Edited version of private advice

Authorisation Number: 1052168739004

Date of advice: 13 September 2023

Ruling

Subject: CGT and discount capital gain

Question 1

Did CGT event C2 under section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to the Taxpayer when it entered the Deed of Consent?

Answer

Yes.

Question 2

Is the capital gain arising on receipt of the Consent Fee a discount capital gain under Division 115 of the ITAA 1997?

This ruling applies for the following period:

Income year ended 30 June 2022

The scheme commenced on:

23 December 2020

Relevant facts and circumstances

The taxpayer is the trustee of a Trust. It is the owner of specific land (the Land).

The Trust is a fixed unit trust.

Since its establishment, the Land is the only asset of substance held in the Trust.

Background to the use of the Land

The Land was acquired by the taxpayer in the 19XXs. It was acquired to be used in a chicken farming business conducted by a related entity.

Some time after, the Trust used the land to conduct a farming business (buying, raising and selling cattle).

It ceased carrying on the farming business as it became unprofitable and because it became increasingly difficult to continue the farming business.

The Land was also no longer needed, nor was it viable, for the bird agribusiness.

Accordingly, Trust decided to sell the Land (in its current state). At no stage did it contemplate developing or subdividing the Land, save for its use in the related primary production/agribusinesses outlined above.

Sale of Land

An entity interested in acquiring the Land (the Buyer) approached the Trust to buy the Land.

By a Put and Call Option Deed (Option Deed), the taxpayer granted the Buyer an option to purchase the Land in return for the call option fee. The call option fee was paid in three equal instalments.

The Land is currently vacant land and has not been used to conduct any business.

Transaction documents

By the Option Deed, the Buyer granted to the taxpayer an option for the taxpayer to sell the Land to the Buyer.

The call option fee was creditable against the purchase price if the call/put option was exercised.

The Option Deed was conditional on the Land being rezoned with a planning scheme amendment.

A Deed of Consent to Transfer of Shares (Deed of Consent) was later entered into by the taxpayer, the Buyer and an entity that wished to acquire all the shares in the Buyer (Share Purchaser).

The Deed of Consent was entered into because a clause of the Option Deed (clause X) provides that the Buyer could not effect a change in the control of the corporation as existed at the date of the Deed.

Under another clause of the Option Deed (clause Y), a breach of a term of the Deed by the Buyer will, if unremedied, allow the taxpayer to terminate the deed; and enforce the terms of the Deed and seek to recover any it may have incurred in connection with the breach.

The Deed of Consent provides that, despite clause X of the Option Deed, the taxpayer consents to a change of control of the Buyer and to the transfer of all the shares in it to the Share Purchaser on payment of a Consent Fee (Consent Fee) by the Buyer.

The Consent Fee was paid pursuant to the Deed of Consent.

Assumptions

The cost base of the CGT asset comprising the taxpayer's rights under clause 13 of the Option Deed is zero.

Relevant legislative provisions

Section 104-25 of the Income Tax Assessment Act 1997

Section 102-25 of the Income Tax Assessment Act 1997

Section 115-40 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Did CGT event C2 under section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to the taxpayer when it entered the Deed of Consent?

Summary

CGT event C2 happened to the taxpayer when it entered the Deed of Consent.

Detailed reasoning

CGT event C2 is provided under section 104-25 of the ITAA 1997.

104-25(1)

CGT event C2 happens if your ownership of an intangible *CGT asset ends by the asset:

(a) being redeemed or cancelled; or

(b) being released, discharged or satisfied; or

(c) expiring; or

(d) being abandoned, surrendered or forfeited; or

(e) if the asset is an option - being exercised; or

(f) if the asset is a *convertible interest - being converted.

A CGT asset is defined under section 108-5 of the ITAA 1997

108-5(1)

A CGT asset is:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

108-5(2)

To avoid doubt, these are CGT assets:

(a) part of, or an interest in, an asset referred to in subsection (1);

(b) goodwill or an interest in it;

(c) an interest in an asset of a partnership;

(d) an interest in a partnership that is not covered by paragraph (c).

Note 1:

Examples of CGT assets are:

•        land and buildings;

•        shares in a company and units in a unit trust;

•        options;

•        debts owed to you;

Contractual rights a vendor acquires under a contract of sale is a CGT asset for the purposes of the CGT provisions under subsection 108-5(1). The explanatory memorandum to the Taxation Laws Amendment Bill (No 4) 1992 recognises that rights under a contract are an example of an incorporeal asset.

A part of (or an interest in) a legal or equitable right is also a CGT asset in its own right: subsection 108-5(2).

In this case:

•         The rights that the taxpayer has under the Option Deed are a CGT asset. Each such right is also a CGT asset.

•         Under clause Y of the Option Deed, the taxpayer has a right, arising from an unremedied breach of a term of the Deed by the Buyer, to termination, enforcement and recovery upon the occurrence of the breach of any term of the Deed, which may arise in different ways and under a multitude of various circumstances.

•         The particular circumstance in which the breach has occurred in this case is one that involved the purchase by the Share Purchaser of the shares in the Buyer. On the occurrence of this event, the taxpayer would have been able to exercise its rights to termination, enforcement and recovery under clause Y.

•         However, upon its entry into the Deed of Consent, the Taxpayer effectively 'abandoned, surrendered or forfeited' its clause Y rights in respect of this event.

•         As such we consider that CGT event C2 applies; namely that under paragraph 104-25(1)(d), The taxpayer's ownership of the clause 13 rights in respect of and exercisable upon the share sale ended by those rights being 'abandoned, surrendered or forfeited'.

•         As CGT event C2 happens to this case, CGT event D1 has no application: subsection 102-25(1) and subsection 102-25(3).

Question 2

Is the capital gain arising on receipt of the Consent Fee a discount capital gain under Division 115 of the ITAA 1997?

Summary

The capital gain arising on receipt of the Consent Fee is a discount capital gain.

Detailed reasoning

Section 115-5 of the ITAA 1997 provides as follows:

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

In applying the provisions to the facts in this case:

•         Section 115-10 states that a discount capital gain can be made by a trust. In this case, the gain is made by the Trust of which the taxpayer is trustee.

•         Section 115-15 states that the capital gain must result from a CGT event happening after 11:45am on 21 September 1999. As the CGT event happened at the time of entry into the Deed of Consent on 2 June 2022 (as per paragraph 104-25(2)(a)), the condition is satisfied in this case.

•         Section 115-20 requires the capital gain to be worked out using a cost base calculated without reference to indexation. It is assumed on the facts of this case that the cost base of the right is zero.

•         Section 115-25 requires that the capital gain 'result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event'.

The CGT asset in this case, being the specific clause 13 rights mentioned above, arose when the Option Deed was entered into on (date), because it was by virtue of its entry as a party to the Option Deed that the taxpayer acquired its rights under clause Y.

As the CGT event happened on (date), the condition in section 115-25 is satisfied.