Edited version of private advice

Authorisation Number: 1051627895719

Date of advice: 31 January 2020

Ruling

Subject: CGT consequences upon sale of company shares

Question 1

Will the sale by Individual 1, Individual 2, Individual 3, Individual 4 and the Superannuation Fund (the Shareholders) of their respective shares in the Company to a purchaser result in CGT event A1 happening pursuant to subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Have Individual 1, Individual 2, Individual 3 and Individual 4 (the Individual Shareholders) acquired their respective shares in the Company before 20 September 1985 for the purposes of Part 3-1 of the ITAA 1997?

Answer

Yes

Question 3

Has the Superannuation Fund (the Fund) acquired its shares in the Company before 20 September 1985 for the purposes of Part 3-1 of the ITAA 1997?

Answer

No

Question 4

Will any capital gain made by the Individual Shareholders from the sale of their respective shares in the Company be disregarded under subsection 104-10(5) of the ITAA 1997?

Answer

Yes

Question 5

Will any capital gain made by the Fund from the sale of its shares in the Company be disregarded under subsection 104-10(5) of the ITAA 1997?

Answer

No

Question 6

Have the pre-CGT assets of the Company stopped being pre-CGT assets as a result of the application of subsection 149-30(1) of the ITAA 1997?

Answer

No

Question 7

If the pre-CGT assets of the Company stopped being pre-CGT assets as a result of the application of subsection 149-30(1) of the ITAA 1997, will the Commissioner exercise his discretion under subsection 149-30(2) of the ITAA 1997?

Answer

Not relevant

Question 8

Will the sale by the Individual Shareholders of their respective shares in the Company to a purchaser result in CGT event K6 happening pursuant to section 104-230 of the ITAA 1997?

Answer

No

Question 9

Will the sale by the Fund of its shares in the Company to a purchaser result in CGT event K6 happening pursuant to section 104-230 of the ITAA 1997?

Answer

Not relevant

Question 10

If the pre-CGT assets of the Company stopped being pre-CGT assets as a result of the application of subsection 149-30(1) of the ITAA 1997 and the Commissioner does not exercise his discretion under subsection 140-30(2) of the ITAA 1997, will such pre-CGT assets continue to be treated as having been acquired pre-CGT for the purposes of CGT event K6?

Answer

Not relevant

This ruling applies for the following periods:

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

Year ending 30 June 2024

Year ending 30 June 2025

Year ending 30 June 2026

Relevant facts and circumstances

The Company was registered on a date before 20 September 1985.

Company shareholding

Immediately before 20 September 1985, the shareholding in the Company was as follows:

Changes to shareholding that occurred between 20 September 1985 and the date of this ruling

Pursuant to an order of the Family Court, on a date after 20 September 1985 Individual 1's former spouse transferred all of their shares in the Company to Individual 1.

On a date after 20 September 1985, through an amendment in the Company's Articles of Association, the ordinary shares in the Company held by the Individual Shareholders were converted to 'A' class ordinary shares and the ordinary shares held by the Fund were converted to 'B' class ordinary shares. There was a variation in the rights attached to the original ordinary shares, however there was no change to the number of shares held by each shareholder.

No capital proceeds were received as a result of the variation in the rights attached to the original ordinary issued shares in the Company.

The shareholding of the Company as at the date of this ruling is as follows:

The Fund

The Fund is a complying self-managed superannuation fund, established by trust deed on a date before 20 September 1985.

Company Asset - Property 1

The Company is the legal and beneficial owner of a large rural property (Property 1).

Property 1 is comprised of four separate lots - Lots 1, 2, 3 and 4. The total combined land area of these four lots is approximately 200 hectares.

Lots 1, 2 and 3 were acquired by the Company prior to 20 September 1985. The total combined land area of these three lots is approximately 150 hectares.

Lot 4 was purchased by the Company on a date after 20 September 1985. The land area of Lot 4 is approximately 50 hectares.

Based on relative land area, Lot 4 is worth approximately 25% of the estimated total property market value.

From the 19X0s, a large portion of Property 1 has been used by the Company to carry on a primary production business.

Property 1 is of interest to developers for the purpose of redevelopment mainly by way of subdivision and sale of the separate subdivided lots.

The Company has not incurred any expenditure to have Property 1 rezoned or to obtain development approval from council.

The use of the land will not be changing before the time of any sale of Property 1.

The Company does not intend to subdivide the land prior to any sale of Property 1.

Company Asset - Property 2

The Company is the legal and beneficial owner of Property 2 which it acquired after

20 September 1985.

Property 2 is a residential duplex and is leased to unrelated tenants.

Sale of Company shares

The Shareholders are presently negotiating the sale of their respective shares in the Company with a potential purchaser (the Purchaser).

The Purchaser is proposing to purchase the Shareholders' respective shares in the Company by way of call option deed (Call Option Deed).

The details of the Call Option Deed have been provided. If the call option is validly and properly exercised by the Purchaser, then the Shareholders as the vendors and the Purchaser will enter into a Share Sale Agreement.

Before the Shareholders enter into a contract with the Purchaser to sell their respective shares in the Company, Property 2 will be transferred out of the Company for market value consideration, all debtors will be collected, all of the liabilities of the Company will be discharged and any cash left in the Company will be paid out to the Shareholders as a dividend. The only remaining assets of the Company will be Property 1 and any capital improvements made to Property 1.

The Company does not have any trading stock.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 subsection 104-10(4)

Income Tax Assessment Act 1997 subsection 104-10(5)

Income Tax Assessment Act 1997 paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 subsection 104-40(1)

Income Tax Assessment Act 1997 subsection 104-40(5)

Income Tax Assessment Act 1997 section 104-230

Income Tax Assessment Act 1997 subsection 104-230(1)

Income Tax Assessment Act 1997 subsection 104-230(2)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 109-10

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 subsection 126-5(1)

Income Tax Assessment Act 1997 paragraph 126-5(1)(a)

Income Tax Assessment Act 1997 subsection 126-5(6)

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 subsection 149-15(1)

Income Tax Assessment Act 1997 subsection 149-15(2)

Income Tax Assessment Act 1997 subsection 149-15(3)

Income Tax Assessment Act 1997 subsection 149-30(1)

Income Tax Assessment Act 1997 subsection 149-30(2)

Income Tax Assessment Act 1997 subsection 149-30(3)

Income Tax Assessment Act 1997 subsection 149-30(4)

Income Tax Assessment Act 1997 section 295-90

Reasons for decision

All legislative references are to the ITAA 1997.

Question 1

Summary

The sale by the Shareholders of their respective shares in the Company to a purchaser will result in CGT event A1 happening pursuant to subsection 104-10(1).

Detailed reasoning

Subsection 104-10(1) provides that CGT event A1 happens if you dispose of a CGT asset.

Shares in a company are a CGT asset as defined in section 108-5.

Subsection 104-10(2) provides that a disposal happens when there is a change of ownership from you to another entity. The sale of the Shareholders' shares to a purchaser will constitute a disposal.

Therefore, the sale by the Shareholders of their respective shares in the Company to a purchaser will result in CGT event A1 happening.

Subsection 104-10(3) provides that the time of the event is when you enter into the contract for the disposal. As the Shareholders are proposing to sell their shares in the Company by way of a Call Option Deed, the time of CGT event A1 will be when the option is exercised and the Share Sale Agreement is entered into.

Subsection 104-10(4) states that you make a capital gain if the capital proceeds from the disposal are more than the asset's cost base.

Questions 2 and 3

Summary

The Individual Shareholders acquired their respective shares in the Company before 20 September 1985 for the purposes of Part 3-1.

The Fund did not acquire its shares in the Company before 20 September 1985 for the purposes of Part 3-1.

Detailed reasoning

Individual Shareholders

Unless shares in a company are issued or allotted to you under a contract, the shares are acquired at the time they were issued or allotted to you (item 2 of the table in section 109-10).

Half of Individual 1's shares (51), and all of Individual 2's, Individual 3's and Individual 4's shares were allotted before 20 September 1985 and therefore acquired before that date for the purposes of Part 3-1.

Paragraph 126-5(1)(a) provides that there is a roll-over if a CGT event happens involving an individual (the transferor) and his or her spouse (the transferee) because of a court order under the Family Law Act 1975 or under a State law, Territory law or foreign law relating to breakdowns of relationships between spouses.

The roll-over under subsection 126-5(1) applies to the other half of Individual 1's shares which were transferred by Individual 1's former spouse to them on a date after 20 September 1985 as a result of a Family Court order.

Pursuant to subsection 126-5(6), where the transferor acquired the disposed asset before 20 September 1985, the transferee is also taken to have acquired it before that day. As Individual 1's former spouse was allotted (and therefore acquired) the XX shares they transferred to Individual 1 before 20 September 1985, Individual 1 is also taken to have acquired those shares before 20 September 1985.

The conversion of the ordinary shares held by the Individual Shareholders on a date after 20 September 1985 to A class ordinary shares by way of amendment of the Company's Articles of Association did not impact on the acquisition date of those shares.

The Fund

Section 295-90 provides that a CGT asset owned by a trustee or former trustee of a complying superannuation fund before 30 June 1988 is deemed to have been acquired by the trustee on 30 June 1988 for the purposes of the CGT regime in Part 3-1 and 3-3.

Therefore, for the purposes of Part 3-1, the Fund is not considered to have acquired its shares in the Company before 20 September 1985.

Questions 4 and 5

Summary

Any capital gain made by the Individual Shareholders from the sale of their respective shares in the Company will be disregarded under subsection 104-10(5).

Any capital gain made by the Fund from the sale of its shares in the Company will not be disregarded under subsection 104-10(5).

Detailed reasoning

Under paragraph 104-10(5)(a), a capital gain you make from a CGT event A1 is disregarded if you acquired the asset before 20 September 1985.

As the Individual Shareholders each acquired all of their respective shares before 20 September 1985 for the purposes of Part 3-1, any capital gain made by each of them under section 104-10 from the sale of their respective shares in the Company will be disregarded under subsection 104-10(5).

As the Fund is deemed to have acquired its shares on 30 June 1988 pursuant to section 295-90, any capital gain made by the Fund under section 104-10 from the sale of its shares in the Company will not be disregarded under subsection 104-10(5).

Question 6

Summary

The pre-CGT assets of the Company have not stopped being pre-CGT assets as a result of the application of subsection 149-30(1).

Detailed reasoning

Division 149 discusses when an asset stops being a pre-CGT asset. Subsection 149-30(1) provides that an asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985.

Subsection 149-15(1) defines majority underlying interests as:

(a)   more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and

(b)   more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset.

Subsection 149-15(2) defines an underlying interest as a beneficial interest that an ultimate owner has (whether directly or indirectly) in the asset or in any ordinary income that may be derived from the asset.

Subsection 149-15(3) provides that an ultimate owner includes an individual.

Ownership immediately before 20 September 1985 was as follows:

Ownership as at the date of this ruling is as follows:

The only change in ownership between 20 September 1985 and the date of this ruling was the transfer of Individual 1's former spouse's XX shares to Individual 1 on a date after

20 September 1985. In this regard (and in any event), subsections 149-30(3) and 149-30(4) provide that, if an ultimate owner (the new owner) has acquired an interest in an asset because it was transferred to the new owner by way of a marriage breakdown roll-over, the new owner is treated as having held the underlying interest of the former owner for the period the former owner held them.

As ultimate owners who held majority underlying interests in the pre-CGT assets of the Company immediately before 20 September 1985 continue to have more than 50% of the beneficial interests in those assets and any ordinary income that may be derived from those assets, and therefore continue to hold majority underlying interests in the assets, the assets have not stopped being pre-CGT assets pursuant to subsection 149-30(1).

The conversion of the ordinary shares held by the Shareholders on a date after 20 September 1985 to A class ordinary shares and B class ordinary shares by way of amendment of the Company's Articles of Association did not result in a change of beneficial interests in the Company's pre-CGT assets.

Question 8

Summary

The sale by the Individual Shareholders of their respective shares in the Company to a purchaser will not result in CGT event K6 happening pursuant to section 104-230.

Detailed reasoning

Under subsection 104-230(1), CGT event K6 happens if you own shares in a company that were acquired before 20 September 1985 (pre-CGT shares), a CGT event happens in relation to the shares, there is no roll-over for the other CGT event and the requirement in subsection (2) is satisfied. The time of the CGT event K6 is when the other CGT event happens.

Subsection 104-230(2) requires that the market value of property of the company (that is not trading stock) that was acquired on or after 20 September 1985 (post-CGT property) be at least 75% of the net value of the company.

As the Individual Shareholders own pre-CGT shares in the company, CGT event A1 will happen when the shares are sold, and there is no roll-over for the event, the requirement in subsection 104-230(2) must be considered to determine if CGT event K6 will happen.

At the time the Individual Shareholders sell their shares and CGT event A1 happens, the post-CGT property will only consist of Lot 4 of Property 1, and any capital improvements made to Lot 4.

As the market value of Lot 4 and capital improvements made to Lot 4 constitute approximately 25% of the total property market value, less than the 75% required by subsection 104-230(2), CGT event K6 will not happen when the Individual Shareholders sell their respective shares in the Company to a purchaser.