ATO ID 2003/774: Capital Gains Tax: capital proceeds - shares held in escrow
Date of decision: 24 July 2003
Year of income: Year ended 30 June 2000
Business line: Small Business/Individual Taxpayers

Issue
Are shares received for the sale of a CGT asset included in the capital proceeds for the sale under subsection 116-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997) if the shares are subject to a deed of escrow which imposed a restriction on dealing in the shares?

Decision
Yes. The restrictions on dealing in the shares imposed by the deed of escrow do not prevent them being property received in respect of the sale and therefore capital proceeds under paragraph 116-20(1)(b) of the ITAA 1997. This means the value of the shares at the time of the sale must be taken into account in working out whether the sale resulted in a capital gain or capital loss.

Facts
The taxpayer sold the assets of their business in the 1999-2000 income year. Consideration received by the taxpayer for the sale included shares in the company that purchased the business. On settlement the shares were registered in the taxpayer's name. However, it was a condition of the issue of the shares to the taxpayer that the taxpayer would not sell them during the 12 month period starting at the date of the sale agreement (that is, the escrow period). The taxpayer's holding of the shares during the escrow period was not subject to any other restrictions.

Reasons for decision
Summary: The sale of the taxpayer's business caused CGT event A1 in section 104-10 of the ITAA 1997 to happen. The capital proceeds from a CGT event are the total of the money and the market value of other property received in respect of the event: subsection 116-20(1) of the ITAA 1997. The market value of other property is to be worked out at the time of the event (paragraph 116-20(1)(b)). The restrictions on dealing in the shares imposed by the deed of escrow do not prevent them being property received in respect of the sale, that is, in respect of the CGT event. The taxpayer received the shares, albeit with a restriction attached. While the taxpayer could not sell the shares for 12 months, they were entitled to all the other benefits of a shareholder. Therefore, the market value of the shares at the time of the sale is included in the taxpayer's capital proceeds (paragraph 116-20(1)(b) of the ITAA 1997). The taxpayer cannot use the value of the shares at the end of the escrow period for this purpose.

Legislative references: Income Tax Assessment Act 1997 section 104-10 subsection 116-20(1) paragraph 116-20(1)(b)
Subject references: Capital gains Capital gains tax CGT capital proceeds Property law Shares