Private ruling: whether a CGT event happens
Published: August 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Does a Capital Gains Tax (CGT) event occur under Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997) if the company converts two ordinary shares worth $1 each into one hundred A class shares worth one cent each and one hundred B class shares worth one cent each? | A1: No | Q2: Will the converted shares have the same date of acquisition as the original shares to which they relate? | A2: Yes

Relevant facts and circumstances: The company's issued capital is $2 which is comprised of two ordinary shares which were issued at $1 each. One of the $1 shares is held as a post-CGT asset by shareholder 1 and the other $1 share is held by shareholder 2 as a pre-CGT asset. The company is proposing to convert the two ordinary shares into 100 A class ordinary shares of one cent each and 100 B class shares of one cent each. The A and B class shares have exactly the same rights. The amounts allocated to the share capital account are unaltered and there is no change in the proportion of equity owned by each shareholder in the share capital account. The reason for the change is to separate out the pre-CGT shareholder from the post-CGT shareholder and allow for future estate planning.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 104

Reasons for decision: Summary: Taxation Determination TD 2000/10 outlines what the CGT consequences are for a shareholder if a company converts its shares into a larger or smaller number of shares. If a company converts its shares into a larger or smaller number of shares ('the converted shares') in accordance with section 245H of the Corporations Law ('C Law') in that: The original shares are not cancelled or redeemed in terms of the C Law; There is no change in the total amount allocated to the share capital of the company; and The proportion of equity owned by each shareholder in the share capital account is maintained; No CGT event happens to the shareholder's original shares for capital gains purposes. The converted shares have the same date of acquisition as the original shares to which they relate. In this case the company proposes to increase the number of shares in accordance with section 245H of the C Law. The original shares will not be cancelled or redeemed in terms of the C Law; there will not be a change in the total amount allocated to the share capital of the company; and the proportion of equity owned by each shareholder in the share capital account will be maintained. Consequently no CGT event will happen upon the implementation of the proposed change. The converted shares have the same date of acquisition as the original shares to which they relate.