Private ruling: CGT - disposal of shares
Date of advice: 26 October 2022
Published: 9 January 2023
Ruling period: Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are Individual A, Individual B and Individual C (the Beneficiaries) absolutely entitled as opposed to Company A to the shares in Company B from the time they were acquired under section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Will CGT event A1 under section 104-10 of the ITAA 1997 be triggered when the CGT assets are transferred from Company A to the Beneficiaries? | A2: No. | Q3: Is the relevant acquisition date and cost of the shares for the Beneficiaries, Company A's acquisition date and cost? | A3: Yes.

Relevant facts and circumstances: Company A is an Australian resident company. An initial share offer was made by Company B as an unlisted company with the maximum number of shareholders capped at X. Individual A, Individual B and Individual C (the Beneficiaries) entered into an arrangement with Company A to purchase shares in Company B and deal with them on their behalf (the Arrangement). Under the Arrangement, Company A acquired shares in Company B as part of the initial share offer on behalf of the Beneficiaries just over two years ago. Under the Arrangement, Company A subsequently acquired additional shares in Company B on a limited number of occasions over the last two years. Under the Arrangement, Company A is obliged to hold the shares, maintain a record of allocation and deal with them at the direction of the Beneficiaries. The shares in Company B held by the Company A are fungible with the number of shares each Beneficiary is entitled to at the exclusion of all other Beneficiaries is known and not in contention. Each Beneficiary is entitled against Company A to have their share entitlement satisfied by a distribution or allocation in their favour. The Arrangement prevents the interests held by the Beneficiaries being defeated by the actions of any person or the occurrence of any subsequent event. It is proposed that the legal ownership of the Company B shares held on behalf of the Beneficiaries be transferred from Company A to the Beneficiaries in the income year ending 30 June 20XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 106-50

Reasons for decision: Summary: Under the Arrangement each of the Beneficiaries hold a vested and indefeasible interest to the shares held by Company A. The Beneficiaries are each absolutely entitled to their share allocation against Company A as: • the Company B shares are fungible, • the Arrangement provides for clear allocation of share entitlement • the Arrangement allows for the beneficial interest to be satisfied upon request at the exclusion of the other beneficiaries. | Detailed Reasoning - Detailed reasoning: The circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a CGT asset of the trust as against its trustee is explained in Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (TR 2004/D25). | Detailed Reasoning - Requirements of absolute entitlement: The beneficiary must have an interest in the relevant asset in order to be considered absolutely entitled to it for CGT purposes (paragraph 70 of TR 2004/D25) The interest a beneficiary has in the trust asset or assets must be vested in possession and indefeasible (paragraph 73 of TR 2004/D25). A vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession or enjoyment of it (paragraph74 of TR 2004/D25). An indefeasible interest means that it cannot be defeated by the actions of any person or the occurrence of any subsequent event (paragraph 75 of TR 2004/D25). A beneficiary will have difficulty in establishing that they are absolutely entitled to a trust asset for CGT purposes if one or more other beneficiaries also have an interest in the asset (paragraph 80 of TR 2004/D25). A beneficiary with a vested and indefeasible interest in trust assets where one or more others also have an interest in those assets will nonetheless be considered absolutely entitled to a specific number of the trust's assets if the three factors listed below are also present (paragraph 81 of TR 2004/D25). First, the assets must be fungible, at least to the extent to which a person would reasonably be expected to be indifferent to the replacement of any one asset with another (paragraph 85 of TR 2004/D25). Secondly, it must be the case that equity would permit the beneficiary to have their interest in all those assets satisfied by a distribution or allocation in their favour of a specific number of them (paragraph 86 or TR 2004/D25). Thirdly, there must be a very clear understanding on the part of all the relevant parties that the beneficiary is entitled, to the exclusion of the other beneficiaries, to a specific number of the trust's assets (paragraph 87 of TR 2004/D25). | Detailed Reasoning - Application to client's circumstances: Under the Agreement, the Beneficiaries have a right to have their allocated share interest transferred to their benefit at any time. On this basis we accept that the Beneficiaries allocated share interest is vested in possession. The agreement does not permit the Beneficiaries allocated share interest to be defeated by the actions of any person or the occurrence of any subsequent event. On this basis, we accept that the Beneficiaries allocated share interest is indefeasible. Despite their being multiple beneficiaries in this case, each Beneficiary has absolute entitlement to their respective share interest under the Agreement as: • The shares in Company B are fungible. • The Arrangement allows for each Beneficiary to have their interest in the shares satisfied by distribution or allocation by request. • The Arrangement provides for a clear understanding between Company A and the Beneficiaries as to the allocated share interest that each Beneficiary is entitled to, at the exclusion of other Beneficiaries. | Detailed Reasoning - Question 2: Paragraph 144 of TR 2004/D25 provides that no CGT event happens when the legal title in an asset to which a beneficiary is absolutely entitled as against the trustee is transferred to the beneficiary. In this case, the Beneficiaries are absolutely entitled to the share allocation in Company B held by Company A so the transfer of the legal title from Company A to the Beneficiaries does not result in a change in beneficial ownership. As there is no change in beneficial ownership CGT event A1 under section 104-10 of the ITAA 1997 is not triggered. | Detailed Reasoning - Question 3: Subsection 106-50(2) of the ITAA 1997 provides that Part 3-1 and Part 3-3 apply, from just after the time the beneficiary becomes absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), to an act done in relation to the asset by the trustee as if the act had been done by the beneficiary (instead of by the trustee). In this case, the Arrangement was in place before the initial shares in Company B were purchased by Company A. As previously discussed, the Arrangement results in the Beneficiaries being absolutely entitled to their share allocation as against Company A. It follows that under subsection 106-50(2) of the ITAA 1997, any act done in relation to the shares by Company A, including the acquisition, is regarded as an act done by the Beneficiaries. As a result, the relevant acquisition date of the shares for the Beneficiaries is the date Company A acquired them on behalf of the Beneficiaries. The cost of the shares for the Beneficiaries is the cost Company A paid for them.