Private ruling: Capital Gains Tax and the transfer of shares
Date of advice: 14 October 2017
Published: March 2018
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Did a Capital Gains Tax (CGT) event occur when you inherited shares from your late spouse’s estate? | A1: Yes | Q2: Is the capital gain or capital loss disregarded when you acquired the shares from your late spouse’s estate? | A2: Yes | Q3: Will you have a capital gain or loss when you transfer the shares that you inherited to your child? | A3: Yes

Relevant facts and circumstances: You inherited shares from your late spouse’s estate. The shares consist of both pre and post CGT acquisitions. You would like to transfer/gift these shares to your child for nil remuneration.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-5. | Income Tax Assessment Act 1997 Section 102-20. | Income Tax Assessment Act 1997 Section 104-10. | Income Tax Assessment Act 1997 Section 116-30, | Income Tax Assessment Act 1997 Section 128-15, | Income Tax Assessment Act 1997 Subsection 128-15(3) and | Income Tax Assessment Act 1997 Subsection 128-15(4).

Reasons for decision: Summary: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss as a result of a CGT event. The most common event is CGT event A1, which happens when a person disposes of a CGT asset to someone else. Shares acquired on or after 20 September 1985 are CGT assets. You are deemed to have disposed of a CGT asset if there is a change in ownership from you to another entity (section 104-10 of the ITAA 1997). CGT event A1 occurred when the transfer of the shares occurred from the estate to you. A capital gain or capital loss is disregarded when a Legal Personal Representative or beneficiary of a deceased estate acquires a CGT asset. Subsection 128-15(3) advises that any capital gain or loss the legal personal representative makes if the asset passes to a beneficiary of the estate is disregarded. Transferring your ownership interest in shares to another person for no consideration constitutes a disposal because there is a change of ownership. CGT event A1 will happen when you transfer your ownership interest in the shares to another person. The time of the event will either be: ● when you enter into a contract for the disposal of the shares, or ● if there is no contract, when you stop being the owner of the shares. In your case you will be transferring your interest of your shares to your child. Although the result of this transaction will be that you do not receive any remuneration for the shares, a transfer in ownership has nevertheless occurred. CGT event A1 will occur when the transfer in ownership occurs. | Detailed Reasoning - Market value substitution rule: If you receive nothing in exchange for the shares, section 116-30 of the ITAA 1997 states that you are taken to have received the market value of the shares at the time of the CGT event. This is known as the market value substitution rule for capital proceeds. As you will not receive anything in exchange for the shares, the market value substitution rule for capital proceeds will apply to you. | Detailed Reasoning - Calculating the capital gain or capital loss: You will make a capital gain if the capital proceeds from the disposal (the market value of the shares at the time of the CGT event) are more than the cost base of the shares. You will make a capital loss if those capital proceeds are less than the reduced cost base of the shares. | Detailed Reasoning - Assets acquired by the deceased before 20 September 1985: If the deceased acquired the 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, before they died, a person made a major improvement to a pre-CGT asset on or after 20 September 1985, the improvement is not treated as a separate asset by the legal personal representative or beneficiary. They are taken to have acquired a single asset. The cost base of this asset is equal to the cost base of the major improvement on the day the person died plus the market value of the pre-CGT asset (excluding the improvement) on the day the person died. In your case, when calculating the capital gain or capital loss in relation to shares that were acquired by your late spouse before the 20 September 1985, the first element of the cost base will be the market value of the shares on the date of death. | Detailed Reasoning - Assets acquired by the deceased on or after 20 September 1985: If the deceased acquired the asset on or after 20 September 1985, the first element of your cost base and reduced cost base is taken to be the deceased’s cost base and reduced cost base for the asset on the day they died. For shares which your late spouse acquired on or after 20 September 1985, the cost base will be the same as the cost base they had on the day they died. The first element of your late spouse’s cost base on the day they died would be based on the price that they originally paid to acquire the shares.

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