Private ruling: Capital gains tax discount
Date of advice: 1 June 2016
Published: July 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2015

Ruling: Q1: Can the disposal of the taxpayer's interest in the company be a discount capital gain as defined in section 118-5 of the Income Tax Assessment Act 1997 ? | A1: Yes.

Relevant facts and circumstances: You were offered employment by an Australian company. As part of this employment, you were provided with a more than XX% ownership interest in the company. You have held the shares for more than 12 months. You wish to dispose of the shares to the company or another individual. You advise that the majority of the assets of company (by value) have been held by it for more than 12 months. As a result, the total cost bases of CGT assets that the company has owned for less than 12 months is not more than half the total of the cost bases of all CGT assets that the company owns. In addition, you advise that if all CGT assets in the company were sold for market value, the capital gain from the CGT assets held by the company for less than 12 months would not be more than half the capital gain made, on all CGT assets of the company.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 115-10 | Income Tax Assessment Act 1997 - Section 115-21 | Income Tax Assessment Act 1997 - Section 115-15 | Income Tax Assessment Act 1997 - Section 115-20 | Income Tax Assessment Act 1997 - Section 115-25 | Income Tax Assessment Act 1997 - Section 115-40 | Income Tax Assessment Act 1997 - Section 115-45

Reasons for decision: Summary: Under section 115-10 of the Income Tax Assessment Act 1997 (ITAA 1997), a capital gain made by an individual can be a discount capital gain provided that the capital gain resulted from a CGT event happening to an asset that was acquired at least 12 months before the CGT event that resulted in the capital gain (subsection 115-21(1) of the ITAA 1997). A capital gain which meets the requirements of section 115-10, 115-15, 115-20 and 115-25 of the ITAA 1997 is a discount capital gain unless sections 115-40 and 115-45 of the ITAA 1997 apply to treat the capital gain as not being a discount capital gain (section 115-5 of the ITAA 1997). Although a capital gain may satisfy the requirements in section 115-5 of the ITAA 1997, it will not be a discount capital gain if section 115-45 of the ITAA 1997 applies. Broadly, that section prevents a capital gain on a share from being a discount capital gain if the owner of the share, assuming they owned the assets underlying the share and had sold them rather than the share, would not have had a discount capital gain on the majority of CGT assets (by cost and value) underlying the share. Specifically, subsection 115-45(2) of the ITAA 1997 provides that a capital gain made from a CGT event happening to a share in a company is not a discount capital gain if the following conditions are satisfied: • before the CGT event the taxpayer and their associates owned at least 10% by value of the shares in the company (subsection 115-45(3) of the ITAA 1997). • the total cost bases of CGT assets that the company owned at the time of the CGT event and had acquired less than 12 months before then is more than half the total of the cost bases of all the CGT assets the company owned at the time of the event (subsection 115-45(4) of the ITAA 1997). • the notional net capital gain of the company worked out under subsection 115-45(6) of the ITAA 1997 is more than half of the notional net capital gain worked out under subsection 115-45(7) of the ITAA 1997 (subsection 115-45(5) of the ITAA 1997. The notional net capital gain worked out under subsection 115-45(6) of the ITAA 1997 is calculated as if: • just before the CGT event (that happened to the shares), the company had disposed of all of the CGT assets that it owned and had acquired less than 12 months before the CGT event, • the company received the market value of those assets for the disposal, • the company did not have any other capital gains or capital losses, and • the company did not have a net capital loss for an earlier income year. The notional net capital gain worked out under subsection 115-45(7) of the ITAA 1997 is calculated in a similar manner except it is assumed that: • the company had disposed of all the CGT assets that it owned just before the CGT event (rather than those it acquired less than 12 months before the event), and • all of the capital gains and capital losses from those assets were taken into account in working out the net capital gain, despite any rules providing that one or more of those capital gains or capital losses are not to be taken into account in working out a net capital gain. | Detailed Reasoning - Application to your circumstances: Because you will have held the shares for more than 12 months prior to them being sold, you will be able to calculate your capital gain using the discount method subject to the exclusion in subsection 115-45(2) of the ITAA 1997. In this case, the exclusion in subsection 115-45(2) of the ITAA 1997 does not apply. This is because although you have more than a XX% ownership interest in the company, the majority of the company's assets (by value) have been held by the company for more than 12 months. Please note that this ruling is subject to there being no material change to the facts, just before the CGT event happens to the shares.