Private ruling: capital gains tax roll-over for the exchange of shares in the same company
Published: September 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will you be eligible for capital gains tax (CGT) roll-over relief on the cancellation of the original "A", "B", "C", "D" and "E" class shares and their replacement with the newly issued "A", "B" and "C" class shares and six ordinary shares? | A1: No | Q2: Will you be eligible for CGT roll-over relief on the exchange of your two original "C' class shares for two new ordinary shares? | A2: Yes | Q3: Will you be eligible for CGT roll-over relief on the receipt of a new "B" class share which will pass to you under A's will? | A3: No | Q4: Is the proposed cost base allocation, where the accumulated cost bases of the original "A", "B", "C", "D" and "E" class shares are apportioned equally between the newly issued "A", "B" and "C" class shares and six ordinary shares acceptable? | A4: No | Q5: Will the first element of the cost base for each new ordinary share received in the exchange for your original "C" class shares be valued at the same cost base as your original shares? | A5: Yes | Q6: Will the first element of the cost base for the new "B" class share (which passed to you under A's will) be 1/3rd of the total value of: · the market value of the original "A" class shares on the date of A's death, and · A's cost base of the original "B" class shares on the date of A's death | A6: Yes

Relevant facts and circumstances: Company A was incorporated prior to 20 September 1985 (pre-CGT). The capital of the company is divided into; · 2 "A" class shares · 2 "B" class shares · 2 "C" class shares · 2 "D" class shares · 2 "E" class shares · 2 "F" class shares · X ordinary shares On incorporation the following shares were issued: Name Date of issue Quantity Type A Pre-CGT 2 "A" class B Pre-CGT 2 "B" class C Pre-CGT 2 "C" class On dd/mm/yyyy, the following additional shares were issued: Name Date of issue Quantity Type D Post-CGT 2 "D" class E Post-CGT 2 "E" class No "F" class shares were ever issued. The rights attaching to each of the "A" to "E" class shares were the same and gave each shareholder; · the right to vote · the right to dividends · the right to a distribution of capital on winding up The articles of association of the company allow for the issue of ordinary class shares. The ordinary class shares have a right to a distribution of capital on winding up only. The articles of association identify A as the Governing Director of the company. In 200X, B died and their "B" class shares transferred to A, in accordance with the provision of their will. A adopted the market value of the shares on the date of B's death as A's cost base for the "B" class shares. In 20YY, A died and so activated the provision of Clause 3(D)(viii) of the articles of association which stipulates that on the death of A, all of the A, B, C, D, E and F class shares will be converted to ordinary shares and the rights applicable to the A, B, C, D, E and F class shares shall end. The provisions of A's will state that their estate shall be divided equally between C, D and E. As the "A" to "E" class shares will not divide equally between the beneficiaries, the company intends to cancel the ordinary shares and issue the following: Name Quantity Type D 1 "A" class D 2 Ordinary C 1 "B" class C 2 Ordinary E 1 "C" class E 2 Ordinary The new "A", "B" and "C" class shares will have equal rights to: · vote · dividends · distribution of capital on winding up The company intends that the rights attaching to the ordinary shares will be expanded from the present right to participate in the distribution on winding up to also include; · the right to vote · the right to dividends The economic ownership of the company before and after the cancellation and issue of new shares will be that each beneficiary had and still holds a 1/3 interest in the company. The cost base of the original "A" class shares will be the market value at the date of A's death. The cost base of the original "B" class shares will be the market value at the date of B's death. The cost base of the original "C" class shares will be the cost base at the date of issue. The cost base of the original "D" class shares will be the cost base at the date of issue. The cost base of the original "E" class shares will be the cost base at the date of issue. Proposed cost base allocation Your proposed cost base allocation of the newly issued "A", "B" and "C" class shares and Z ordinary shares is as follows; As there will be Y) new shares issued, it is intended that the cost base applicable to each share will be Y of the value of the original "A" to "E" class shares.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Section 124-240 | Income Tax Assessment Act 1997 Section 124-15 | Income Tax Assessment Act 1997 Section 128-15 | Income Tax Assessment Act 1997 Section 128-20

Reasons for decision: Detailed Reasoning - Cancellation of shares: The cancellation of shares constitutes CGT event C2. Subsection 104-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides 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. Subsection 104-25(2) of the ITAA 1997 explains that the time of the event is when you enter into the contract that results in the asset ending, or, if there is no contract, when the assert ends. You make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3) of the ITAA 1997). Subsection 104-25(5) of the ITAA 1997 provides that a capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985. | Detailed Reasoning - Exchange of shares in the same company: Roll-over relief is available under section 124-240 of the ITAA 1997, at the option of the taxpayer, where there is a reorganisation of share capital within a company and, as part of the reorganisation, a shareholder surrenders all his/her shares of a particular class to the company in exchange solely for other shares of the same company. The roll-over is not permitted where any other form of consideration, such as cash, is received in relation to the exchange of shares. Likewise, the relief is not available where shares in another company are offered in substitution. Subsection 124-15(2) of the ITAA 1997 provides that where the roll-over is chosen, any capital gain or loss made from the cancellation or redemption of shares is disregarded. In more detail, the roll-over is available where a company redeems or cancels shares held by the taxpayer, and issues new shares in substitution for the redeemed or cancelled shares, provided the conditions of section 124-240 of the ITAA 1997 are met. Those conditions are as follows: · the company redeems or cancels all of the shares in a particular class of shares held by the taxpayer · the company issues new shares to the taxpayer in substitution for the shares that have been redeemed or cancelled · the taxpayer receives nothing else from the company in the course of the redemption/cancellation and reissue · the market value of the new shares issued to the taxpayer, immediately after their issue, is at least equal to the market value of the original shares immediately before their redemption or cancellation · the paid-up share capital of the company does not change as a result of the redemption/cancellation and reissue of the shares, and · either: § the taxpayer was an Australian resident at the time of the redemption or cancellation, or § if the taxpayer was not an Australian resident at that time, the redeemed or cancelled shares were "taxable Australian property" just before that time and the new shares are taxable Australian property when they are issued. If you acquired all the original assets before 20 September 1985, you are taken to have acquired each new asset before that day (subsection 124-15(4) of the ITAA 1997). That is, each new share inherits the pre-CGT status of the original shares. Subsection 124-15(3) of the ITAA 1997 explains that if you acquired all the original assets on or after 20 September 1985, the first element of each new asset's cost base is: The total of the cost bases of all the original assets (worked out when your ownership of them ended) Number of new assets Where the 'original assets' are the shares that are redeemed or cancelled and the 'new assets' are the shares issued in substitution. Subsection 124-15(5) of the ITAA 1997 provides that if you acquired some of the original assets before 20 September 1985, you are taken to have acquired a number of new assets before that day. It is the maximum possible that does not exceed: The number of new assets × The number of original assets you *acquired before 20 September 1985 The total number of original assets If the result is less than one, none of the new assets are taken to have been acquired before 20 September 1985. | Detailed Reasoning - Shares acquired from a deceased estate: Subsection 128-15(1) and 128-15(2) of the ITAA 1997 explain that if a CGT asset you owned just before dying devolves to your legal representative or passes to a beneficiary in your estate, the legal personal representative, or beneficiary, is taken to have acquired the asset on the day you died. Subsection 128-20(1) of the ITAA 1997 states that a CGT asset passes to a beneficiary in your estate if the beneficiary becomes the owner of the asset: a) under your will, or that will as varied by a court order; or b) by operation of an intestacy law, or such a law as varied by a court order; or c) because it is appropriated to the beneficiary by your legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in your estate; or d) under a deed of arrangement if: i. the beneficiary entered into the deed to settle a claim to participate in the distribution of your estate; and ii. any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of your estate Subsection 128-15(4) of the ITAA 1997 provides if the deceased person acquired their asset before 20 September 1985, the first element of your cost base and reduced cost base (that is, the amount taken to have been paid for the asset) is the market value of the asset on the day the person died. If a deceased person acquired their asset on or after 20 September 1985, the first element of your cost base and reduced cost base is taken to be the deceased person's cost base and reduced cost base of the asset on the day the person died | Detailed Reasoning - Exchange of "C" class shares for ordinary shares: You acquired "C" class shares Company A prior to 20 September 1985, therefore your shares are pre-CGT shares. On the death of A, your "C" class shares were cancelled and you were issued with new ordinary shares, with the same cost base as the original shares. Company A satisfied the conditions for roll-over relief for the exchange of shares in the same company as: · all the "C" class shares were cancelled · you received new ordinary shares in substitution for your "C" class shares · you did not receive anything extra in the course of the cancellation and reissue · the market value of the new shares received is at least equal to the market value of the original shares · the paid-up share capital of the company does not change as a result of the cancellation and reissue of the shares, and · you are an Australian resident As Company A satisfied the conditions for roll-over relief for the exchange of shares in the same company, any capital gain you made on the cancellation of your shares will be disregarded. As your original "C" class shares were pre-CGT, the two new ordinary shares you received in substitution will inherit the pre-CGT status of the original shares. Accordingly, any capital gain made by you on the subsequent disposal of the new ordinary shares will be disregarded. | Detailed Reasoning - Shares acquired from a deceased estate: It is not necessary to consider whether CGT roll-over relief is applicable to the "A" and "B" class shares, held by A's deceased estate being cancelled and re-issued as one "A" class, one "B" class and one "C" class share and distributed to you and your siblings. This is because these new shares will pass to you under A's will and therefore the relief would apply to A's deceased estate and not to you as a beneficiary of the deceased's will. On the date of A's death, they held two "A" class shares which they acquired prior to 20 September 1985 (pre-CGT) and two "B" class shares they acquired after 20 September 1985 (post-CGT) on the death of B. The first element of the cost base of the original "A" class shares for A's deceased estate is the market value of the shares on the date of A's death, as they had acquired the shares pre-CGT. The first element of the cost base of the original "B" class shares for A's deceased estate is the deceased's cost base on the date of their death, as A acquired B's "B" class shares post-CGT. On the death of A, the original shares they held were cancelled and three new shares were issued as substitutes to their estate. That being, one "A" class, one "B" class and one "C" class share. Under A's will, you are to receive one new "B" class share. The first element of your cost base for the new share will be calculated by adding up the cost bases of the original "A" and "B" class shares and dividing by the new shares issued. As you have acquired the new "B" class share post-CGT, you will be liable for any capital gain or loss you make on the subsequent disposal of the share.