Private ruling: Sale of sugar mill rights
Published: September 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Questions and Answers: | 1. Was your distribution received from a liquidator, for the ending of your member interest in a cooperative, a non-taxable pre-CGT gain to you? | No | 2. Was your distribution received from a liquidator, for the ending of your member interest in a cooperative, an unfranked dividend to be included as assessable dividend income in your 2012/13 income tax return? | Yes

Relevant facts and circumstances: Your partnership conducted a business using an asset purchased prior to 20 September 1985. At the time of purchasing the asset, you also received an interest in a local co-operative, which was later incorporated. This entitled your partnership to a distribution of profits each year. In addition, this interest entitled your partnership to a guaranteed annual supply of product to the cooperative. The cooperative assets were sold by a liquidator, from which you received a liquidator's distribution. In its advice to the members, the liquidator advised: (i) as none of its members have contributed amounts as share capital, the distribution could not be a return of capital; (ii) as there has been a more than 50% change in its membership since the introduction of capital gains tax, the original pre-CGT assets had become post-CGT assets; and (ii) as the cooperative asset had very minor franking credits, the dividends paid to members are likely to be wholly unfranked distributions.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 47 | Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 115-10 | Income Tax Assessment Act 1997 Section 149-30 | Income Tax Assessment Act 1997 Section 149-35

Reasons for decision: Summary: Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states a CGT asset is: (a) any kind of property; or (b) a legal or equitable right that is not property. Section 149-30 of the ITAA 1997 provides an asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. Section 149-35 of the ITAA 1997 provides the first element of the cost base of an asset that stops being a pre-CGT is the asset's market value at the time referred to in subsection 149-30(1). Section 47 of the Income Tax Assessment Act 1936 (ITAA 1936) is about distributions made by a liquidator. When a distribution of company capital gain is made by a liquidator to a shareholder, paragraph 47(IA)(b) of the ITAA 1936 has the effect of making the distribution to the shareholder the same as the net capital gain that was worked out for the company. For example, if a liquidator distributes non-taxable pre-CGT company capital gain to a shareholder, the distribution will also be non-taxable for the shareholder. However, a shareholder cannot receive a distribution of discounted capital gain from a company liquidation, under section 47 of the ITAA 1936, because section 115-10 of the ITAA 1997 excludes companies from discount capital gains. In addition, the full amount of a final distribution made by a liquidator on the winding-up of a company constitutes capital proceeds from the ending of the shareholder's shares in the company for the purposes of capital gains or capital losses made on the happening of CGT event C2 in section 104-25 of the ITAA 1997 (refer to Taxation Determination TD 2001/27). Also, section 118-20 of the ITAA 1997 is an anti-overlap provision that ensures that no part of a final liquidator's distribution is taxed as both a dividend and a capital gain, where the dividend is assessable income or exempt income. Section 118-20 of the ITAA 1997 acts to reduce a capital gain you make from a CGT event when that capital gain is included in your assessable income because of another tax provision (such as included in your assessable income due to section 47 of the ITAA 1936). In your case, the distribution received from the liquidator was not for the sale of your member interest in the co-operative but, instead, a distribution received in respect to your member right entitlements. As advised, by the liquidator, due to a more than a 50% change in its membership since the introduction of capital gains tax, the assets of the co-operative ceased being held as pre-CGT assets and were deemed to have been acquired as post-CGT assets. It follows, under section 47 of the ITAA 1936, the distribution made to your partnership was a taxable dividend, since any capital gain made by the co-operative, when it sold its post-CGT assets, was a taxable capital gain. As any capital gain made by the co-operative could not be discounted, your distribution received and assessable under section 47 of the ITAA 1936 was not discounted. As for the happening of CGT event C2 in relation to the ending of your member rights, whilst being a discount capital gains, section 118-20 of the ITAA 1997 acts to reduce your discount capital gain to nil, since the relevant amount of the capital gain is included in your distribution income that is assessable under section 47 of the ITAA 1997. In other words, section 118-20 of the ITAA 1997 acts to reduce your CGT gain rather than to reduce your section 47 income. In conclusion, (as the co-operative did not have any franking credits) your distribution received is an assessable unfranked dividend in your hands (because it represents a distribution of your member right entitlements) and also the CGT proceeds for the ending/cancellation of your member rights (rather than the CGT proceeds from the sale of your member rights).