Private ruling: Discount capital gain
Date of advice: 17 June 2022
Published: September 2022
Ruling period: Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you able to access the CGT discount if you make a capital gain on the disposal of your A and Non-Voting B Shares? | A1: Yes.

Relevant facts and circumstances: • X ordinary share held by the managing director (Managing Director) of the Company that is a voting share: and • Cumulative redeemable participating preferences shares comprising: ­ A shares (A Shares) that are non-voting; and ­ B shares which are: o voting where they are held by current ABC group (the Group) employees (Voting B Shares); and, o are non-voting when they are held by a former Group employees (Non-Voting B Shares). • The holders of A Shares will dispose of their shares to Hold Co, the proceeds calculated as $X for each A Share held plus the formula amount to which they are entitled under the Constitution,and they will be paid in cash (initially outstanding as Hold Co's liability subsequently funded out of future capital raising / financing, likely from an external investor). • Holders of Non-Voting B Shares will dispose of their shares to Hold Co, the proceeds calculated as $X for each Non-Voting B Share held plus the formula amount to which they are entitled under the Company Constitution, and they will be paid in cash (initially outstanding as Hold Co's liability subsequently funded out of future capital raising / financing, likely from an external investor). • The A Shares and Non-Voting B Shares in the Company then held by Hold Co will be cancelled for the original prescribed subscription amount; ($X and $X respectively). • X shares acquired on XX XX 20XX • X shares acquired on XX XX 20XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 115 | Income Tax Assessment Act 1997 Section 115-10 | Income Tax Assessment Act 1997 Section 115-15 | Income Tax Assessment Act 1997 Subsection 115-20(1) | Income Tax Assessment Act 1997 Subsection 115-25(1)

Reasons for decision: Summary: All references are to the Income tax Assessment Act 1997 unless otherwise specified. • the gain must be made by, an individual, a complying superannuation entity, a trust, or a life insurance company (section 115-10) • the CGT event must happen after 11.45am on 21 September 1999 (section 115-15) • the cost base must be calculated without reference to indexation (subsection 115-20(1)), and • the CGT asset must have been acquired at least 12 months before the CGT event (subsection 115-25(1)). • you are an individual or a trust • the CGT event will occur during the 20XX income year, • the shares were acquired after 21 September 1999, and as such indexation of your cost base in the shares is not available, and • you have held the shares for at least 12 months.

Relevant facts and circumstances: ABC Pty Ltd (the Company) has the following share classes on issue: | A Shares and Non-Voting B Shares shareholders are referred to collectively as 'Exiting Members' and the Voting B Shares are referred to as 'Exchanging Members'. | These are the only shares on issue in the Company. Shares can only be issued to qualified Group employees under a scheme contained in the Company's constitution which is intended to benefit the Group business by, among other matters, attracting and retaining senior employees. | The Company is of the view that the existing share structure is a material impediment to the future development of the Group's business and has proposed a reorganisation (Reorganisation) of its structure, to address this issue. | The Company is the holding company of DEF Ltd (DEF) and holds 100% of the shares in DEF. | The intention is for the Company to form an income tax consolidated group with its wholly owned subsidiary, DEF as the sole joining entity, prior to the Reorganisation. | A new holding company (Hold Co) will be established at the commencement of the Reorganisation. The Company will hold X ordinary shares in Hold Co's capital which will represent its entire issued share capital, issued for nominal value of $X. | As part of the Reorganisation: | As part of the Reorganisation, the Company will obtain an independent valuation of its business. That valuation will assess the enterprise value of the business on a market basis and be used for the purposes of determining the exit value of Exiting Members, and the remaining value for Exchanging Members. | Person A acquired A Shares on XX XX 20XX. | The trustee for the ABC Trust (the Trust) acquired Non-Voting B shares in two parcels, as follows: | Person A and the Trust are Australian residents for tax purposes. | The Company's shareholders hold their Company shares on a capital account for tax purposes. | CGT event A1 will happen when the A and the Non-Voting B Shares are disposed of to Hold Co. | The cancellation of the various shares noted above would be in line with the requirements and timing under the Corporations Act 2001 , the Company's Constitution, and any shareholder resolutions. | Any resolutions made to enact the Reorganisation will be made in accordance with the Company's Constitution. | Where CGT event A1 happens to shares you own, you will make a capital gain if the capital proceeds from the disposal are more than the cost base of those shares (subsection 104-10(4). | If you make a capital gain on the disposal of your shares, Division 115 sets out the requirements for it to be a discount capital gain: | Indexation of the cost base of a CGT asset is not available if the asset was acquired after 11.45 am legal time in the ACT on 21 September 1999. | If you have made a capital gain on the disposal of your A and Non-Voting B shares, you will meet the requirements for the capital gain to be a discount capital gain as: