Private ruling: CGT - cancellation of shares
Date of advice: 22 December 2022
Published: 20 February 2023
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the amounts receivable by the Shareholders from the Buyer under the Contract, requiring the dissolution of the Company and the cancellation of its shares, capital proceeds in respect of CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes, the amounts receivable by the Shareholders from the Buyer under the Contract, requiring the dissolution of the Company and the cancellation of its shares, are capital proceeds in respect of CGT event C2 in section 104-25 of the ITAA 1997.

Relevant facts and circumstances: For the purposes of this ruling, the applicants Company Pty Ltd (the Company), Person A and Person B (the Shareholders) will collectively be referred to as the Sellers. The Company was incorporated in the 2000s. The Company developed technological IP (the IP). Person A and another individual (the Second Employee) were employed by the Company. The Shareholders each hold one Ordinary and one B-class share in the Company. The Contract On XX October 20XX (the Closing Date), the Sellers entered into a Technology Licence and Purchase Agreement (the Contract) with a purchasing entity (the Buyer). The Contract provides for: • an exclusive licence over the IP to the Buyer for a period of 18 months • an option, but no obligation, for the Buyer to subsequently acquire the IP, and • a cancellation of the shares in the Company held by the Shareholders, being 100% of shares issued by the Company The terms of the Contract are such that the whole of the business operated by the Company, a competitor of the Buyer, is to cease. The Contract requires that the Company is wound up and the shares held by the Shareholders are cancelled within a defined time period. The Contract provides that the Buyer will be granted an exclusive, irrevocable, royalty-free and fully paid-up, worldwide licence for use of the IP for period of time up until the IP Transfer Date occurring at the first anniversary of the Closing Date. The Closing Date occurs following satisfaction of a number of conditions, including: • Acceptance by Employees of offers of employment with the Buyer; • Seller providing written notice to discontinue and no longer offering products to customers; • Written communication to counterparties advising that the seller is ceasing the business; • Releasing a final update for the Sellers' current products • Removal of promotional, branding, online material, social media accounts. Person A is required to continue to use the IP to fulfill existing product-related contractual obligations, including maintenance and service obligations until the Company ceases. The Contract provides that there is a Retention Period of 18 months from the Closing Date, during which an amount is withheld by the Buyer (the Retention Holdback) to satisfy warranty or indemnity claims, should any arise. The total consideration for the Contract is USD $X paid in two instalments: • the Closing Payment, being USD $Y paid on the Closing Date • the Retention Holdback, being USD $Z paid on completion of the Retention Period The Buyer and Sellers act at arm's length and the consideration payable is market value. Employment The Contract provides that the payments made under the Contract do not represent employment income. From Closing Date, Person A and the Second Employee will be seconded to the Buyer for up to 18 months to fulfil obligations including maintenance and service obligations and allow them to undertake any required or outstanding activities for the Company. A separate Statement of Work operates with separate payments for separate milestone requirements, to provide for transition of the IP to the Buyer's IT environment, should the Buyer exercise the option to acquire the IP. The employment contracts are separate agreements with market value remuneration. The employment contracts do not have a fixed end date, nor are there any obligations to remain after the retention payment is made and the Contract completed.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-25 | Income Tax Assessment Act 1997 section 104-25

Reasons for decision: Summary: ATO Interpretive Decision ATO ID 2001/308 Income Tax - Sale of Company via Share Cancellation discusses the Commissioner's views on whether amounts received from third parties in respect of a share cancellation (i.e., not from the company in which the shares are being cancelled), is capital proceeds in respect of CGT event C2 contained in section 104-25 of the ITAA 1997. Paragraph 104-25(1)(a) of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being redeemed or cancelled. Paragraph 104-25(2)(a) provides that, where a contract exists in relation to the redemption or cancellation of the intangible asset, the time of the CGT event is when you enter into the contract that results in the asset ending. In this case the Contract requires that the Company cease operations and the shares are cancelled. Accordingly, the amount received, or receivable, from the Buyer are capital proceeds in respect of CGT event C2. No consideration under the contract is referable to goodwill, provision of services or an inducement to enter into employment contracts.