Private ruling: Capital gains tax - deceased estate - disposal of shares
Published: December 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the cost base of the shares you acquired from your spouse's estate the market value on their date of death? | A1: No. | Q2: Is the cost base of the shares you acquired through a dividend reinvestment plan (DRP) be the amount of the dividend used to purchase the shares? | A2: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Your late spouse acquired shares in company A when they demutualised more than 15 years ago. Your late spouse did not participate in company A's DRP. The embedded value of the company A shares was a specified amount. Approximately X years ago company B took over company A and shareholders received a specified number of company B shares for a specified number of company A shares. Your late spouse chose scrip for scrip rollover to apply. Your late spouse died more than Y years ago. At the time your late spouse died they owned a number of company B shares. You have provided permission for the Australian Taxation Office (ATO) to use information available to us in relation to company A. These shares were transferred into your name approximately Z years ago. You tried unsuccessfully to obtain documentation from a number of organisations as to when your late spouse acquired their shares. You and your late spouse participated in the company B's DRP. Last year you held a number of company B shares. Last year you disposed of your home. Last year you disposed of your company B shares to pay to stamp duty on the disposal of your home. You have provided documentation to support your application and this documentation is to be read with and forms part of your application for the purpose of this ruling.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 121AA | Income Tax Assessment Act 1936 Section 121AD | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 102-22 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 109-5 | Income Tax Assessment Act 1997 Section 110-52 | Income Tax Assessment Act 1997 Section 116-20 | Income Tax Assessment Act 1997 Section 124-780 | Income Tax Assessment Act 1997 Section 124-785

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. The most common capital gains tax (CGT) event, CGT event A1, occurs if you dispose of a CGT asset, such as shares. The time of the event is when you enter into the contract for the disposal or if there is no contract - when a change of ownership occurs. CGT event A1 occurred when you disposed of your company B shares. | Detailed Reasoning - Deceased estate: There is a special rule that allows any capital gain or capital loss made on a CGT asset acquired after 20 September 1985, to be disregarded if, when a person dies, the asset they owned passes: § to legal personal representative or to a beneficiary, or § from their legal personal representative to a beneficiary. | Detailed Reasoning - Date of Acquisition: A CGT asset which passes to a beneficiary from a deceased estate is taken to have been acquired by the beneficiary on the day the deceased died. In your case, you are taken to have acquired your late spouse's company shares on their date of death. | Detailed Reasoning - Cost base of the shares: If the deceased person acquired their assets after 20 September 1985, the first element of the 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. Therefore, you are taken to have acquired your late spouse's company B shares for their cost base. | Detailed Reasoning - Company A shares: Upon demutualisation of company A, members received shares in exchange for their membership rights. In general, you acquire a CGT asset when you become its owner. Therefore, your late spouse is taken to have acquired their shares on a specified date, when the demutualisation of company A occurred. | Detailed Reasoning - Cost base of company A shares: Shares that are received through a demutualisation, although they are allocated free of charge to the member often have a deemed cost base. This is considered to be the value of the shares at the time that they are allocated to the member. In order to calculate any capital gain or capital loss from these shares it is necessary to know the cost base (acquisition cost) of the company A shares when the demutualisation occurred. Generally, if an insurance company is demutualised and its policyholders or members dispose of their listed shares in the company, for tax purposes the acquisitions costs of the shares is based on the lessor of: · the embedded value or net tangible asset value of the company, or · the value of the company based on the total first trading day price of all shares in the company. Company A has given the ATO a specified figure as the embedded value per share. We have calculated that a specified number of shares were issued to your late spouse from company A through the demutualisation and they had a cost base of: · number of shares X embedded value = $X. | Detailed Reasoning - Scrip for scrip rollover - Colonial Mutual shares for CBA shares: If the conditions for scrip for scrip rollover are met any capital gain on exchanging shares in one company for shares in another company, usually as part of a takeover or merger is deferred until the new shares are disposed of. In this instance, the conditions of scrip for scrip rollover were met which means that when your late spouse's company A shares were exchanged for company B shares, and they elected to use the scrip for scrip rollover provisions, the capital gain would not need to be calculated until the disposal of the shares. | Detailed Reasoning - Cost base of shares acquired due to takeover: Shareholders need to use the cost base of their company A to work out the cost base of their company B shares if they chose scrip for scrip when their company A shares were exchanged for company B shares. One of the conditions of the merger was that for every specified number of company A shares held shareholders were entitled to a specified number of company B shares. In your late spouse's case, they received a specified number of company B shares. Your late spouse's cost base is still the cost base of their company A. The cost base of each company B share is a specified amount (the cost base of the shares ÷ the number of company B shares). | Detailed Reasoning - DRP: Under a DRP you can choose to use the dividend to acquire additional shares in the company instead of receiving a cash payment. These shares are usually issued at a discount on the current market price of the shares in the company. For CGT purposes, if you participate in a DRP you are treated as if you had received a cash dividend and then used the cash to buy additional shares. Under the DRP, each share that is acquired after 20 September 1985 is subject to CGT. The cost base of the new shares includes the price you paid to acquire them, which would be the amount of the dividend used to purchase the shares plus any second element costs. Your late spouse and their estate received shares due to their participation in a DRP. Therefore, when you disposed of your company B shares you need to calculate any capital gain or capital loss on each separate parcel of shares. | Detailed Reasoning - Working out your capital gain or capital loss: To work out the capital gain or capital loss made on the disposal of an asset, it is necessary to compare two amounts and determine the difference between them. These amounts are the capital proceeds and cost base. Where the capital proceeds are greater than the cost base of the asset, a capital gain has been made. Where the capital proceeds are less than the cost base of the asset, a capital loss has been made. | Detailed Reasoning - Cost base: The cost base is made up of five elements. In your case, the most relevant elements are: 1. money or property given for the asset. In your case, the amount of specified amount (company B shares you acquired from your late spouse's estate) and for the shares you acquired in your name through company B DRP it will be the dividend amount used to purchase the new shares, and 2. incidental costs of acquiring the CGT asset or that relate to the CGT event, such as brokerage fees. You can use the discount method to calculate your capital gain as: · you are an individual § a CGT event happened to an asset you owned § the CGT event happened after 20 September 1999, and § you did not choose the indexation method. The discount rate for individuals is 50%. This amount is included in your income tax return at item 18 of your income tax return for individuals (supplementary section).