Edited version of private advice

Authorisation Number: 1051652828833

Date of advice: 23 April 2020

Ruling

Subject: CGT asset's cost base

Question 1

For the purposes of subsection 110-25(2) of the ITAA 1997, is the first element of the cost base of Category 1 Units $446,501?

Answer

Yes

Question 2

For the purposes of subsection 110-25(2) of the ITAA 1997, is the first element of the cost base of Category 2 Units $200,000?

Answer

Yes

Question 3

For the purposes of subsection 110-25(2) of the ITAA 1997, is the first element of the cost base of Category 3 Units $789,161?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 2020

The scheme commences on:

1 July 19XX

Relevant facts and circumstances

The Investment Trust was established by Deed (Trust Deed).

The Taxpayer and the Trustee of the Family Trust were the initial unit holders in the Investment Trust, each with one Ordinary Unit. The Taxpayer now holds all 1,899,939 units in the Investment Trust.

Between 30 April 19XX and 30 June 19XX, the Family Trust was allotted 1,253,438 units (including the one initial unit) in the Investment Trust.

The taxpayer came to acquire all of the units in the Investment Trust either by allotment or acquisition at various times, being:

(a)   446,501 units (including the one initial unit) between 30 April 19XX and 30 June 19XX (Category 1 Units);

(b)   200,000 units between 1 July 19XX and 30 June 20XX (Category 2 Units); and

(c)   1,253,428 units between 1 July 20XX and 30 June 20XX (Category 3 Units).

The Trust Deed at clause 9 provides:

The Trust Fund as originally constituted shall be divided into Ordinary units of One Dollar each which shall be held by the original Unit Holders whose names and addresses and the number of units to be held are set out in the First Schedule. ...

The First Schedule to the Trust Deed provides that: the initial Unit Holders are the Superannuation Fund and the Family Trust, which each hold '1 Ord' unit in the Investment Trust of 'Dollars ($1-00) Units'.

For the period up to 30 June 19XX the holding of units in the Investment trust was substantiated by forms for the application and allotment of the units.

The Investment Trust's income tax return for the:

·                 19XX income tax year lists proprietor's funds at Item 38 as $1,699,939. Item 51 shows that

·                 20XX income Tax year lists proprietor's funds at label 39 a $1,899,939. Item 51shows:

Item 61 of the Investment Trust's 20XX income year tax return only lists the Superannuation Fund as a beneficiary to have received a distribution.

Part B of the CGT Schedule to the Family Trust's 20XX income year tax return records a capital loss on 'shares and units in unit trusts' of $464,277. This was in relation to the disposal by the Family Trust of its unit holdings in the Unit Trust.

The Taxpayer's financial statements for 20XX and 20XX financial years have assets including Units in the Unit Trust with a value of $1,435,662 - recorded at historical values.

Records in relation to the Taxpayer's acquisition of the units in the Investment Trust are not available for reasons beyond the control of the Taxpayer.

Assumption

All transactions in relation to the acquisition and disposal of the Unit Trust units have been at market value.

Reasons for Decision

These reasons for decision accompany the Notice of private ruling for the Taxpayer.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

For the purposes of subsection 110-25(2) of the ITAA 1997, is the first element of the cost base of Category 1 Units $446,501?

Summary

The first element of the cost base for 446,501 Category 1 Units is a total of $446,501.

Detailed reasoning

Subsection 110-25(2) of the ITAA 1997 provides that the first element of a Capital Gains Tax (CGT) asset is the money paid in respect of acquiring the CGT asset plus the market value of any property given in respect of acquiring it.

Section 121-20 of the ITAA 1997 requires the Taxpayer to keep records of every act, transaction, event or circumstance that might reasonably expected to be relevant to working out whether it has made a capital gain or loss. The records must show sufficient details about the nature of a transaction, the day on which it occurred, the parties to it, and to demonstrate the transaction's relevance to the Taxpayer's capital gain or loss.

If records don't exist, under subsection 121-20(5) of the ITAA 1997 the Taxpayer must reconstruct such records.

The above explanation applies equally to questions two and three.

For the Category 1 Units, the Trust Deed records that the Taxpayer was an initial unit holder of the Unit Trust, holding 1 Ordinary Unit. It also records that the initial sum was $1 per unit.

The Taxpayer has retained applications made by the Taxpayer for further Ordinary Units in the Unit Trust as well as the corresponding resolutions of the trustee of the Unit Trust allotting units for period one, being a total of 446,500 Ordinary Units at $1 per Ordinary Unit.

The cost base of each of the 446,501 Category 1 Units is $1; a total of $446,501.

Question 2

For the purposes of subsection 110-25(2) of the ITAA 1997, is the first element of the cost base of Category 2 Units $200,000?

Summary

The first element of the cost base for the 200,000 Category 2 Units is a total of $200,000.

Detailed reasoning

A comparison of the proprietor's funds at Item 38 of the Unit Trust's income tax return for the 19XX income year and the proprietor's funds at Item 38 of the Unit Trust's income tax return for the 20XX income year shows an increase of $200,000 over that period.

A comparison of Item 51 of the 19XX and 20XX income year income tax returns for the Unit Trust's distributions show that the Taxpayer's share of distributions from the Unit Trust increased from 26.27% (ie 205,647/782,821) in the 19XX income year to 34.03% (ie 19,563/57,491) in the 2000 income year.

Similarly, if it is accepted that each new unit was issued for a $1, the increase in proprietor's funds of $200,000 would mean that 200,000 new units were issued during the 20XX income year. Proportionately, this means that at the beginning of the 20XX income year the taxpayer held 448,501 of 1,699,939 units on issue (being 26.27%) and at the end of the 20XX income year 644,501 of 1,899,939 units (being 34.03%), which is the same as the increase in the percentage of income distributed to the Taxpayer.

This demonstrates that 200,000 Category 2 Units issued during the 20XX income year for an issue price of $1 each. The total issue price of Category 2 Units is $200,000 and first element of cost base is also $200,000.

Question 3

For the purposes of subsection 110-25(2) of the ITAA 1997, is the first element of the cost base of Category 3 Units $789,161?

Summary

The first element of the cost base for Category 3 Units is a total of $789,161.

Detailed reasoning

The Taxpayer has no original records relevant to holding the Category 3 Units.

However, the Trust Deed shows that the Family Trust was an initial unit holder in the Unit Trust with one Ordinary Unit and that the initial sum was $1 per unit.

Further, for the period one, the Application and Allotment forms show that 1,253,437 Ordinary Units were issued to the Family Trust. This resulted in the Family Trust holding a total of 1,253,438 Ordinary Units for a historic total amount of $1,253,438, which was also the total cost base for the holding.

For the reasons explained in relation to Question 2, there was no change in the period 1 July 19XX to 30 June 20XX. The number of units the Family Trust held did not change, as disclosed at Item 51 of the Unit Trust's income tax return for the:

(a)   19XX income year which discloses that the Family Trust was entitled to 73.73% of the income distributed, consistent with holding 1,253,438 of the total 1,699,939 units; and

(b)   20XX income year which discloses that the Family Trust was entitled to 65.97% of income distributed, consistent with holding 1,253,438 of the 1,899,939 units issued.

Equally, the 7.73% reduction in the proportion of total Unit Trust units held by the Family Trust (from 73.73% to 65.97%) correlates with the 7.76% increase in the proportion of total Unit Trust units held by the Taxpayer (from 26.27% to 34.03%).

CGT records obtained by the Taxpayer demonstrate the units held by the Family Trust were acquired by the Taxpayer for $789,161.

Further, the earliest available financial statements of the Taxpayer, being those as at 30 June 20XX, record that in the 20XX and 20XX years the Taxpayer held assets including "Units in the Unit Trust" with a value of $1,435,663.