Private ruling: Disposal of shareholding - assessable income - capital gains tax (CGT) - CGT event K6
Published: April 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will any amount from the sale of your shares in the company be included as assessable income under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will any amount from the sale of your shares in the company be included as assessable income under the capital gains tax (CGT) provisions of the ITAA 1997? | A2: No. | Q3: Will CGT event K6 occur on the sale of your shares in the company? | A3: No.

Relevant facts and circumstances: The company was incorporated sometime prior to 20 September 1985 and since that time has been undertaking its business which specialises in commercial plumbing and related building construction services. The company has at all times had paid up share capital of a certain amount represented by a number of class B shares and a number of class C shares. At the time the company was incorporated the shares were initially issued to you and an unrelated party as equal shareholders in both classes of shares. The nature of the business of the company has remained the same since inception and has grown organically. The goodwill of the company was a pre-CGT asset (acquired prior to 20 September 1985) up until a number of years ago. A number of years ago (sometime after 20 September 1985), the unrelated party's shares were acquired by a discretionary trust of your family. After this sale, you and the family trust were equal shareholders in both classes of shares. The change in majority underlying interests in the company triggered sections 149-15 and 149-30 of the ITAA 1997 with the result that the company's goodwill became a post CGT asset. You now will dispose of your 50% shareholding interest in the company to an associated company for consideration equal to the market value of those shares. The associated company is a family company that is 100% owned by a discretionary trust of the family. You have sought and received an independent valuation of the market value of the shares. Using the figures provided in this independent market valuation, you have established that the market value of the property of the company that was acquired on or after 20 September 1985 will be less than 75% of the net value of the company at the time of the disposal of the shares. You will sell the shares as your relative has taken over the management of the company and wishes that the share structure better reflect such a change and that the broader family benefits from future results of the company. You have never been in the business of share trading and the shares have never been held as trading stock. You have never had any profit making objectives, undertakings or plans in relation to the shares and the sale of the shares is solely due to your family's succession planning.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5, | Income Tax Assessment Act 1997 Section 15-15, | Income Tax Assessment Act 1997 Subsection 15-15(2), | Income Tax Assessment Act 1997 Section 104-10, | Income Tax Assessment Act 1997 Subsection 104-10(5), | Income Tax Assessment Act 1997 Section 104-230, | Income Tax Assessment Act 1997 Section 149-15, | Income Tax Assessment Act 1997 Section 149-30, Schedule 1 to the Taxation Administration Act 1953 Section 359-35 and | Schedule 1 to the Taxation Administration Act 1953 Paragraph 259-35(2)(a).

Reasons for decision: Summary: 1. Will any amount from the sale of your shares in the company be included as assessable income under section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? Section 6-5 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. It has been established through the courts that ordinary income includes business income. Section 15-15 of the ITAA 1997 provides that the profit arising from the carrying on of a profit-making undertaking or plan is also assessable income. However, subsection 15-15(2) of the ITAA 1997 states that the section does not apply to a profit that is assessable income as ordinary income under section 6-5 of the ITAA 1997. Generally, proceeds from the sale of shares will only be assessable income in accordance with section 6-5 of the ITAA 1997 where the shares were held as trading stock as part of a share trading business. Taxation Ruling TR 92/3 considers whether profits made as a result of an isolated transaction are income. A profit from an isolated transaction is generally assessable income when both of the following elements are present: a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction. In determining whether an isolated transaction amounts to a business operation or commercial transaction the following factors are relevant: a) the nature of the entity undertaking the operation or transaction; b) the nature and scale of other activities undertaken by the taxpayer; c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; d) the nature, scale and complexity of the operation or transaction; e) the manner in which the operation or transaction was entered into or carried out; f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction; g) if the transaction involves the acquisition and disposal of property, the nature of that property; and h) the timing of the transaction or the various steps in the transaction. | Detailed Reasoning - Application to your circumstances: You acquired your shares a significant amount of time prior to 20 September 1985 and have held them since that time. You have never carried on any business of share trading. You did not acquire the shares for resale at a profit, nor have you ever had that intent in relation to the shares. You acquired the shares for the sole purpose of acquiring an equity interest in a business of the company. You have only recently considered the sale of the shares after holding them for a significant period of time. The sole purpose of the sale is to facilitate your family's succession planning in relation to the company and to provide for your extended family. You have never had any profit making objectives, undertakings or plans in relation to the shares. Accordingly the proceeds from the sale are not assessable income under either section 6-5 or section 15-15 of the ITAA 1997. 2. Will any amount from the sale of your shares in the company be included as assessable income under the capital gains tax (CGT) provisions of the ITAA 1997? | Detailed Reasoning - 3. Will CGT event K6 occur on the sale of your shares in the company?: In accordance with section 104-10 of the ITAA 1997, CGT event A1 will happen when you dispose of a CGT asset such as shares. Subsection 104-10(5) of the ITAA 1997 provides that a capital gain or capital loss is disregarded where an asset was acquired prior to 20 September 1985. However, because pre-CGT shares of a company are being disposed of, CGT event K6 in section 104-230 of the ITAA 1997 has to be considered. According to section 104-230 of the ITAA 1997 a CGT event K6 occurs if: • You own shares in a company you acquired before 20 September 1985 • CGT event A1, C2, E1, E2, E3, E5, E6, E7, E8, J1 or K3 happens in relation to the shares • There is no roll-over for the other CGT event, and • The market value of the property of the company that was acquired on or after 20 September 1985 is at least 75% of the net value of the company. In your situation, in accordance with sections 149-15 and 149-30 of the ITAA 1997 the goodwill of the company became a post-CGT asset when there was a change of majority underlying interests in the company. However, as outlined in Taxation Ruling TR 2004/18, where a CGT asset is treated as having been acquired post-CGT because of the operation of Division 149, the item of property continues to be treated as having been acquired pre-CGT for the purposes of CGT event K6. Further to this, the market value of the property of the company that was acquired on or after 20 September 1985 will be less than 75% of the net value of the company at the time of the disposal of the shares. Therefore, CGT event K6 will not apply and any capital gain that you make as a result of the sale of the shares will be disregarded in accordance with subsection 104-10(5) of the ITAA 1997.