Private ruling: Capital gains tax, Shares and Compensation payments

Ruling: Q3: Is the 50% CGT discount available on the disposal of the Company D Shares? Yes.



Reasons for decision: Summary: When considering the disposal of the Company D shares, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner of the asset. In absence to the contrary, property is considered to be owned by person(s) registered on the title. Evidence may include documents that show the registered owner holds the property in trust for someone else. It is possible for legal ownership to differ from beneficial ownership. Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property in trust for the beneficial owner. In this situation, you have always retained legal and beneficial ownership of the Company D shares although they formed part of a chain of lending Agreements. In accordance with TR 95/35, the compensation receipts are considered to be capital proceeds for the underlying assets, the Company D shares. Although the proceeds were initially paid to Company B, the proceeds were eventually distributed to you and thus are considered to be the capital proceeds in the calculation of your capital gain. A 50% discount can be applied to a capital gain where that asset has been owned for more than 12 months. In this situation, you acquired the shares in Company A when you exercised your Company A options. Although the Company D shares were held as security under chain of lending agreements, you have always retained ownership of the shares and your ownership period has exceeded 12 months. Therefore, you are entitled to the individual 50% discount.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Question 1: Did CGT event A1 occur when Company D was put into liquidation and the Company D shares were confiscated and disposed of the financial institutes? | Question 2: Are the first, second, third and fourth compensation payments and any further compensation payments received by Company B considered to be the capital proceeds on the disposal of the Company D shares? | Relevant facts: You are the chairperson of the Board of Directors of Company A. | You are also the sole shareholder and director of Company B. | On various occasions you, either in your own name or through Company B, acquired both share and option interests in Company A. | You held a number of Company A options (the options). | You exercised the options and as a result you acquired shares in Company A (Company A shares). | Immediately after, you entered into a Securities Lending Agreement with Company B (the Company B Agreement). At the same time, Company B entered into a Securities Lending and Borrowing Agreement (the Company C Agreement) with Company C. | Under the Company C agreement, Company B provided the Company A shares as security for a margin loan. This included fees and prepaid interest. | The Company B Agreement was made on the same terms as the Company C Agreement; however, it did not involve the provision of a margin loan. | You have provided copies of each Agreement as part of your ruling request. | Company D wrote to Company B outlining that it was seeking all Company C Securities accounts to be transferred to it. This included the transfer of the margin loan. A copy of this letter was provided in your ruling request. | Company B agreed to this assignment and signed a document titled "Novation Letter" and completed documents opening a new account with Company D. In effect, it appears that: | · Company B established a new account with Company D; and | · A Novation of the Company B agreement occurred, with the obligations of Company C ceasing and identical obligations on the part of Company D commencing. | Some time later, a number of Company A shares (the Unencumbered shares) were released from the Company D account and transferred to Company B. This was because the value of the Company A shares had increased such that the security provided far outweighed the value of the margin loan. | The unencumbered shares were subsequently transferred to you. | The remainder of the Company A shares remained with Company D (the Company D shares). | The Company A shares were split on a 1-for-10 basis. | A third party was appointed as Joint and several administrators to the Company group which comprised Company C and Company D (the Company Group). | At this point the value of the margin loan that was held between Company B and Company D was less than the value of the Company D shares held. | The Company group was put into liquidation by its creditors. All shares held by Company D were disposed of by financial institutes pursuant to a facility agreement they had entered into with Company group. | Legal proceedings were commenced by a number of creditors against the financial institutes and the Company group alleging, amongst other things, misleading and deceptive conduct. | The liquidators proposed a scheme of arrangement between the Company group, its connected entities and its creditors. The legal action was settled as part of the scheme of arrangement. | Company B was admitted as an "established securities claim" holder and the liquidator indicated a value of the Company D shares. The scheme of arrangement was approved by the Federal Court of Australia and became effective at that time. | Company B has received the following interim scheme dividends: | (a) the first compensation payment. | (b) the second compensation payment. | (c) the third compensation payment; and | (d) the fourth compensation payment. | The liquidators have advised that further scheme dividends may be paid (further compensation payments). The amount and timing of such payments is uncertain, and is dependant primarily on asset realisations and agreement of claims by the liquidators. | The scheme dividend payments paid to Company B have been passed on to you. | You have not included any capital gain or capital loss in your income tax return as yet. At the time of lodgement of your income tax return, no capital gain was ascertainable. | You expect that you have made a capital gain on the disposal of the Company D shares.