Edited version of private advice

Authorisation Number: 1051601174146

Date of advice: 12 November 2019

Ruling

Subject: Income tax - capital gains tax

Question 1

Does the Commissioner accept the share allocation method for the purposes of determining the net capital gain under subsection 102-5(1), part 3-1 and part 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997).

Answer

Yes.

Question 2

Will the passing of shares owned by the Taxpayer to Entity A cause Capital Gains Tax (CGT) event K3 to happen for her in respect of the Income Year? If so, must any capital gain or capital loss from the event be disregarded?

Answer

Yes.

Question 3

Will the passing of shares acquired after 20 September 1985 by the Taxpayer to Entity A cause CGT event K3 to happen for her in respect of the Income Year, where those shares have been determined using the Share Allocation Mechanism? If so, must any capital gain or capital loss from the event be disregarded?

Answer

Yes.

Question 4

If the answer to question 3 is yes; must any capital gain or capital loss from the event be disregarded?

Answer

No.

Question 5

Will the passing of shares acquired prior to 20 September 1985 by the Taxpayer to Entity B cause CGT event K3 to happen for her in respect of the Income Year? If so, must any capital gain or capital loss from the event be disregarded?

Answer

Yes.

Question 6

Will the Commissioner seek to apply Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) to any of the arrangements that form part of this private ruling, in particular, the Share Allocation Mechanism?

Answer

No.

This ruling applies for the following periods:

The scheme commences on:

Relevant facts and circumstances

The deceased died on XX XXXX 20XX and left a will.

The Deceased owned a portfolio of shares acquired prior to 20 September 1985 and after 20 September 1985.

The Deceased maintained meticulous hand-written records of all of their purchases and sales for each share.

The executor of the estate will distribute the shares (Share Allocation Method) between Entity A and Entity B which are beneficiaries of the estate.

Entity A is a deductible gift recipient and is a tax exempt entity.

Entity B is a tax exempt entity but is not a deductible gift recipient.

Reasons for Decision

Question 1

Share Allocation Method

Taxation Determination TD 33 explains that where a disposal of shares occurs and those shares are able to be individually distinguished, for example, by reference to share numbers or other distinctive rights or obligations attached to them, those shares are identifiable; their date of acquisition and cost base will be a matter of fact.

Taxation Ruling TR 96/4 also explains where shares cannot be identified by reference to either individual numbers or share certificates, but a taxpayer maintains appropriate accounting records, of the acquisition and disposal of shares, that will be regarded as sufficient to specifically identify shares to determine their value for taxation purposes. A taxpayer then is able to identify which shares are being appropriated to a particular sale transaction.

As the Taxpayer has kept adequate accounting records it is considered that the shares are identifiable. The manner in which the capital gain or capital loss is calculated by the Taxpayer for the purposes of section 102-5 of the ITAA 1997 by the share allocation method is acceptable in determining the taxpayer's overall net capital gain or loss and will satisfy the requirements of subsection 121-20(1) of the ITAA 1997.

Questions 2,3 and 4

When a person dies, any capital gain or loss made by them in respect of a capital gains tax (CGT) asset they owned just before dying is disregarded, unless CGT event K3 applies (sections 128-10 and 104-215 of the ITAA 1997).

CGT event K3 in section 104-215 of the ITAA 1997 happens if a CGT asset owned by a deceased person just before they die passes to a beneficiary in their estate that, when the asset passes, is an exempt entity. Under subsection 104-215(3) of the ITAA 1997, CGT event K3 is taken to happen just before the deceased's death.

An exempt entity is one whose ordinary and statutory income is exempt from income tax because of Division 50 of the ITAA 1997 (subsection 995-1(1) of the ITAA 1997).

Therefore, CGT event K3 will happen in this case when the deceased's property passes from the deceased estate to the beneficiary, who is an exempt entity.

However, under subsection 118-60(1) of the ITAA 1997, a capital gain or loss made from a testamentary gift of property is disregarded if the gift would have been deductible under section 30-15 of the ITAA 1997 had it not been a testamentary gift.

Subsection 30-15(1) of the ITAA 1997 provides that entities can deduct a gift in the situations set out in the table in section 30-15. The table sets out who the recipient of the gift can be, the type of gift that can be made, how much can be deducted and any special conditions that apply.

Item 1 of the table sets out one of the situations in which a gift can be deducted. Under that item a gift of property must:

·                     be made to a DGR that is in Australia

·                     satisfy any gift conditions affecting the type of deductible gifts the recipient can receive, and

·                     be property that is covered by one of the listed gift types.

Therefore, any beneficiaries who are a DGR in Australia, the deceased would have been entitled to a deduction under section 30-15 of the ITAA 1997 for the gift had it been made during her lifetime.

Accordingly, any capital gains or losses made from CGT event K3 happening are disregarded under subsection 118-60(1) of the ITAA 1997 when the property passes to the DGR beneficiary.

Application to your situation

The passing of shares owned by the Taxpayer to Entity A will cause CGT event K3 to occur however any capital gain or loss is disregarded under subsection 118-60(1) of the ITAA 1997.

In respect of those shares which were acquired by the Taxpayer on or after 20 September 1985 and are passed to Entity B, any capital gain or capital loss from the CGT K3 event cannot be disregarded for the reason that Entity B is not a deductible gift recipient.

Question 5

The passing of shares acquired prior to 20 September 1985 by the Taxpayer to Entity B will cause CGT event K3 to occur as the shares are passed to a tax exempt entity however any capital gain or capital loss from the event must be disregarded under section 104-215(5) of the ITAA 1997.

Question 6

For Part IVA to apply to a scheme, it must be concluded that, having regard to certain matters in subsection 177D(2) of the ITAA 1936, the person, or one of the persons who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme.

The matters listed in subsection 177D(2) of the ITAA 1936 are:

(a) the manner in which the scheme was entered into or carried out;

(b) the form and substance of the scheme;

(c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out;

(h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f).

Conclusion

In the present case, having regard to the relevant factors in subsection 177D(2) of the ITAA 1936, it is considered that the scheme would not be entered into for the dominant purpose of obtaining a tax benefit in connection with the scheme. This leads to the conclusion that the tax benefit arising from the scheme will not be one to which Part IVA applies.

Accordingly, the Commissioner confirms that Part IVA will not apply to the proposed arrangement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 50

Income Tax Assessment Act 1997 Division 30

Income Tax Assessment Act 1997 Section 104-215

Income Tax Assessment Act 1997 Section 118-60

Income Tax Assessment Act 1997 Division 121

Income Tax Assessment Act 1936 Part IVA