Edited version of private advice

Authorisation Number: 1051599794570

Date of advice: 25 October 2019

Ruling

Subject: Capital gains tax

Question

Will any capital gain arise from capital gains tax (CGT) event G1, H2 or any other CGT event on the adoption of the new company constitution by Company A?

Answer:

No.

This ruling applies for the following period:

Year ending 30 June 20XX to Year ending 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents that were provided with the private ruling application. These documents form part of and are to be read with this description. The relevant documents are:

• ASIC extract
• Company A's current company constitution
• Draft new company constitution for Company A

You own shares in Company A which is an Australian incorporated and resident private company that was incorporated in 19XX.

The company issued shares of varying classes.

The directors would like to simplify and modernise the company's constitution and to this end a draft new constitution has been prepared.

No record has been found of any special rights attaching to any of the existing share classes.

Further, no record has been found of shareholders having been treated differently based on the class of shares they hold since at least 30 June 19XX.

Most of the shares are held by the grandchildren of the founder. Their children hold the balance of the shares.

All of the shareholders are residents of Australia for tax purposes.

A key goal of the directors in modernising and simplifying the constitution and operations of the company is to ensure that all shareholders continue to be treated the same, regardless of share class.

To achieve this they considered cancelling or redeeming all the existing shares and replacing them with a new issue of shares, all of which would be of the same class.

However, they believe that another way of achieving the same outcome is to simply remove the power of the directors in the constitution to treat shareholders differently. That is, they would adopt a new constitution that stated that if dividends are paid, they must be paid at the same rate across all classes of shares so that no share class is advantaged or disadvantaged over any other. Also, the new constitution would require that shares be issued or redeemed or cancelled at their market value.

Company A will not be making a payment to its shareholders in relation to the adoption of the new constitution.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-5

Income Tax Assessment Act 1997 Section 104-135

Income Tax Assessment Act 1997 Section 104-155

Reasons for decision

All legislative references that follow are to the Income Tax Assessment Act 1997.

CGT event G1

One of the requirements set out in section 104-135 for CGT event G1 to happen is for a company to make a payment to you in respect of a share you own in the company.

Company A will not be making a payment to its shareholders in relation to the adoption of the new constitution.

Therefore, CGT event G1 will not happen to you on the adoption of the new constitution.

CGT event H2

Subsection 104-155(1) states that CGT event H2 happens if:

(a)   an act, transaction or event occurs in relation to a CGT asset that you own; and

(b)   the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base.

Subsection 104-155(3) states that 'You make a capital gain if the capital proceeds because of the CGT event are more than the incidental costs you incurred that relate to the event.'

You will not be receiving any capital proceeds in relation to the adoption of the new constitution.

Consequently, you will not have a capital gain from CGT event H2.

Other CGT events

The adoption of the new constitution does not meet the criteria for any of the other CGT events to happen.