ATO ID 2009/1: Capital Gains Tax: first element of cost base of shares - company formation expenses
Date of decision: 18 July 2008
Year of income: Year ended 30 June 2009
Business line: Private Groups and High Wealth Individuals

Issue
Is an appropriate proportion of the costs incurred by the proposed initial shareholders (the shareholders) of a company in formation in respect of establishing the company, included in the first element of the cost base of each of the shareholder's initial shares under paragraph 110-25(2)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No, an appropriate portion of the costs of establishing the company are not included in the first element of the cost base of each of the initial shareholder's shares.

Facts
The shareholders of a company in formation paid another entity an amount to assist in the company registration process including preparing the registration application and consents. The shareholders paid a separate amount to the company once it was formed for each share they agreed to take up.

Reasons for decision
Summary: Paragraph 110-25(2)(a) of the ITAA 1997 includes in the first element of the cost base of a CGT asset money paid, or required to be paid, in respect of acquiring it. In the present circumstances the expenditure was for the services provided to assist in establishing the company; it was not in respect of the acquisition of the shareholder's initial shares. Therefore, no part of the payment is included in the first element of the cost base of any of the shares acquired by the initial shareholders. The first element of the cost base of each share owned by an initial shareholder is the separate amount paid to the company for each share.

Legislative references: Income Tax Assessment Act 1997 paragraph 110-25(2)(a)
Subject references: Capital gains tax CGT cost base Share capital