Private ruling: Early stage innovation company CGT treatment
Date of advice: 3 June 2021
Published: August 2021
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Would the eligible shareholders in the Company retain the modified Capital Gains Tax (CGT) treatment under section 360-50 of the ITAA 1997 for their shares once they are transferred to a bare trust? | A1: Yes

Relevant facts and circumstances: 1. The Company was incorporated on Date X. 2. The Company has assessed that they qualify as an ESIC company. 3. Several investors have qualified for the ESIC CGT concessions. 4. These investors will roll their shares into a bare trust arrangement.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 360-A | Income Tax Assessment Act 1997 Section 360-50

Reasons for decision: Summary: The eligible shareholders in the Company will retain the modified Capital Gains Tax (CGT) treatment under section 360-50 of the Income Tax Assessment Act 1997 ('ITAA 1997') for their shares once they are transferred to a bare trust. | Detailed Reasoning - Detailed reasoning: Modified CGT Treatment - section 360-50 1. An investor that acquires shares in a qualifying ESIC will be taken to hold these shares on capital account and the disposal of these shares would give rise to a capital gain or a capital loss as per paragraph 360-50(2). 2. The specific CGT consequence arising for these shares depends on: • when the investor entity deals with the shares (and the relevant CGT event happens); and • whether the investor entity realises a capital gain or a capital loss from that event. Shares held for more than 12 months and less than ten years 3. An investor that has continuously held a qualifying share for between 12 months and less than ten years may disregard a capital gain arising from the share however it must disregard any capital loss as per subsections 360-50(3) and (4) Shares held for 10 years or more 4. An investor that has continuously held a qualifying share for at least ten years will receive a market value, as determined on the ten year anniversary date, as the first element of the cost base and reduced cost base of the share. This ensures that any incremental gains (or losses) in value after 10 years will be taxable as per subsection 360-50(5). | Detailed Reasoning - Application to your circumstances: Entitlement to modified CGT Treatment - section 360-50(1) and (2) 5. When the shares in the Company are transferred into a bare trust, the original shareholders will no longer be the legal owner of the shares, however as the shares are held in trust for them, they will continue to be the beneficial owners of the shares. 6. Section 104-10(2) states You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. 7. As there is no change in ownership of the Company shares the shareholders will be taken to continuously hold their shares and as such will still be entitled to the CGT concessions in section 360-50. | Detailed Reasoning - Conclusion: 8. The eligible shareholders in the Company will retain the modified Capital Gains Tax (CGT) treatment under section 360-50 of the Income Tax Assessment Act 1997 ('ITAA 1997') for their shares once they are transferred to a bare trust.