Private ruling: Capital Gains Tax
Published: July 2014
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the shares that you sold subject to capital gains tax? | A1: Yes | Q2: Will you be eligible for a 50% discount on any capital gain made on the sale of shares? | A2: Yes

Relevant facts and circumstances: You held an endowment policy with X prior to their demutualisation. X demutualised and issued you shares for no consideration. Company Y took over Company X (former X) and your received seven Company Y shares for every 20 Company X shares. You received XY Company Y shares. You chose scrip for scrip rollover. You sold the Company Y shares more than 12 months after demutualisation.

Relevant legislative provisions: Section 102-20 of the Income Tax Assessment Act 1997 | Section 104-10 of the Income Tax Assessment Act 1997 | Subsection 104-10(3) of the Income Tax Assessment Act 1997 | Section 108-5 of the Income Tax Assessment Act 1997 | Section 110-25 of the Income Tax Assessment Act 1997 | Subsection 110-25(2) of the Income Tax Assessment Act 1997 | Subsection 112-20(1) of the Income Tax Assessment Act 1997 | Subdivision 115-A of the Income Tax Assessment Act 1997 Section 115-25 of the Income Tax Assessment Act 1997 | Section 115-100 of the Income Tax Assessment Act 1997 | Section 115-105 of the Income Tax Assessment Act 1997 | Section 115-110 of the Income Tax Assessment Act 1997 | Section 124-780 of the Income Tax Assessment Act 1997 | Section 124-785 of the Income Tax Assessment Act 1997 | Section 121AA of the Income Tax Assessment Act 1936

Reasons for decision: Summary: You make a capital gain or capital loss as a result of a capital gains tax (CGT) event happening (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). A capital gain or capital loss may arise if a CGT event happens to a CGT asset. Section 108-5 of the ITAA 1997 states that a CGT asset is any kind of property, or a legal or equitable right that is not property. Under section 104-10 of the ITAA 1997, the disposal of a CGT asset causes a CGT event A1 to occur. You dispose of an asset when a change of ownership occurs from you to another entity. According to subsection 104-10(3) of the ITAA 1997, the time of the event is when you enter into the contract for the disposal of if there is no contact, the time the time the change of ownership occurs. Company X shares Upon demutualisation of Company X, members received shares in exchange for their membership rights. In general, you acquire a CGT asset when you become its owner. Therefore, you are taken to have acquired your shares when the demutualisation of Company X occurred. Cost base of X 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 you. In order to calculate any capital gain or capital loss from these shares it is necessary to know the cost base (or acquisition cost) of the X shares when demutualisation occurred. As explained by section 121AA of the Income Tax Assessment Act 1936 (ITAA 1936), if an insurance company demutualised and its policyholders or members dispose of their listed shares in the company, for tax purposes the acquisition costs of the shares is based on the lessor of: • the embedded value or net tangible asset value of the company; and • the value of the company based on the total first trading day price of all shares in the company. Company X gave the Tax Office a figure of $A as the embedded value per share. You received B Company Y shares when they took over Company X. As those shares were issued on a basis of seven shares for every 20 Company X, we can calculate your number of Company X shares to be (B x 20)/7 = C. Therefore, the shares that you were issued to you from Company X through the demutualisation will have a cost base of C shares multiplied by $A = $AC. Scrip for Scrip Rollover X shares for Company Y shares If the conditions for scrip for scrip rollover contained in section 124-780 of the ITAA 1997 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 you dispose of the new shares. In your case, the conditions for scrip for scrip rollover were met which means that when your Company X shares were exchanged for Company Y shares and you elected to use the scrip for scrip rollover provisions (by not accounting for the gain in the relevant year), the capital gain would not need to calculated until the disposal of the Company Y shares. Cost base of Company Y shares Shareholders need to use the cost base of their Company X shares to work out the cost base of their Company Y shares if they chose scrip for scrip rollover when their Company X shares were exchanged for Company Y shares (section 124-785 of the ITAA 1997). One of the conditions of the merger was that for every 20 Company X shares held shareholders were entitled to seven Company Y shares. In your case, you received XY Company Y shares. Your overall cost base is still $AC, which was the cost base of your Company X shares. The cost base of each Company Y share is $AC/B. Please note: your cost base will change if you incur other costs in relation to these shares (for example, selling costs). Calculating capital gains and losses You make a capital gain if the capital proceeds from the disposal of the asset are more than the asset's cost base. You make a capital loss if the capital proceeds are less than the asset's reduced cost base. Capital gains are taxed at the rate that applies as a result of the level of your other taxable income plus your net capital gain. Discount capital gain Under subdivision 115-A of the ITAA 1997 an individual who makes a capital gain from a CGT event happening after 21 September 1999 may be eligible for a discount capital gain. In addition to this the cost base may not be indexed and the discount only applies to certain CGT events. In your case, CGT event A1 occurred when you disposed of the asset by sale. This is not an event that is excluded by section 115-25 of the ITAA 1997. You held the asset for at least 12 months and you have a discount capital gain. Section 115-100 of the ITAA 1997 provides that the discount percentage will be 50% if the gain is made by an individual and neither section 115-105 nor 115-110 (about foreign or temporary residents) applies to the gain. In your case, you made the gain as an individual and neither of the abovementioned sections applies. Accordingly, you are eligible for a 50% discount capital gain.