Private ruling: CGT - shares and units
Published: January 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will the disposal of shares trigger CGT event C1 under section 104-20 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Are you eligible to choose replacement asset roll over relief pursuant to Subdivision 124-B of the ITAA 1997? | A2: No. | Q3: Will the Commissioner allow further time as provided in paragraph 103-25(1)(b) of the ITAA 1997 for you to choose to apply the replacement asset roll-over relief to a capital gain that arose in the 2011-12 financial year? | A3: No. | Q4: If you choose the replacement asset roll-over relief, will you be able to disregard any capital gain made on the unauthorised disposal of your shares under subsection 124-10(2) of the ITAA 1997? | A4: No.

Relevant facts and circumstances: The Deceased died in 2012 and Probate was granted. A Deed of Family Arrangement was subsequently made in 2012. The Estate comprises a share portfolio. The share portfolio was under the management of the Bank who operate through an investment management group. The intention of the Executors and Trustees was that the share portfolio be distributed equally between the adult beneficiaries of the Estate. The Will gave the Trustees power to allot assets of the Estate to beneficiaries in satisfaction of their interest in the Estate. At no time did the Executors and Trustees intend that any part of the share portfolio was to be sold. In 2012 the solicitor for the Estate, informed the investment managers that Probate of the Estate was granted and enclosed, among other things, a completed Withdrawal Request form. The letter states "Please proceed with the closing of all Accounts in the deceased's name solely and remit the balance by cheque payable to the Estate to me." The withdrawal request form was signed by both Executors. The withdrawal form did not indicate which accounts were to be withdrawn. The form also advised that "all" was the amount that should be withdrawn, it did not specify that this was intended to be the cash component. The investment managers treated the letter as an instruction to sell the Estate's entire share portfolio and the entire share portfolio was sold. Upon discovering that the entire shares were sold, the solicitor acting for the Estate, instructed the investment managers to re-purchase the estate's shareholdings immediately. The investment managers purchased back the entire share portfolio without any significant difference in the cost of the purchase. The cost of re-acquiring the share portfolio was funded by the proceeds of the incorrect disposal. The 2012 income tax return for the Estate was prepared and lodged on the basis that the Estate derived a capital gain as a result of the disposal of the shares.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-25. | Income Tax Assessment Act 1997 Section 103-25. | Income Tax Assessment Act 1997 Section 104-20. | Income Tax Assessment Act 1997 Section 104-10. | Income Tax Assessment Act 1997 Subdivision 124-B. | Income Tax Assessment Act 1997 subsection 124-10(2).

Reasons for decision: Summary: CGT event C1 happens if a CGT asset you own is lost or destroyed as per subsection 104-20(1) of the ITAA 1997. Paragraph 2 of Taxation Determination TD 1999/79 states that: The word 'lost' in its context in subsection 104-20(1) does not contemplate voluntary actions. The Macquarie Dictionary , 3rd ed, defines 'lost' as '1. past tense and past participle of lose' and defines ' lose ' as '1. to come to be without, by some chance, and not know the whereabouts of: to lose a ring '. The word in its context in CGT event C1 suggests an involuntary rather than a voluntary act. In ATO ID 2010/124, the taxpayer clearly instructed their stockbroker to sell 1000 shares and the stockbroker mistakenly sold all 10000 shares to a third party. The shares were sold without notice of the taxpayer's lack of consent to the sale. The 9000 shares were "lost" within the meaning of section 104-20 of the ITAA 1997 and therefore, CGT event C1 occurred. In this case, we consider that the withdrawal form was sufficient consent for the investment managers to dispose of the shares. Your situation is materially different from ATO ID 2010/124 as the disposal was not a result of an involuntary action. Therefore, CGT event C1 did not occur as the shares were not "lost." Instead, CGT event A1 occurred when the shares were sold. Subdivision 124-B of the ITAA 1997 addresses when replacement asset roll-overs are available for asset that are compulsorily acquired, lost or destroyed. Section 124-70 of the ITAA 1997 states that you may be able to choose a roll-over if one of these events happens to a CGT asset (the original asset ) you own: (a) it is compulsorily acquired by an Australian government agency; (aa) it is compulsorily acquired by an entity (other than an Australian government agency or a foreign government agency) under a power of compulsory acquisition conferred by a law covered under subsection (1A); (b) it, or part of it, is lost or destroyed; (c) you dispose of it to an entity (other than a foreign government agency) in circumstances meeting all of these conditions: (i)the disposal takes place after a notice was served on you by or on behalf of the entity; (ii)the notice invited you to negotiate with the entity with a view to the entity acquiring the asset by agreement; (iii)the notice informed you that if the negotiations were unsuccessful, the asset would be compulsorily acquired by the entity; (iv)the compulsory acquisition would have been under a power of compulsory acquisition conferred by a law covered under subsection (1A); (ca) you dispose of it to an entity (other than a foreign government agency) in circumstances meeting all of these conditions: (i)the asset is land over which a mining lease was compulsorily granted; (ii)the lease significantly affected your use of the land; (iii)the lease was in force just before the disposal; (iv)the entity to which you dispose of the land was the lessee under the lease; (cb) you dispose of it to an entity (other than a foreign government agency) in circumstances meeting all of these conditions: (i)the asset is land over which a mining lease would have been compulsorily granted if you had not disposed of it; (ii)that lease would have significantly affected your use of the land; (iii)the entity to which you dispose of the land would have been the lessee under the lease. (d) if it is a lease granted to you by an Australian government agency under an Australian law - the lease expires and is not renewed. In this case, as established above, a CGT even C1 did not occur as your shares were not lost and therefore, you are unable to choose the roll-over relief under subsection 124-70(b) of the ITAA 1997. Additionally, as none of the other events listed in Section 124-70 of the ITAA 1997 happened to a CGT asset you own you are unable to choose the roll-over under this Subdivision. Under paragraph 103-25(1)(b) of the ITAA 1997 the Commissioner has the discretion to allow further time to make the choice to apply the replacement asset roll-over relief. In this case, you are not eligible for the replacement asset roll-over relief and therefore the Commissioner will not exercise his discretion to allow you further time. As per subsection 124-10(2) of the ITAA 1997, under the Replacement asset roll-over relief, a capital gain or a capital loss you make on the original asset is disregarded. In your case, as established above, you are not eligible for the Replacement asset roll-over relief and therefore, cannot disregard any capital gain made on the disposal of the shares.