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Edited version of your written advice
Authorisation Number: 1051203152662
Date of advice: 21 March 2017
Ruling
Subject: Whether a CGT event happens upon the proposed conversion of shares
Question 1
Does a Capital Gains Tax (CGT) event occur under Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997) if the company converts 2 ordinary shares worth $1 each into one hundred A class shares worth one cent each and one hundred B class shares worth one cent each?
Answer
No
Question 2
Will the converted shares have the same date of acquisition as the original shares to which they relate?
Answer
Yes
This ruling applies for the following period
Year ending 30 June 2017
The scheme commenced on
1 July 2016
Relevant facts and circumstances
The company's issued capital is $2 which is comprised of two ordinary shares which were issued at $1 each.
One of the $1 shares is held by shareholder A as a pre-CGT asset and the other $1 share is held as a post-CGT asset by shareholder B.
The company is proposing to convert the two ordinary shares into 100 A class ordinary shares of one cent each and 100 B class shares of one cent each. The A and B class shares have exactly the same rights. The amounts allocated to the share capital account are unaltered and there is no change in the proportion of equity owned by each shareholder in the share capital account.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 104
Reasons for decision
Taxation Determination TD 2000/10 outlines what the CGT consequences are for a shareholder if a company converts its shares into a larger or smaller number of shares.
If a company converts its shares into a larger or smaller number of shares ('the converted shares') in accordance with section 245H of the Corporations Law ('C Law') in that:
(a) The original shares are not cancelled or redeemed in terms of the C Law;
(b) There is no change in the total amount allocated to the share capital of the company; and
(c) The proportion of equity owned by each shareholder in the share capital account is maintained;
no CGT event happens to the shareholder's original shares for capital gains purposes.
The converted shares have the same date of acquisition as the original shares to which they relate.
In this case the company proposes to increase the number of shares in accordance with section 245H of the C Law. The original shares will not be cancelled or redeemed in terms of the C Law; there will not be a change in the total amount allocated to the share capital of the company; and the proportion of equity owned by each shareholder in the share capital account will be maintained.
Consequently no CGT event will happen upon the implementation of the proposed change. The converted shares have the same date of acquisition as the original share to which they relate. As shareholder A acquired their $1 share before 20 September 1985 (pre-CGT share) the converted shares (which will replace the one share) will maintain their pre-CGT status.