Private ruling: Shares - value shifting
Published: January 2014

Ruling: Q1: Will the cost base of your shares in Company H be uplifted pursuant to Division 725 of the ITAA 1997? Yes Year ended 30 June 2014 01 July 2013 Since before 19 September 1985 the shareholding of Company H has been: Individual 1 1 Ordinary Share Individual 2 1 Ordinary Share You 200 Preference Shares Company H has not declared any dividends to its shareholders nor made any distributions of capital. In particular, no preferential dividends have been declared in respect of the Preference Shares. Furthermore, as Company H has never traded nor derived income or capital gains, it does not have an ABN or TFN and has never lodged income tax returns. It has been proposed that the following changes in the shareholdings of Company H take place (Proposed Transaction): · Company H, with the consent of the directors and the members of the company, to vary the rights attaching to your Preference Shares to convert them back to ordinary shares (Share Conversion). Thereafter, your shares will carry equal rights to voting and distributions of income and capital of Company H, alongside the two ordinary shares owned by Individual 1 and Individual 2. The proposed transaction will effectively transfer X% of the control of Company H (i.e. via the voting rights), and X% of all future distributions of income and capital of the company, to you. The private ruling application and all annexure form part of the facts Income Tax Assessment Act 1997 Division 725 Income Tax Assessment Act 1997 Section 725-240 Income Tax Assessment Act 1997 Section 725-250 Income Tax Assessment Act 1997 Section 725-375



Reasons for decision: Summary: The cost base of your shares in Company H will be uplifted pursuant to Division 725. | Detailed Reasoning - Detailed reasoning: Section 725-240 provides that the cost base of an up interest is uplifted at the increase time to the extent provided for in section 725-250. However, the cost base of an up interest is only uplifted to the extent the amount of the uplift is still reflected in the market value when a later CGT event happens to the interest. Item 8 in the table in section 725-250 applies where you own an up interest and other affected owners own the down interest. This section applies to Individual 3 as Individual 3 owns the up interest and other affected owners own the down interest. This item specifies that Individual 3s uplift is determined under section 725-375. Section 725-375 includes a method statement for working out the up lift in adjustable value (cost base) of Individual 3s up interest: Your up lift is determined as follows: Step 1 : Group together all up interests of the kind referred to in the relevant item that sustained the same increase in market value as the up interest because of the direct value shift. Step 2: The value shifted to that group of up interests from the 'down interests is the amount worked out using the formula: Sum of the increases in market value of all up interests in the group because of the direct value shift X Sum of the decreases in market value of those down interests Total value of the direct value shift Step 3 : The uplift in the adjustable value of the up interest under the relevant item is equal to: Value shifted Number of up interests in the group All of your shares will be grouped together because they will be the same class. Given that the market values of up interests and down interests equal the total value of the direct value shift, the result of Step 2 will be equal to the market value shifted from the other shareholders to Individual 3s shares. Accordingly, if the amount of the uplift is reflected in the market value of Individual 3s shares when a later CGT event happens, the cost base of your shares will be uplifted to reflect the shift in value from the other shares.