Private ruling: CGT - Shares cost base
Date of advice: 26 August 2025
Published: 27 October 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the purchase costs paid directly to the shareholders constitute the cost base of acquiring 100% of the shares in another company under section 110-25 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Does the total purchase costs paid as stated in the purchase agreement, constitute the CGT cost base of acquiring 100% ownership of the business under section 110-25 of the ITAA 1997? | A2: Yes. Summary

Relevant facts and circumstances: You entered a formal Share and Purchase Agreement to acquire 100% of the shares in another company. Where you paid the following on completion of the purchase agreement: Your total purchase cost breakdown by real time electronic transfer on settlement as follows: Purchase Price as per the agreement Plus, Cash Less Leave entitlements: Less Instalments previously paid Less Instalments previously paid Less Payment of company deb Balance payable at completion to the former shareholders Shareholder 1 Shareholder 2 Shareholder 3 Shareholder 4 In addition, payable to a creditor for the bank guarantee: Guarantee 1 Guarantee 2 Guarantee 3 Guarantee 4 The purchase agreement: Background: The Sellers have agreed to sell and the Buyers has agreed to buy the Shares with effect from the Completion date for the Purchase Price and on the terms and conditions contained in this Agreement. Clause 2.7 Change of Control a) The parties acknowledge and agree that Completion of this Agreement is subject to and conditional upon each of the following: (Consent Conditions) b) The Buyer will provide to each of the Landlords such reasonable information as each landlord requires for the purposes of providing its consent to the change of Control of companies respectively. c) Each party will use reasonable endeavours to ensure that such consents are obtained before the Completion Date and will pay the reasonable costs of each of the Landlords of obtaining the consent of each of the Landlords to the change of Control of the companies respectively. d) The Buyer will provide: i. Cash security to a creditor to enable the guarantees for the Lease to remain in place and the Sellers to be released from all liability to the creditor in respect of such guarantees; ii. Substitute guarantees or other security acceptable to each of the Landlord to enable release to the Sellers of the current guarantees provided for each of the Lease. Clause 3. Sale of the Shares Subject to clause 2.7(a), on Completion, the Sellers must sell and Buyer must buy the Shares, together with all rights attached to them, for the Purchase Price free of Security Interests and other third party rights. Clause 4.5 Buyer's obligations at Completion a) Executed consents to act as director, secretary and public officer of the Buyer's nominees and confirmation of the registered office and signatories for the Company bank accounts to enable the Sellers to complete the resolution referred to in clause 4.4; and b) Evidence of cash security provided to XX to enable the bank guarantees for the XX Lease and the XX Lease to remain in place; or c) Substitute bank guarantees or other security acceptable to XX Landlord and XX Landlord to enable release to the Sellers of the current bank guarantees held by the XX Landlord and the XX Landlord. Clause 4.6 - Purchase Price a) The Buyer will, on completion, pay the following amounts (The Purchase Price) in equal proportions to the respective Sellers or as the Sellers otherwise direct: i. An amount in respect of the whole of the issued Shares in the company, adjusted in accordance with clause 4.6(b); and ii. An amount in respect of the whole of the issued Shares in the company. Clause 4.7 - Debt a) The Buyer acknowledges that the total Debt of the Group as at the date of this Agreement is owned to a vendor's creditor and totals approximately an amount. b) The Buyer will make such arrangements as the Buyer determines to ensure that the Debt is either refinanced or repaid on Completion to ensure that any Security Interest registered in respect of the Debt and any personal or corporate guarantees given by any Seller in favour of the vendor's creditor will be released on or before the Completion date. c) The Sellers acknowledges and agrees that no Seller is responsible for repayment of any of the Debt. Clause 15.9 Entire Agreement a) This Agreement embodies the entire agreement between the parties with respect to the subject matter of this Agreement and supersedes any prior negotiation, arrangement, understanding or agreement with respect to the subject matter or any term of this Agreement. b) Any statement, representation, term, warranty, condition, promise or undertaking made, given or agreed to in any prior negotiation, arrangement, understanding or agreement, has no effect except to the extent expressly set out or incorporated by reference in this Agreement. As part of the purchase agreement, you undertook the following: a) Repayment of Vendor's debt - an amount paid directly to vendor's creditor Bank which is not a usual feature of a passive equity transaction. b) Replacement of Guarantees - an amount paid to replace guarantees, again an operational handover feature. c) Assumption of Liabilities (Accounts Payable) - vendor did not deduct them from the price, you took them on, which is typical in business sale agreements, not share deals. d) Cash replacement - purchaser paid an amount to 'top up' vendor's bank cash, an action clearly tied to ongoing operations. e) Leave Entitlements deducted - indicates a 'net asset' approach, consistent with business sales.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 103-5 | Income Tax Assessment Act 1997 section 112-30 | Income Tax Assessment Act 1997 section 112-35 | Income Tax Assessment Act 1997 section 110-25

Reasons for decision: Summary: Payment, cost or expenditure, can include giving property under section 103-5 of the ITAA 1997: To the extent that such a provision does say that a payment, cost or expenditure can include giving property, use the *market value of the property in working out the amount of payment, cost or expenditure. Section 110-25 of the ITAA 1997 provides that the cost base of a CGT asset consists of five elements. These elements are: • First element - Acquisition costs • Second element - Incidental costs - which may include giving property. • Third element - Costs of ownership • Fourth element - Capital expenditure to increase of preserve the asset's value • Fifth element - Capital expenditure to establish, preserve or defend title to the asset or a right over the asset. The cost base of a CGT asset is the sum of the costs that make up the five elements. The cost base of a CGT asset is generally what it cost you to buy it, plus other costs you incur to hold and dispose of it. Section 110-25(3) of the ITAA 1997 provides that the second element of the cost base of a CGT asset is the incidental costs the owner of the asset incurred to acquire it. Incidental costs are further defined in section 110-35 of the ITAA 1997. The incidental costs that are incurred 'to acquire a CGT asset' or 'that relate to a CGT event' form part of the CGT cost base. The connection is a wide one: Narain v Parnell (1986) 64 ALR 561. But must be considered in context. In the case of Narain v Parnell the acquisition of an asset, the nexus is expressed by costs incurred 'to acquire' the asset. The nexus expressed by 'that relate to' could be satisfied even if the incidental costs were incurred after the time of the CGT event. That a tax treatment of a transaction must reflect its true commercial substance, not merely its legal structure. As outlined in the case of FCT v Orica Ltd [1998] FCA 1571; 98 ATC 4494; 39 ATR 66 (Orica): Orica restricted its operations by transferring assets to a wholly owned subsidiary, then sold the shares in that subsidiary. The dispute concerned whether associated costs were deductible or capital in nature. The Full Federal Court concluded that while the transaction was legally a share sale, the commercial substance indicated it was part of a broader business divestment. The court looked beyond legal form to determine tax consequences based on the economic reality. Under section 112-30 of the ITAA 1997, if you acquire a CGT asset and only part of the expenditure incurred relates to the asset: The first element of your cost base and reduced cost base of the asset is that part of the expenditure that is reasonable attributable to the acquisition of the asset. Section 112-35 of the ITAA 1997, states that: If you acquire a CGT asset from another entity that is subject to a liability, the first element of your cost base and reduced cost base of the asset includes the amount of the liability you assume. For example: You acquire a block of land for $150,000. You paid $50,000 and assume a liability for an outstanding mortgage of $100,000. The first element of your cost base and reduced cost base is $150,000. | Detailed Reasoning - Application to your circumstances: In 20XX, you entered into a purchase agreement to acquire 100% of the shares in another company. It was your intention to acquire, control, and continue the business as a going concern for the medical accreditation purposes, with the corporate shell retained purely as a vehicle to ensure seamless operational transfer. You paid the following on completion of the purchase agreement: An amount - paid directly to the four shareholders for the purchase of the company shares. An amount - paid directly to vendor's creditor to discharge debt owed by the company. An amount - paid for the Long Service Leave liabilities. The total purchase price is stated at clause 4.6 of the purchase agreement. The structure of your purchase agreement states that the contract is a share sale and purchase agreement. However, since you have assumed the company's outstanding accounts payable, which was not reduced from the purchase price, demonstrates that the operational liabilities formed part of the transaction's substance. As part of the purchase agreement, you undertook the following: a) Repayment of Vendor's debt - an amount paid directly to vendor's creditor which is not a usual feature of a passive equity transaction. b) Replacement of Guarantees - an amount paid to replace guarantees, again an operational handover feature. c) Assumption of Liabilities (Accounts Payable) - vendor did not deduct them from the price, you took them on, which is typical in business sale agreements, not share deals. d) Cash replacement - purchaser paid up to an amount to 'top up' vendor's bank cash, an action clearly tied to ongoing operations. e) Leave Entitlements deducted - indicates a 'net asset' approach, consistent with business sales. Under section 110-25 of the ITAA 1997, the cost base of a CGT asset consists of five elements. The amount you directly paid to the four shareholders to acquire 100% ownership of the shares in another company forms part of the first element and constitutes as the acquisition costs of acquiring the shares. The other amounts you paid, such as the repayment of the vendor's debt, replacement of the guarantees, the cash replacement, and the leave entitlements are all costs that were agreed upon that formed part of the purchase agreement. These amounts in total plus, the costs of the shares constitute your overall combined CGT cost base of acquiring the business under section 110-25 of the ITAA 1997 as these amounts were contractually required as part of the acquisition. You assumed the liability and paid out the vendor's debt. You paid for the long service leave liabilities, and you further assumed the company's outstanding accounts payable, which was not reduced from the purchase price. These amounts paid further demonstrates that the operational liabilities formed part of the total transaction to purchase the business. The cost base of each of the shares is a proportionate amount of the amount paid for the shares, and the remaining assets it the purchase price less the cost base of the shares.