Edited version of private advice

Authorisation Number: 1052226157093

Date of advice: 22 March 2024

Ruling

Subject: CGT - conversion of precious metal

Question 1

Will the conversion of unallocated precious metal held by the XXXX Mint, into allocated bars result in a Capital Gains Tax (CGT) event for the company under Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

If the answer to question 1 is yes, are any CGT exemptions or rollovers available to defer any gains until the allocated bars are eventually sold?

Answer

Not applicable as there is no CGT event.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer purchased parcels of unallocated precious metal under an Agreement with the intention that the parcels be held as a long-term investment between 20xx and 20xx income years.

A copy of the Agreement was provided.

The Agreement stipulates the contractual rights and obligation that will govern the relationship between the parties in respect of any purchases or sale of precious metals.

The Taxpayer has purchased precious metals on an unallocated basis by entering the Agreement.

The Taxpayer has converted parcels of unallocated precious metals into allocated precious metal.

Under the terms of the Agreement the title of the Precious Metal remains with the client at all times.

Allocated precious metal is stored and identified by specific XX references or specific descriptions of the metal.

Unallocated metal is owned in common with other clients as an undivided interest in the pool of precious metal maintained in unsegregated storage on a fungible basis.

Unallocated metal may be converted to allocated, the converse is designated as a sale under the Agreement.

The conversion from unallocated to allocated precious metal incurs fabrication fees and storage fees.

In 20XX income year the Taxpayer converted the majority of the parcels of unallocated XX unallocated xx into allocated XX and allocated XX XX of varying sizes.

The Taxpayer incurred fabrication fees.

The conversion was undertaken to allow the Taxpayer the option to take physical possession of the allocated XX for economic security.

The allocated XX continue to be held under the terms of the Agreement

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104

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 section 104-25

Income Tax Assessment Act 1997 subsection 104-25(1)

Income Tax Assessment Act 1997 section 104-155

Income Tax Assessment Act 1997 subsection 104-155(1)

Income Tax Assessment Act 1997 subsection 104-155(3)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 108-5(2)

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 subsection 112-25(2)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Issue

Question 1

Summary

As you retain title to the precious metal (the CGT asset) at all times, the conversion from holding the precious metal as unallocated to allocated with no change in legal or beneficial ownership, does not trigger a CGT event. As there is no CGT event, a capital gain or loss will not arise in relation to the conversion of the precious metal.

Detailed reasoning

Your assessable income includes your net capital gain for an income year. Your net capital gain is the total of your capital gains for the year, reduced by your capital losses.

For CGT to apply there needs to be a CGT event that happens to a CGT asset.

Section 102-20 states that a capital gain or capital loss is made only if a CGT event happens.

Section 108-5 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. Note 1 to subsection 108-5(2) gives examples of CGT assets.

CGT event

Division 104 sets out the CGT events that can happen to a CGT asset.

Of relevance is CGT event A1 which occurs on the disposal of an asset. Under section 104-10, a CGT asset is disposed of when there is a change of ownership, whether because of some act or event or by operation of law.

Subsection 104-10(2) provides that a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

Another possible CGT event C2 happens if a taxpayer's ownership of an intangible CGT asset ends in certain ways, including because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited (subsection 104-25(1)).

As a consequence of a CGT event you make a capital gain if the capital proceeds from the disposal are more than the assets cost base or conversely you make a capital loss if the capital proceeds are less than the assets reduced cost base.

Changed assets

Section 112-25 sets out the rules when an asset is split, changed, or merged. It provides that where a CGT asset (the original asset) changes in whole or in part into an asset (also the new asset) of a different nature and the same entity is the beneficial owner of the original asset and each new asset, the splitting or change is not a CGT event (subsection 112-25(2)).

Application to your circumstances

CGT Asset

The Taxpayer originally purchased precious metals on an unallocated basis when they entered into the Agreement.

The terms governing the storage of precious metal in the Agreement stipulate that the title to the precious metal remains with the client at all times.

Consistent with the Agreement, the Taxpayer purchases physical precious metals that is available in various forms.

At the time the Taxpayer entered the Agreement they acquired both the title to and the physical precious metal, albeit in an unallocated form.

It follows that the precious metal is the CGT asset for the purposes of the section 108-5.

Conversion

In 20XX income year the Taxpayer converted the majority of their parcels of precious metals from unallocated into allocated precious metal of varying sizes, so they could take physical possession of the allocated XX for economic security.

The Taxpayer incurred fabrication fees on the conversion of their precious metal from being stored as unallocated to allocated.

The owner of unallocated precious metal has ownership of an amount of an unspecified and unidentified precious metal, whereas with allocated precious metals the owners title is attached to the specific XX.

The fabrication of the precious metal from unallocated to allocated provides the Taxpayer with greater economic flexibility allowing them to take physical possession of their precious metal in allocated XX, but the amount of underlying precious metal remains unchanged and title to precious metal remains with the Taxpayer at all times.

As the CGT asset is the physical precious metal, the conversion from holding the precious metal as unallocated to allocated with no change in ownership does not trigger a CGT event.

CGT event A1 will not apply as title to the CGT asset will continue to be held by the same Taxpayer, before and after the conversion of the precious metal from unallocated to allocated. As there is no change of legal or beneficial ownership and therefore no disposal of the CGT asset, there will be no CGT event under section 104-10.

Similarly, CGT event C2 cannot be triggered as the CGT asset is the physical precious metal. Therefore, there is no right that will be cancelled or redeemed as a result of the conversion of the precious metal from unallocated to allocated, nor will the Taxpayers' CGT asset end in any other way contemplated by subsection 104-25(1).

Although the CGT asset undergoes change as part of the fabrication process, consistent with the approach in subsection 112-25(2), a CGT asset that changes in whole or in part into an asset of a different nature and the same entity is the beneficial owner of the original asset and each new asset, the splitting or change is not a CGT event (subsection 112-25(2)).

As there is no CGT event, a capital gain or loss will not arise in relation to the conversion of the precious metal.