Private ruling: Capital gains tax - Shares - Private company
Published: June 2012
Ruling period: 2011-12 income year | 2012-13 income year
Date scheme commenced: 1 July 1984

Ruling: Q1:  | A1:  | Q2:  | A2:  | Q3:  | A3:  | Q4:  | A4: 

Relevant facts and circumstances: You are a shareholder of a specified company. You acquired your 'D' class shares in about 2000. A review of the financial statements for the year ended 30 June 1985 indicate the company owned certain land and buildings with a cost base of about $X at this point in time. The financial statements prepared for the year ended 30 June 1986 show this property still being held and the cost base remaining unchanged. You do not have a copy of the financial statements for the years ended 30 June 1987, 1988 and 1989. The financial statements for the year ended 30 June 1990 (with 1989 comparisons) indicate the property was sold during the period between 30 June 1986 and 30 June 1989. The land and buildings are removed from the balance sheet and a capital profits reserve (pre CGT Capital Gain) is disclosed on the balance sheet. You understand renovations were conducted to the property prior to the disposal but the total cost incurred was less than $50,000.00. The shareholders of the company are looking at liquidating the company. The shareholders of the company are summarised into classes of shares. The only assets of the company are loans made to a related trust. These loans have been drawn on dates between 1980 and 1990. Please note these loans have not been forgiven. To liquidate the company the following steps will occur: · A related entity will advance money to the trust. · The trust will repay these loans to the company. · The funds will be distributed to the shareholders as a liquidator's distribution representing the paid up share capital and the capital profits reserve (pre CGT gains). For the purpose of this ruling, the shareholders will gift the liquidator's distribution back to the related entity. As stated above the only assets of the company are loans made to a related trust. You calculate the breakup of these loans will be as follows: Pre 20 September 1985 About 40% Post 19 September 1985 About 60%

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 44, | Income Tax Assessment Act 1936 Section 47, | Income Tax Assessment Act 1936 Section 160L, | Income Tax Assessment Act 1936 Section 160P, | Income Tax Assessment Act 1936 Section 160Q, | Income Tax Assessment Act 1936 Section 160U, | Income Tax Assessment Act 1936 Part IVA, | Income Tax Assessment Act 1997 Section 104-25, | Income Tax Assessment Act 1997 Section 104-135 and | Income Tax Assessment Act 1997 Section 104-230.

Reasons for decision: Summary: The Commissioner will conclude that the property sold by the company is pre-CGT. | Detailed Reasoning - Detailed reasoning: The inclusion of the property in the company's accounts for the year ended 30 June 1986 with comparison figures showing that it was also owned by the company as at 30 June 1985 is sufficient evidence to demonstrate that the company owned it as a pre-CGT asset (given that there is no evidence to support any contrary contentions). As such, there is no need to prove an actual acquisition date before 20 September 1985 to confirm that the sale of the property by the company was not subject to the capital gains provisions as they then applied. Further, capital improvements costing less than $50,000.00 were not treated as a separate asset for capital gains purposes unless another Part of the ITAA 1936 also treated it as a separate asset. (Generally, this outcome only applied to depreciable assets and they were normally dealt with using the balancing adjustment provisions rather than as capital gains or losses.) | Summary: The payout of the capital profits reserve is not treated as a return of capital to you upon the liquidation of the company. | Detailed Reasoning - Detailed reasoning: Subsection 104-135(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that CGT event G1 happens if: · A company makes a payment to you in respect of a share that you own in the company (except for CGT event A1 or C2 happening in relation to the share) · Some or all of the payment is not a dividend, or an amount that is taken to be a dividend under section 47 of the ITAA 1936, and · The payment is not included in your assessable income. Subsection 104-135(6) of the ITAA 1997 states that you disregard a payment by a liquidator for the purpose of section 104-135 if the company ceases to exist within 18 months of the payment. | Detailed Reasoning - Is any part of the payout of the capital profits reserve a dividend?: Generally, a payment made by a company to a shareholder out of the company's profits is a dividend in accordance with section 44 of the ITAA 1936. However, section 47 of the ITAA 1936 refines the definition of the term dividend where a payment is made by a liquidator in the course of winding up a company. Section 47 of the ITAA 1936 limits the scope of 'liquidating dividends' to: · Assessable income (other than net capital gains), and · Net capital gains calculated in a modified manner. This refined definition of dividend does not include the distribution of exempt capital gains. Therefore, the payout of the capital profits reserve (being derived from the capital gain made by the company from the sale of land and buildings situated at the X Shopping Centre) will not be a dividend. | Detailed Reasoning - Will any part of the payout of the capital profits reserve form part of CGT event C2?: Subsection 104-25(1) of the ITAA 1997 provides that CGT event C2 happen when a share is cancelled at the end of the voluntary winding up of a company. A payment made by the liquidator within 18 months of the company ceasing to exist will form part of the capital proceeds when calculating any capital gain or capital loss made as a result of the cancellation of the share. Taxation Determination TD 2001/27 states from paragraph 11 that: · In the absence of written advice from the liquidator that the company will not cease within 18 months of payment of the interim distribution, a shareholder may assume that the company will cease to exist within 18 months. The shareholder may therefore initially apply subsection 104-135(6) to disregard the non-assessable part for the purposes of CGT event G1 and this amount will be part of their capital proceeds for the happening of CGT event C2 when their shares end. If the company does not cease to exist within 18 months of the payment of the interim liquidation distribution, subsection 104-135(6) does not apply and CGT event G1 can have effect. Consequently, the payout of the capital profits reserve to you will form part of the capital proceeds for the cancellation of your 'D' class shares and will not be a 'return of capital' for the purpose of CGT event G1. | Summary: Part IVA of the ITAA 1936 will not apply to the gifting of the liquidator's final distribution back to the related entity? | Detailed Reasoning - Detailed reasoning: Part IVA of the ITAA 1936 is a general anti-avoidance provision that can apply in certain circumstances if a tax benefit is obtained in connection with a scheme, and it can be concluded that the scheme, or any part of it, was entered into for the dominant purpose of enabling a tax benefit to be obtained. The application of Part IVA of the ITAA 1936 depends on the facts of the particular case. In order for the Commissioner to exercise the discretion in subsection 177F(1) of the ITAA 1936, the requirements of Part IVA of the ITAA 1936 must be satisfied. These requirements are that: · a 'tax benefit' as defined in section 177C of the ITAA 1936, was or would, but for subsection 177F(1) of the ITAA 1936 have been obtained; · the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A of the ITAA 1936; and · having regard to section 177D of the ITAA 1936, it would be concluded that the main or dominant purpose of entering into the scheme was to obtain the tax benefit. The definition of scheme in subsection 177A(1) of the ITAA 1936 is very broad and applies to any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and any scheme, plan, proposal, action, course of action or course of conduct. In your case, the following steps comprise a scheme as defined in section 177A of the ITAA 1936: · The related entity will advance money to the trust. · The trust will repay these loans to the company. · The funds will be distributed to the shareholders as a liquidator's distribution representing the paid up share capital and the capital profits reserve (pre CGT gains). · The shareholders will gift the liquidator's distribution back to the related entity. Tax benefit is defined in subsection 177C(1) of the ITAA 1936. Paragraph 177C(1)(a) of the ITAA 1936 provides that a taxpayer may be found to have obtained a tax benefit if they entered into or carried out a scheme that results in an amount not being included in assessable income where it otherwise might have been, or might reasonably be expected to have been included in assessable income of the taxpayer in relation to a year of income if the scheme had not been entered into or carried out. An alternate postulate is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out, that is, what the taxpayer would have done absent the scheme. In identifying a reasonable alternate postulate, the following factors are taken into account: · the most straightforward and usual way of achieving the commercial and practical outcome of the scheme, · commercial and social norms, · behaviour of relevant parties before and after the scheme, and · the actual cash flow. A tax benefit will not arise for a particular taxpayer in connection with a scheme if: · there is a reasonable alternate postulate that shows how the taxpayer would have undertaken or might reasonably be expected to have undertaken a particular arrangement absent the scheme, and · the alternate postulate would or might reasonably be expected to have resulted in an allowable deduction of the same kind as the deduction claimed by the taxpayer under the scheme. The fact that you are dealing with related parties under the scheme does not of itself compel the application of Part IVA of the ITAA 1936. In your case, the scheme results in a distribution from the company not being assessable as a dividend under section 44 of the ITAA 1936, although it may form part of the calculation of a net capital gain. Were you not to enter into or carry out this scheme (and liquidate the company), any distribution you received from the company would be assessable to you as a dividend under section 44 of the ITAA 1936, but the company would continue to incur ongoing fees. The alternate postulate leaves the company incurring ongoing fees. In your circumstances it is a comparable, but less ideal way of achieving the same practical outcome. The Commissioner accepts that there are a number of ways of doing a transaction or organising your affairs. In this matter, the Commissioner accepts that you are not entering into the transaction for the purpose of obtaining a tax benefit as defined in section 177C of the ITAA 1936, having regard to the alternate postulate and the manner in which the scheme is implemented. Therefore, Part IVA of the ITAA 1936 will not apply to include an amount in your assessable income in the proposed arrangement the subject of this Ruling Application. | Summary: CGT event K6 is not triggered by this liquidation. | Detailed Reasoning - Detailed reasoning: Subsection 104-230(1) of the ITAA 1997 provides that CGT event K6 happens if: · You own shares in a company you acquired before 20 September 1985 · CGT event A1, C2, E1, E2, E3, E5, E6, E7, E8, J1 or K3 happens in relation to the shares · There is no roll-over for the other CGT event, and · Certain other requirements are satisfied. While CGT event C2 will happen when your shares in the company are cancelled at the end of the liquidation, CGT event K6 will not happen as you acquired the shares in about 2000 and this is after 20 September 1985. It is, therefore, not necessary to determine whether or not there would be an unrealised capital gain in the company.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Subject: Capital gains tax - Shares - Private company: Question 1: Will the Commissioner conclude that the property sold by the company is pre-CGT? | Question 2: Is the payout of the capital profits reserve treated as a return of capital to you upon the liquidation of the company? | Question 3: Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the gifting of the liquidator's final distribution back to the related entity? | Question 4: Is CGT event K6 triggered by this liquidation? | Reasons for decision: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.