Edited version of private advice

Authorisation Number: 1051618499252

Date of advice: 17 January 2020

Ruling

Subject: Discount capital gain

Question: Will the Trustee for the A Trust be entitled to a discount capital gain under Subdivision 115-A of the Income Tax Assessment Act 1997 on the disposal of its share in Company X?

Answer:

Yes

This ruling applies for the following period:

1 July 2019 - 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

1.         The A Trust is an Australian trust estate.

2.         The Trustee holds ordinary shares in Company X, a company incorporated in Australia.

3.         Company Y is an Australian incorporated company listed on the Australian Securities Exchange.

4.         Company Y entered into an agreement with the Trustee and all other shareholders in Company X to acquire 100% interest in Company X (Agreement).

5.         Company Y made the offer to each shareholder in Company X in proportion to their shareholdings before the transaction.

6.         The shareholders had the choice to elect to receive a mix of ordinary shares in Company Y and cash subject to a maximum scrip threshold.

7.         The Trustee elected to receive cash only on the disposal of its shares to Company Y.

8.         All the shareholders in Company X and Company Y dealt with each other at arm's length.

9.         The Trustee acquired the shares in Company X after 20 September 1985 and held the shares on capital account for more than 12 months at the date the Agreement was entered into.

10.      The disposal of the shares in Company X resulted in a capital gain to the Trustee.

11.      The total of the cost bases of the capital gains tax (CGT) assets that Company X had acquired within 12 months before the date of the Agreement was less than 50% of all cost bases of all CGT assets that Company X owned at that time.

12.      The notional net capital gain of Company X from CGT assets acquired within 12 months before the date of the Agreement was less than 50% of the notional net capital gain from all CGT assets of Company X.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 115-5

Income Tax Assessment Act 1997 section 115-10

Income Tax Assessment Act 1997 section 115-15

Income Tax Assessment Act 1997 section 115-20

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 section 115-45

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

CGT event A1 under subsection 104-10 happens when the Trustee disposes of its shares in Company X to Company Y. The time of the event is the time the Agreement was executed (paragraph 104-10(3)(a)).

The capital proceeds from CGT event A1 happening to the disposal of the shares in Company X was $xxx and the Trustee made a capital gain under subsection 104-10(4).

Discount capital gain

Section 115-5 states that a discount capital gain is a capital gain that meets the requirements of sections 115-10, 115-15, 115-20 and 115-25.

The capital gain in relation to the ineligible part is a discount capital gain for the following reasons:

·         it is made by a trust (paragraph 115-10(c);

·         it is made after 21 September 1999 (section 115-15);

·         it will be worked out using a cost base that has been calculated without reference to indexation as the Trustee acquired the shares in Company X after 21 September 1999 (paragraph 115-20(1)(b));

·         the Trustee has held the shares in Company X for more than 12 months (subsection 115-25(1)); and

·         the exception under section 115-45 does not apply to deny the discount capital gain as the condition in subsections 115-45(4) and 115-45(5) is not met.

The capital gain arising from the cash components of the consideration received by the Trustee on the disposals of the shares in Company X will qualify as discount capital gain under Subdivision 115-A.