Private ruling: Capital gains tax and shares
Date of advice: 2 March 2016
Published: April 2016
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Question and answer | Will any capital gain or capital loss on the sale of the shares be disregarded under paragraph 104-10(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)? | No.

Relevant facts and circumstances: Prior to 1985, shares in Company X were purchased by Company Y in which you held shares. The shares in Company Y were held equally by you and the other shareholders. Several years ago, the other shareholders decided that Company Y should be liquidated. Although you did not wish to liquidate the company, you agreed to the liquidation in order to appease the other shareholders. Agreement between you and the other shareholders as to the distribution of the assets of Company Y was subsequently reached. On liquidation, the assets of Company Y were divided among you and the other shareholders. You received all the shares in Company X that Company Y held. There was a change in ownership of the shares in Company X from Company Y to you.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 paragraph 104-10(5)(a) | Income Tax Assessment Act 1997 section 109-5

Reasons for decision: Summary: Section 109-5 of the ITAA 1997 provides that you acquire a capital gains tax (CGT) asset when you become its owner. The disposal of a CGT asset will generally give rise to a capital gain or capital loss; however, any gain or loss will be disregarded if the asset was acquired before 20 September 1985 (paragraph 104-10(5)(a) of the ITAA 1997). In your case, you and the other shareholders held equal shares in Company Y which in turn held shares in Company X. The shares were purchased prior to 20 September 1985 and were subsequently transferred to you by mutual agreement following the voluntary liquidation of Company Y. Voluntary liquidation occurs when shareholders agree amongst each other to wind up an entity. This differs from a compulsory winding up of an entity as it is initiated by its members rather than via a court. A voluntary liquidation is only possible for solvent companies and the winding up process itself is subject to the control of the company members. Involuntary liquidation is legally enforceable and usually as a result of insolvency or bankruptcy. A compulsory winding up of a company is the result of a court order on the grounds of Corporations Law, where a court will direct the process of liquidating a company's assets and winding up its affairs to begin. Rollover relief is made available to defer or disregard CGT from a capital gain event in the case of some transactions and entity restructures where specific conditions are met. Acquisition of shares on the liquidation of a company does not fall within any of the rollover provisions whether the liquidation is a voluntary or involuntary liquidation. Further, in your correspondence you refer to the compulsory acquisition rollover concessions and argue that they may apply in your situation. These concessions can apply to a taxpayer who disposes of a CGT asset involuntarily, that is, the asset is compulsorily acquired by another party. Consequently, in your situation the only entity that could possibly obtain this concession was Company Y from which the shares were transferred to you. However, in this case, there was no compulsory acquisition as the Company X shares were transferred to you by mutual agreement following the voluntary liquidation of Company Y. Accordingly, the compulsory acquisition rollover concessions do not apply in your situation. In your correspondence, you also state that you did not 'acquire' the Company X shares following liquidation of Company Y as you already owned the shares by virtue of your shareholding in Company Y. However, Company Y was clearly the legal owner of the Company X shares prior to its liquidation and the legal ownership was then transferred to you. The fact that there was no 'sale' or 'purchase' of the shares by way of a contract, for example, does not alter the fact that there was a change in ownership from Company Y to you. While, as one of the shareholders Company Y, you held an interest in the company, this did not give you a corresponding interest in the assets of Company Y which included the Company X shares. Your shares in Company Y gave you voting rights in the company, the right to participate in dividends paid by the company and the right to receive income and capital on liquidation of the company; but not an entitlement to specific assets of the company. In conclusion, you acquired the Company X shares on the date the shares were transferred into your name and they no longer had a pre-CGT acquisition date from that time. Consequently, any capital gain or capital loss on the sale of the shares will not be disregarded under paragraph 104-10(5)(a) of the ITAA 1997. As the shares were transferred to you for no monetary value, the market value substitution rule in section 112-10 of the ITAA 1997 applies so that the value of the shares is taken to be their market value on the date of transfer.