payment made by a liquidator for the purposes of section 104-135 if the company ceases to exist within 18 months of the payment under subsection 104-135(6) of the ITAA 1997.

The Note attached to this subsection states the payment will be part of your capital proceeds for CGT event C2 happening when the share ends.

Taxation Determination TD 2001/27 at paragraph 7 supports the principle that the relevant payment for the purposes of subsection 104-135(6) is the non-assessable part of the dividend.

7. If the company ceases to exist within 18 months of the payment of the distribution, subsection 104-135(6) ensures that the non-assessable part is disregarded for the purposes of section 104-135. The non-assessable part is treated as part of the capital proceeds for the happening of CGT event C2 when the share ends. Note that it is the company's ceasing to exist, not the final distribution that must happen within 18 months of the payment for this outcome to occur.

Therefore any payment (i.e. the non-assessable part) that is paid within 18 months of the company ceasing to exist will not be assessable under CGT Event G1 (section 104-135 of the ITAA 1997), but will be assessable under CGT Event C2 (section 104-25 of the ITAA 1997). However, if that payment is made more than 18 months of the company ceasing to exist, then it will be assessable under CGT Event G1.

Application to your circumstances

During the 201Y/201Z year of income you received an interim dividend.

All of this distribution was included in your assessable income and the tax return was lodged and assessed.

The company ceased to exist within 18 months of the interim distribution being paid.

The purpose of section 104-35 is to capture payments relating to shares where there is a non-assessable part, in order to subject recipients to the CGT regime.  In this case for CGT event G1 to occur there must have been a non-assessable amount distributed to you from the company.  You have informed us that all of the interim distribution received from the company was included in your assessable income as a section 47(1) dividend. Therefore CGT event G1 did not occur as all of the conditions in subsection 104-135(1) were not met.

As the conditions in subsection 104-135(1) of the ITAA 1997 were not met, CGT event G1 did not apply. Therefore, the exception listed in subsection 104-135(6) (to disregard a payment by a liquidator for the purposes of this section if the company ceased to exist within 18 months of the payment) is not relevant.  It therefore follows that the Note to that subsection is also not relevant.

As there is no CGT G1 event, there will be no cost base or reduced cost base adjustments under subsections 104-135(3) or 104-135(4) of the ITAA 1997.

Question 2

Summary

There is no reduction in the cost base of the pre CGT shares you acquired from the deceased estate.

Detailed reasoning

The term 'cost base' is defined in Subdivision 110-A of the ITAA 1997. In summary, the cost base consists of five elements:

a. The cost of the asset, being the total money paid or required to be paid, or the market value of any property given by a taxpayer in respect of acquiring the asset, pursuant to subsection 100-25(2) of the ITAA 1997.

b. Any incidental costs of disposal, including costs incurred to acquire a CGT asset, costs relating to a CGT event, remuneration for services of surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser, costs of transfer, and stamp duty or other similar duty, pursuant to section 110-35 of the ITAA 1997.

c. Non-capital holding costs, including costs involved with owning the CGT asset such as interest a taxpayer borrowed to acquire the assets and any costs of maintaining, repairing or insuring the asset, pursuant to subsection 110-25(4) of the ITAA 1997.

d. Enhancement expenditure, pursuant to subsection 110-25(5) of the ITAA 1997.

e. Any expenditure to establish, preserve or defend title or rights over the asset, pursuant to subsection 110-25(6) of the ITAA 1997.

Subdivision 110-B of the ITAA 1997 states that the reduced cost base has the same elements as the cost base, except for the third element. The third element is:

● Any amounts that are assessable because of a balancing adjustment for the asset, or that would be assessable if certain balancing adjustment relief were not available, pursuant to section 110-55 of the ITAA 1997.

Subsection 110-55(2) states that with the exception of the third element, all of the elements of the reduced cost base of a CGT asset are the same as those for the cost base. As the shares have no third element, its reduced cost base is the same as the cost base.

Under the general cost base and reduced cost base rules, the first element of the cost base and reduced cost base of an asset is the sum of the amount paid (or required to be paid) and the market value of the shares given (or required to be given) in respect of acquiring it: subsections 110-25(2) and 110-55(2) of the ITAA 1997. The general cost base rules may be modified in certain situations including, relevantly, the market value substitution rule.

The market value substitution rules generally apply where a taxpayer:

● did not incur any expenditure to acquire that asset

● incurred expenditure which cannot be valued in whole or in part, or

● did not deal at arm's length with the other entity in connection with the acquisition.

If the market value substitution rule applies, the first element of the cost base or reduced cost base of a CGT asset that is acquired from another entity is its market value at the time of acquisition (subsection 112-20(1) of the ITAA 1997).

Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out what happens if a CGT asset passed to you as a beneficiary of a deceased estate.

Subsection 128-15(1) sets out what happens if a CGT asset you owned just before dying:

(a) devolves to your legal personal representative; or

(b) passes to a beneficiary in your estate.

Subsection 128-15(3) provides special rules for legal personal representatives and states that any capital gain or capital loss the legal personal representative makes if the asset passes to a beneficiary in your estate is disregarded.

Subsection 128-15(4) provides a table which sets out modifications to the first element of the cost base and reduced cost base of a CGT asset in the hands of a beneficiary of a deceased estate.

Item 1 of the table provides that the first element of the cost base and reduced cost base of an asset that:

• was acquired on or after 20 September 1985, except

• one covered by item 2, 3, 3A or 3B

is the value of the shares on the date of the deceased's death.

Application to your circumstances

The relevant shares were acquired through a deceased estate and, as such, would have had a cost base equivalent to the market value at the time of acquisition by virtue of Division 128 of the ITAA 1997.

The payment of the interim dividend to you did not result in any further adjustment to the cost base of the relevant shares.