Edited version of private advice

Authorisation Number: 1051960184073

Date of advice: 14 March 2022

Ruling

Subject: CGT - deceased estate - acquisition of inherited assets

Question 1: Is the cost base and reduced cost base of your ownership interest in the shares in the Company that you inherited from your spouse based on their market value on the date he passed away?

Answer: Yes.

Question 2: Is your reduced cost base reduced by distributions paid by the Company prior the appointment of the liquidator?

Answer: No.

Question 3: Is your reduced cost base reduced by distributions paid by the liquidator of the Company?

Answer: No.

Question 4: Can you make the choice to make a capital loss for all of your shares in the 20XX-XX income year under section 104-145 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No. You can only make the choice when CGT event G3 occurs in relation to the post-capital gains tax shares you inherited.

This ruling applies for the following period:

Income year ending 30 June 20XX.

The scheme commences on:

1 July 20XX.

Relevant facts and circumstances

The Company was incorporated prior to 20 September 1985.

On the incorporation date you and your spouse (Person A) were each issued equal numbers of Class W and Class X shares and an equal share in a Class X share in the Company.

Your children were issued shares in the Company prior to 20 September 1985 as follows:

•         Person B - Class X and Class Y shares; and

•         Person C - Class X and Class Z shares.

All classes of shares in the Company have the same voting rights, and entitlement to income and capital. However, there were no restrictions on the Company paying a dividend to one or more share classes to the exclusion any other class/es.

Person A passed away after 20 September 1985, and in accordance with their will their shareholding in the Company was transferred to you which resulted in you holding several Class W shares and several Class X shares.

After many years the members of the Company appointed a liquidator (the Liquidator) to facilitate the orderly winding up of the Company with their role to collect the Company's assets, pay debts, tax and accounting fees and make a final in specie distribution to the shareholders.

Prior to the Liquidator being appointed, the Company made the following dividend distributions:

•         During the preceding income year before the Liquidator was appointed - Distributions were made to Persons B and C in relation to their Class Y and Class Z shares respectively; and

•         During the same income year that the Liquidator was appointed, but prior to their appointment - Distributions were made to Persons B and C in relation to their Class Y and Class Z shares respectively.

The Company has only issued dividends in relation to the Class Y and Class Z shares while the current accountant's services have been used, and you do not have any records of earlier dividends.

Dividends were not paid to you during the income year in which the Liquidator was appointed for the purposes of your estate planning objectives, and your lack of need for the funds.

During the income year in which the Liquidator was appointed the Company disposed of its investments.

Following the realisation of the investments, the Company made a final in specie distribution out of the pre-CGT capital reserve as follows:

•         You received an amount (the Distribution); and

•         Persons B and C received an equal amount.

The Liquidator issued a letter (the Loss Declaration) in which it was advised that there was no belief that there was any likelihood of any further distribution to the shareholders and for the purposes of section 104-145 of the Income Tax Assessment Act 1997 the Company's shares were declared to be worthless.

The Company was deregistered during the following income year after the Liquidator was appointed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 104-135

Income Tax Assessment Act 1997 section 104-145

Income Tax Assessment Act 1997 section 110-55

Reasons for decision

Question 1: Is the cost base and reduced cost base of your ownership interest in the shares in the Company that you inherited from your husband based on their market value on the date he passed away

Cost base and reduced cost base of asset acquired from deceased estate

When a taxpayer's legal personal representative or a beneficiary of the taxpayer's estate acquires an asset as a result of the taxpayer's death, the cost base and reduced cost base of the asset in the hands of the legal personal representative or beneficiary are modified under subsection 128-15(4) of the ITAA 1997.

Where the asset is a pre-CGT asset in the hands of the deceased taxpayer, the first element of the cost base (and reduced cost base) to the taxpayer's legal personal representative or beneficiary at the time of acquisition by them is the market value of the asset on the day of the taxpayer's death under item 4 in the table in subsection 128-15(4) of the ITAA 1997.

Application to your situation

Person A acquired their Class W and Class X shares prior to 20 September 1985 and passed away after 20 September 1985.

For CGT purposes you are viewed as having acquired your ownership interests in Person A's shares for the market value of each class of shares on the date they passed away.

Question 2: Is your reduced cost base reduced by distributions paid by the Company prior the appointment of the liquidator?

Question 3: Is your reduced cost base reduced by distributions paid by the liquidator of the Company?

Reduced cost base

Section 110-55 of the ITAA 1997 contains the rules for working out the reduced cost base, amounts that are included in the five elements of the reduced cost base and amounts that are excluded from the reduced cost base.

Adjustments to the cost base and reduced cost base of shares may occur when CGT event G1 occurs in relation to capital payments for shares under section 104-135 of the ITAA 1997.

CGT event G1 occurs if:

a)    company makes a payment to a shareholder in respect of their shares (except for CGT event A1 or C2 happening); and

b)    some or all of the payment is not a dividend, or an amount that is taken to be an dividend under section 47 of the ITAA36; and

c)    the payment is not included in the taxpayer's assessable income.

Any capital gain is disregarded under section 104-135(5) and section 104-135(6) of the ITAA 1997 if:

•         the shares were acquired pre-CGT; or

•         the payment is made by a liquidator provided the Company will cease to exist within 18 months after the payment is made by the liquidator to the shareholders.

Application to your situation

You did not receive any distributions from the Company prior to the Liquidator being appointed. You received the Distribution after the Liquidator had been appointed.

Distributions were made to Persons B and C during the income year the Liquidator was appointed, but prior to their appointment, with a further distribution being made to them after the Liquidator had been appointed.

As you had not received any distributions before the appointment of the Liquidator, your cost base and reduced cost base will not be reduced by section 104-135 of the ITAA 1997 due to dividends being paid to Scott and Gillian.

CGT event G1 will also not apply to the $X distribution made to you on XX Month 20XX because the Company was deregistered within eighteen months of the distribution being made. Therefore, your cost base and reduced cost base will not be reduced because of this CGT event occurring.

Question 4: Can you make the choice to make a capital loss for all of your shares in the 20XX-XX income year under section 104-145 of the ITAA 1997?

Liquidator declares shares worthless

A capital loss may be realised where the liquidator of a company declares shares to be worthless and CGT event G3 occurs under section 104-145 of the ITAA 1997.

The declaration must be in writing and must state the liquidator believes that all shareholders, or shareholders of a certain class, have no likelihood of receiving any further distribution in the course of the winding up.

The time of the CGT event is when the liquidator makes the declaration.

A shareholder can choose to make a capital loss equal to the reduced cost base of their shares (as at the time of the declaration). If the choice is made the cost base and reduced cost base of the shares are reduced to nil.

While a CGT event will still occur in relation to pre-CGT assets, this choice only applies to post-CGT assets and cannot be made in relation to pre-CGT assets under paragraph 104-145(6)(a) of the ITAA 1997.

Most CGT event provisions outline what occurs in relation to pre-cgt assets and to any capital gain or capital losses made when the CGT event occurs, which is generally that they are disregarded.

Application to your situation

The Liquidator issued a Loss Declaration which outlined that there was no belief that there was any likelihood of any further distribution to the shareholders and for the purposes of section 104-145 of the Income Tax Assessment Act 1997 the Company's shares were declared to be worthless.

You can choose to make a capital loss in relation to your post-CGT shares, being the shares you inherited from Person A, in the income year in which the Loss Declaration was issued.

Any capital gain or capital loss arising in relation to your pre-CGT shares is disregarded.

Note: CGT event C2 occurred when the Company was deregistered during the following income year after the appointment of the Liquidator. The capital proceeds for the inherited shares was the Distribution you received that didn't reduce the cost base due to it being paid within 18 months of the liquidation being completed. The cost base of these shares will be $nil if the choice is made to claim the capital loss in the income year when CGT event G3 occurred.