Private ruling: CGT event C1 – involuntary loss of shares – replacement asset
Date of advice: 19 December 2018
Published: April 2019
Ruling period: Year ended 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Has capital gains tax (CGT) event C1 happened on the disposal of the shares? | A1: Yes. The sale of shares occurred without your consent and as a result the shares were involuntarily disposed of. Further information can be found by searching quick code (QC) 17204 on ato.gov.au. | Q2: Can you apply the CGT roll-over contained in Subdivision 124-B of the Income Tax Assessment Act 1997 (ITAA 1997) to the capital gain resulting from the sale of the shares? | A2: Yes. You meet the requirements to choose a roll-over to be deferred against the capital gain. Further information can be found by searching QC 22164 on ato.gov.au.

Relevant facts and circumstances: You have reached your preservation age and retired from the work force. Your advisors had discussions with you about strategies to establish you in retirement. The strategy was presented to you and you signed the relevant form to reflect your understanding and your clear and precise instructions that was to be undertaken by your investor. In the commencement of the new financial year, the strategies were to take effect. Your investor was to sell some of your investments and retain others. Your investor incorrectly sold the wrong investments. This resulted in a significant capital gain. Once the error was identified, your investor attempted to rectify the situation to no avail. The original investments have not been replaced and you have not received compensation.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-20 | Income Tax Assessment Act 1997 section 124-70 | Income Tax Assessment Act 1997 section 124-75 | Income Tax Assessment Act 1997 section 124-85

Reasons for decision: Detailed Reasoning - CGT event C1: CGT event C1 happens if a CGT asset you own is lost or destroyed (subsection 104-20(1) of the ITAA 1997). Taxation Determination TD 1999/79 paragraph 1 says the words ‘lost’ or ‘destroyed’ are not defined in the Act and take their ordinary meaning. Paragraph 4 also says the word ‘destroyed’ contemplates both voluntary and involuntary actions. The word in its context in CGT event C1 applies if the asset is destroyed in an involuntary occurrence, or if it happens by the actions of others over which the taxpayer has no control. CGT event A1 also happened on the sale of the original shares to a third party. Under subsection 102-25(1) of the ITAA 1997, if more than one CGT event happens, you use the one that is most specific to your situation and the most specific event is CGT event C1. In your case, your shares were erroneously sold without your consent. The error was identified before the transaction was completed, but due to circumstances outside of your control the situation could not be rectified. CGT event C1 has occurred in this situation as the shares were lost due to an involuntary occurrence. | Detailed Reasoning - Roll-over relief: Division 124 of the ITAA 1997 allows for a replacement asset roll-over to defer the making of a capital gain or loss from a CGT event happening until a later CGT event in certain circumstances. You can choose a roll-over where: ● the original CGT asset is lost or destroyed ● you receive money as compensation for the event happening ● you incur expenditure acquiring another CGT asset ● some of the expenditure is incurred no later than one year after the end of the income year in which the event happens ● the new CGT asset cannot become an item of your trading stock nor can it be a depreciating asset or a registered emissions unit. Section 124-85 of the ITAA 1997 sets out the consequences if you choose to obtain a roll-over where you have received money as compensation, if you make a capital gain from the event and the original asset was acquired on or after 20 September 1985. In your situation, you meet the requirements to choose a roll-over to be applied to the capital gain resulting from the erroneous sale of the original shares. The original shares were involuntarily sold on 20XX. If you acquire a replacement asset in the following year you are entitled to roll-over the capital gain from the disposal of the shares under Subdivision 124-B of the ITAA 1997.

Subject: CGT event C1 – involuntary loss of shares – replacement asset: This is an edited version of a revised private ruling. It replaces the edited version of the private ruling with the authorisation number of 1051430499616.