Edited version of private advice

Authorisation Number: 1052171897082

Date of advice:

Ruling

Subject: CGT - cancellation of shares

Question

Did the cancellation of your shares in Company A trigger CGT event C2?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2022

Year ended 30 June 2023

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

You have been an Australian resident for tax purposes since 20XX.

You held ordinary class shares in Company A.

Company A is a foreign company that acted as a holding company for Company B.

You were one of the co-founders and shareholders of Company B.

On or about XX/XX/20XX, the Shareholders of Company A and Company A entered an Acknowledgement of Sale agreement with a foreign corporate group structure called The Group. The agreement provided that the Group would acquire the employees of Company B but not its share capital, in return for $XX consideration to be paid directly to the Shareholders. As part of the agreement, the Shareholders agreed to cancel their shares in Company A within XX years of the completion date and Company A would cease operations.

During the income year ended XX/XX/20XX, you received cash payments of $XX.

During the income year ended XX/XX/20XX, you received cash payments of $XX.

The amounts you received were payments in compensation for cancelling the shares you held in Company A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-25

Income Tax Assessment Act 1997 section 104-25

Reasons for decision

Summary

CGT event C2 occurred on cancellation of your shares in Company A.

Detailed reasoning

Section 104-25(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital gains tax (CGT) event C2 happens if your ownership of an intangible CGT asset ends by the asset being cancelled, surrendered, abandoned or ending in a similar way.

Paragraph 104-25(2)(a) provides that, where a contract exists in relation to the redemption or cancellation of the intangible asset, the time of the CGT event is when you enter into the contract that results in the asset ending. If the capital proceeds you receive from the ending are more than the cost base of the asset, you will make a capital gain.

In this case the contract requires that Company B cease operations and the shares are cancelled. Accordingly, the amount received, or receivable, from the Buyer are capital proceeds in respect of CGT event C2.

Application to your circumstances

You held a number of ordinary class shares in Company A. The agreement you entered into required that Company B cease operations and that all of your shares in Company A be cancelled within a defined period after signing the agreement.

As a result of entering into the agreement with the Group, CGT event C2 occurred. The amounts you received are capital proceeds in respect of CGT event C2.

We accept that the amounts of cash and equity you received after you entered into the agreement were paid to you because you had founding equity in Company A, consisting of a number of ordinary class shares. The Acknowledgement of Sale agreement establishes a connection between the payment of the money and the cancellation of the shares.