Private ruling: CGT - foreign investment fund
Date of advice: 21 January 2022
Published: April 2022
Ruling period: Year ended 30 June 20xx | Year ending 30 June 20xx | Year ending 30 June 20xx | Year ending 30 June 20xx | Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Will the proceeds from the disposal or redemption of the shares in the Foreign Investment Fund (the Fund) be subject to the capital gains tax (CGT) provisions and be eligible for the CGT 50% discount if held for at least 12 months? | A1: Yes.

Relevant facts and circumstances: You invested various amounts in the Fund. The amounts you invested entitled you to receive a certain number of 'shares' in the Fund. The Fund was established in a foreign country and it could form multiple sub-funds, each of which constituted a separate sub-fund of the Fund. The Fund was able to create one or more Sub-Funds in order to segregate the assets and liabilities of the Fund held within or on behalf of a particular Sub-Fund, and from its general assets and liabilities. The Fund may issue one or more classes of participating shares relating to the same Sub-Fund. The proceeds from the issuance of all participating shares in a particular Sub-Fund will be applied in the books of the Fund to that Sub-Fund, and the assets and liabilities and income and expenditure attributable thereto will be applied to such Sub-Fund. A shareholder shall (in respect of such participating share) have the right to receive notice of, attend and speak at any general meeting, but the participating shares have no voting rights except in connection with the variation of share rights. Subject to the provisions of the constitution, the participating shares may only be transferred to another investor with the prior written consent of the Fund manager, which consent may be withheld by the manager in their absolute discretion. Participating shares of the Fund will be issued in registered form and no share certificates will be issued unless otherwise determined by the Fund. The Administrator, on behalf of the Fund, maintains a register of the names and addresses of the shareholders and an entry in such register is conclusive evidence of ownership. At any time, the Fund retains the discretion to make distributions to shareholders from the principal, interest, dividends and disposition and realisation proceeds of the Sub-Fund's portfolio. There is no guarantee that distributions will be made, and any income generated from investments of the Sub-Fund during its term may be re-invested by the Fund manager and not distributed. None of the participating shares shall entitle any shareholder to receive any dividend unless so declared by the Fund from time to time. Participating shares may be redeemed at the option of a shareholder. In the absence of any specific instructions from a shareholder, a shareholder will be deemed to have requested a redemption of participating shares on a first acquired, first redeemed basis. The redemption price of each participating share after the initial offer period is the price equal to the net asset value per share in respect of that share.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 104-10(1) | Income Tax Assessment Act 1997 subsection 104-10(2) | Income Tax Assessment Act 1997 subsection 104-10(3) | Income Tax Assessment Act 1997 subsection 104-10(4) | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 subsection 104-25(2) | Income Tax Assessment Act 1997 subsection 104-25(3) | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 115-25

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified. A CGT asset is any kind of property or a legal or equitable right that is not property. Examples of CGT assets include land and buildings, shares in a company and units in a unit trust, options, debts owed to you, a right to enforce a contractual obligation and foreign currency (section 108-5). CGT event A1 happens if you dispose of a CGT asset. 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 (subsections 104-10(1) and (2)). The time of the event is when you enter into the contract for the disposal; or if there is no contract, when the change of ownership occurs (subsection 104-10(3)). You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-10(4)). Section 104-25 relates to cancellation, surrender and similar endings and provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset: a) being redeemed or cancelled; or b) being released, discharged or satisfied; or c) expiring; or d) being abandoned, surrendered or forfeited; or e) if the asset is an option - being exercised; or f) if the asset is a convertible interest - being converted. The time of the event is when you enter into a contract that results in the asset ending, or if there is no contract, when the asset ends (subsection 104-25(2)). You make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3)). For example, CGT event C2 happens where there is a redemption of units in a unit trust, but there is no acquisition of the units by the trustee (because the units are extinguished) - see CGT Determination Number 40 TD 40. | Detailed Reasoning - Analysis: Based on the information provided, investments in the Fund are made by the acquisition of shares in the Fund which provide the shareholder with certain rights, such as: • the right to receive notice of, attend and speak at any general meeting and have voting rights in connection with the variation of share rights only • the right to receive distributions from the principal, interest, dividends and disposition and realisation proceeds of the Sub-Fund's portfolio at the discretion of the Fund manager • transfer shares to another investor subject to approval from the Fund manager • redeem the shares for the price applicable to the net asset value per share by giving the required notice. In your case, the shares in the Fund are identifiable as CGT assets and are therefore subject to the CGT provisions. Consequently, on transfer of any of the shares to another investor, you will have disposed of the shares and CGT event A1 in section 104-10 will happen. You will make a capital gain or loss at the time of disposal based on the rules in subsection 104-10(4). While on redemption of any of the shares, your ownership of the shares will end by the asset being redeemed or cancelled. Therefore, CGT event C2 in section 104-25 will happen and you will make a capital gain or loss at the time of the redemption based on the rules in in subsection 104-25(3). You make a discount capital gain if a CGT event happens to a CGT asset that you acquired at least 12 months before the CGT event (section 115-25).