Private ruling: Income tax - capital gains tax - CGT event K6 - sale of pre-CGT shares
Date of advice: 18 February 2020
Published: March 2020
Ruling period: Year ending 30 June 2020 | Year ending 30 June 2021
Date scheme commenced: The scheme has commenced

Ruling: Q1: Will a capital gain arise under CGT event K6, as set out in section 104-230 of the Income Tax Assessment Act 1997, on the disposal of your pre-CGT shares in COY A? | A1: No

Relevant facts and circumstances: COY A COY A is an Australian resident company incorporated before 20 September 1985 (pre-CGT). Individual A (you) owns X Ordinary shares (86.88%) acquired before 20 September 1985 (the pre-CGT shares), and Y Ordinary shares (0.04%) acquired after 20 September 1985 (the post-CGT shares) in COY A. You are disposing of both the pre-CGT shares and post-CGT share. You have provided information in relation to the assets and liabilities of COY A. You have provided various property valuations stating the market value of the properties. COY B COY B is an Australian resident company incorporated pre-CGT. COY A owns 'B' Class shares (100%) in COY B, which have the right to receive capital on surplus assets or profits of the company. You own 'A' Class shares (100%) in COY B, which provides rights to vote at company meetings, but no rights to capital. You are not proposing to sell this share. You have provided information in relation to the assets and liabilities of COY B. COY C COY C is an Australian resident company incorporated pre-CGT. COY B owns Ordinary shares (31.67%) and 'D' Class shares (100%) in COY C. The Ordinary shares provide rights to voting and capital. The 'A', 'B', 'C' & 'D' Class shares do not provide any rights to capital. You own Ordinary shares in COY C, but are not proposing to sell these shares. You have provided information in relation to the assets and liabilities of COY C. COY D COY D is an Australian resident company incorporated post-CGT. COY C owns Ordinary shares (99.9995%) in COY D. You have provided information in relation to the assets and liabilities of COY D. COY's E and F COY E is a Country A resident company, and COY F is a Country B resident company. The information provided states that COY C owns 100% of COY E and 100% of COY F. You have provided information in relation to the assets and liabilities of COY E and COY F: COY G COY G is an Australian resident company incorporated pre-CGT. COY C owns Ordinary shares (99.87%) in COY G. COY G is a dormant entity that does not hold any assets. COY H COY H is an Australian resident company incorporated post-CGT. COY B owns Ordinary shares (33.33%) in COY H. COY H does not trade or invest in its own capacity, and only acts in the capacity of trustee for the Trust A. Trust A Trust A is an Australian fixed unit trust. COY B owns units (33.33%) in Trust A. You have provided information in relation to the assets and liabilities of Trust A. You have provided various property valuations stating the market value of the properties. COY I COY I is an Australian resident company incorporated on XX 20XX. COY H as trustee for Trust A owns Ordinary shares (17.5%) in COY I . You have provided information in relation to the assets and liabilities of COY I.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-230 | Subsection 104-230(2) | Paragraph 104-230(2)(a) | Paragraph 104-230(2)(b) | Subsection 104-230(7) | Subdivision 124-A | Division 149 | Subsection 995-1(1)

Reasons for decision: Summary: Based on the facts, a capital gain would not arise on disposal of your pre-CGT shares as CGT event K6 would not happen. | Detailed Reasoning - CGT event K6: Note: This ruling uses the terms 'pre-CGT' and 'post-CGT', which refer to the times 'before 20 September 1985' and 'after 20 September 1985', respectively. While capital gains and capital losses on the sale of pre-CGT shares are generally disregarded, a capital gain may be made under CGT event K6. CGT event K6 is set out in section 104-230 of the Income Tax Assessment Act 1997 (ITAA 1997), and happens if: (a) you own shares in a company that you acquired pre-CGT; (b) CGT event A1, C2, E1, E2, E3, E5, E6, E7, E8, J1 or K3 (the other event) happens in relation to the shares; (c) there is no roll-over for the other event; and (d) one of the requirements in section 104-230(2) is satisfied (subsection 104-230(1)). If CGT event K6 happens you make a capital gain as set out in subsection 104-230(6) of the ITAA 1997. Taxation Ruling TR 2004/18 Income tax: capital gains: application of CGT event K6 (about pre-CGT shares and pre-CGT trust interests) in section 104-230 of the Income Tax Assessment Act 1997 (TR 2004/18) discusses CGT event K6 and the tests in subsection 104-230(2) of the ITAA 1997 (the 75% tests). CGT event A1 happens if you dispose of a CGT asset such as shares (subsection 104-10(1) of the ITAA 1997. You 'dispose' of a CGT asset if a change of ownership occurs from you to another entity (subsection 104-10(2). You acquired shares in COY A pre-CGT, and are selling these shares. CGT event A1 will happen when you enter into a contract to sell the shares, or when the ownership of the shares changes (section 104-10(3) of the ITAA 1997). Given these facts, and the assumption that there will be no roll-over for this CGT event A1, paragraphs 104-230(1)(a), (b), and (c) of the ITAA 1997 are satisfied. | Detailed Reasoning - Paragraph 104-230(1)(d) of the ITAA 1997: Section 104-230(2) of the ITAA 1997 requires that, 'just before the other event happened': (a) the market value of the post-CGT property of COY A (excluding trading stock) is at least 75% of the net value of COY A; or (b) the market value of COY A's interests in post-CGT property of interposed companies or trusts (excluding trading stock) is at least 75% of the net value of COY A. As stated above, the relevant time for determining the relevant market values and company net value for the purpose of the 75% tests is 'just before the 'other CGT event' happens'. In this case that is just before CGT event A1 happens - when you enter into a contract to sell the shares or, if there is no contract, when the change of ownership occurs on settlement of the transaction (section 104-10(3) of the ITAA 1997). For the purpose of the 75% tests, the term 'property' has its ordinary legal meaning. It does not mean 'asset' or 'CGT asset'. As such, although some income tax law treats a single item of property as two CGT assets, for the 75% tests there is one item of property and one acquisition date (TR 2004/18 paragraphs 12 and 13). For the purpose of paragraph 104-230(2)(a) of the ITAA 1997, post-CGT 'property' can include post-CGT shares in, or loans to, subsidiary companies and trusts (TR 2004/18, paragraph 17). For the test in paragraph 104-230(2)(b) of the ITAA 1997 it is the post-CGT property of COY A's subsidiary companies and trusts that is relevant: · All subsidiaries post-CGT property is taken into account, regardless of whether the subsidiary's shares or units were acquired pre-CGT or post-CGT, and · The market values of the subsidiaries' shares or units are excluded, even where those shares were acquired post-CGT (TR 2004/18, paragraph 19). For both limbs of the 75% test, the 'net value' of the test company is the amount by which the sum of the market values of its assets exceeds the sum of its liabilities (subsection 995-1(1) of the ITAA 1997). In the context of "net value", the word "assets" means property and other economic resources of the company that the entity is capable of turning to account, even if they are not property (paragraph 20 of TR 2004/18). Accordingly, for the purposes of calculating an entity's net value, "assets" would include trading stock, off-balance sheet assets (eg depreciated plant and internally generated goodwill) and pre-CGT assets. In other words, it would cover all the entity's CGT assets, off-balance sheet assets and identifiable assets in terms of accounting standards. However, it does not include "tax benefits" and non-proprietary assets. "Liabilities" takes its ordinary meaning, and extends to a legally enforceable debt that is due for payment and to a presently existing obligation to pay either a sum certain or an ascertainable sum. It does not extend to a contingent liability or to a future obligation or expectancy (TR 2004/18 at paragraph 21). Property, assets and liabilities owned by foreign residents are included in the calculations of post-CGT property and 'net value' for the purpose of the 75% tests. Subsection 104-230(7) of the ITAA 1997 provides for an adjustment to the acquisition date of certain property owned by foreign residents in certain circumstances. For the purpose of CGT event K6, Division 149 of the ITAA 1997 does not apply to treat property as acquired post-CGT (paragraph 15 of TR 2004/18). Based on the asset and liability values detailed in the facts: · COY A's post-CGT property (excluding trading stock) is less than 75% of COY A's total net value, and · the market value of COY A's interests in post-CGT property (excluding trading stock) of interposed companies and trusts is less than 75% of COY A's total net value. Based on the facts, a capital gain would not arise on disposal of your pre-CGT shares as CGT event K6 would not happen.