Private ruling: CGT - shares and Part IVA
Date of advice: 16 February 2016
Published: April 2016
Ruling period: 1 July 2014 to 30 June 2015 | 1 July 2015 to 30 June 2016

Ruling: Questions and answers | 1. Was the acquisition date of the shares on or around the xx xx xx for the purposes of Division 109 of the Income Tax Assessment Act 1997 (ITAA 1997)? | No. | 2. If the answer to question one is no; was the acquisition date of the shares xx xx xx for the purposes of Division 109 of the ITAA 1997? | Yes. | 3. If the answer to question one is yes; if the shares are sold by sale contract on xx xx xx has the Trust satisfied the requirements of section 115-25 of the ITAA 1997, that it has owned the shares for more than 12 months? | Not applicable. | 4. If the answer to question two is yes; is the disposal date of the shares, to the Company, the date the Put Option is exercised? | Yes | 5. If the answer to question 4 is yes; can the Trust apply the 50% CGT discount? | Yes. | 6. Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 would apply to the Put Option if the Put Option was exercised in the period from xx xx xx to xx xx xx? | No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. 1. On xx xx xx the Trust signed a Shares Transfer form to acquire shares in, a private company, now named the Company, from Trust 2, a related party, at an arms-length value. 2. The Company was a private company. 3. The disposal of the shares to the Trust was done for asset protection. 4. Trust 2 is a beneficiary but not the sole beneficiary of the Trust. 5. The shares disposed of, by Trust 2 to the Trust, represent approximately % of the issued capital in the Company. 6. The transfer of shares was vendor financed. 7. On xx xx xx the share form was sent to the Company's solicitors together with a signed accession agreement binding the Trust to the existing Shareholders' Deed as required by the Shareholders' Deed. 8. There was no other documentation executed for the transfer. 9. The Shareholders' Deed provided that a shareholder could transfer % of their shares to a 'permitted transferee'. The Trust was regarded as a permitted transferee of the shares. 10. Other than transferring the shares to a permitted transferee the shareholders were unable to dispose of the shares other than in accordance with the requirements of the Shareholders' Deed. 11. The Shareholders' Deed provides; Subject to clauses x and z, the Parties acknowledge that this Deed is intended to be read in conjunction with the Constitution and the Corporations Act. To the extent of any inconsistency between the terms of this Deed and either the Constitution or the Corporations Act, this Deed prevails (except to the extent the Corporations Act cannot be overridden by this Deed). …… 12. Under the Shareholders' Deed, it provides; The Shareholder desiring to sell or transfer an Ordinary share (seller) will serve a written notice on the Board (Transfer Notice) giving not less than 3 months' notice (3 Month Period) of desire to sell Ordinary Shares and setting out the number of Ordinary Shares which the Seller wishes to sell (Sale Shares)…. 13. Under the Company Constitution, it provides; A transferor of shares remains the holder of the shares transferred until the transfer is registered and the name of the transferee is entered in the register of members as the holder of the shares. 14. Due to a number of other share transfers the Company did not deal with the share transfers until their Board meeting on xx xx xx. 15. The Board Meeting minutes of xx xx xx it is noted: • That the executed shares transfers and accession deed had been received and as they were permitted transferees the transfers were in accordance with the Shareholders Agreement; and • That the Board approved the transfers and authorised the issue of relevant Share Certificates. 16. The share transfers were accepted by the Company during the Board meeting and a share certificate was issued to the Trust. 17. As of xx xx xx the register shows an increase in shares for the Trust and a decrease in shares for Trust 2. 18. In xx xx the Company announced that it was exploring the opportunity to list the Company's shares. 19. Group Z is used to describe a group of shareholders in the Company and Trust 2, now the Trust, is included in this group. 20. In the Shareholders Deed, a Group Z Monetisation Event is; the acquisition of Shares held by Group Z Shareholders by the Company in accordance with and subject to ……; 21. On xx xx xx the Company emailed the Group Z Shareholders to advise why the Put Option had been established. 22. The Shareholders' Deed contains a 'Group Z Monetisation Event' clause. 23. The purpose of the Group Z Monetisation Clause was to allow the Trust and other shareholders, in the group to, after xx xx xx, ascertain how the Company is performing before deciding to dispose of a portion of its shares. 24. The Shareholders Deed also contains clauses that would operate if the Company undertook a listing to ensure that all shareholders would agree to that listing through a standard 'drag-along' provision. 25. It is the Trust's understanding; that the Group Z group of shareholders are the only ones who were offered Put Options as they relate directly to the Group Z Monetisation Event clause. 26. In relation to the IPO the Company offered the Trust the following choices; • On xx xx xx sell down up to % of its shareholding into the listing; or • Not participate in the IPO and on xx xx xx grant the Trust a Put Option to allow them to dispose of up to % of their shareholdings at the same price at which the shares are sold in the IPO. 27. On xx xx xx the Trustee of the Trust chose not to sell down in the IPO process and the Put Option was granted. 28. The Put Option also allows the Trust to; • ascertain whether the IPO has been a success and consider how the market assesses the Company, (i.e. allowing the Trust the ability to sell its shares on market at a potentially higher price than the IPO sell down price); • Make an informed decision whether to sell down a portion of its shareholding or retain all the shares; • Not be involved in the IPO process as a vendor of shares; • Not be required to commit to the IPO without knowing the final IPO share price. 29. The option is exercisable between xx xx xx and xx xx xx. If the option is not exercised the shares will be retained and become subject to certain short, medium and long term escrow arrangements in place. 30. Under the Put Option Deed, it provides that; Each Grantee may only exercise the Put Option by delivering to the Grantor at any time within the Exercise Period a completed and executed Option Notice. … … Each Grantee may exercise the Put Option and create a contract for the sale and purchase of the Option Shares between itself and: The Grantor; or If the Grantor duly delivers a completed Nominee Notice to each Grantee, a Nominee. 31. Under the Put Option Deed , it states; If a Grantee delivers an Option Notice under clause xx then the Grantor or the Nominee (as applicable), as buyer, and the Grantee, as seller, are immediately bound under contract for the sale and purchase of the Option Shares. The Grantee being each party named as a 'Group Z Shareholder'. The Grantor being the Company. 32. On xx xx xx the Company was officially admitted to the ASX List. 33. The Prospectus states; In connection with the offer and in order to align the exit option for certain group of shareholders with the terms of a shareholders deed between the Existing Shareholders, certain Shareholders have entered into put options…There are xx Shares that are subject to the Put Option Arrangement, which represents % of the issued Shares…. 34. The Trust chose to exercise the Put Option between xx xx xx and xx xx xx primarily due to the prevailing market price of the shares being considerably lower than the exercise price of the Put Option. 35. The Trust has made a capital gain on the shares sold through the Put Option.

Relevant legislative provisions: Income Tax Assessment Act 1936 S ection 177A | Income Tax Assessment Act 1936 subsection 177A(1) | Income Tax Assessment Act 1936 Section 177C | Income Tax Assessment Act 1936 subsection 177C(1) | Income Tax Assessment Act 1936 paragraph 177C(1)(a) | Income Tax Assessment Act 1936 paragraph 177C(1)(b) | Income Tax Assessment Act 1936 paragraph 177(1)(ba) | Income Tax Assessment Act 1936 paragraph 177(1)(bb) | Income Tax Assessment Act 1936 Section 177F | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 subsection 102-25(1) | Income Tax Assessment Act 1997 subsection 104-10(1) | Income Tax Assessment Act 1997 subsection 104-10(2) | Income Tax Assessment Act 1997 Section 104-60 | Income Tax Assessment Act 1997 subsection 109-5(1) | Income Tax Assessment Act 1997 Section 115-40 Further issues for you to consider | You have asked us to limit the scope of Question 6 of this private ruling to the application of Part IVA of the ITAA 1936 to the exercise of the Put Option. Therefore, we have not considered the application of Part IVA to any associated or broader arrangement of which that arrangement may be a part.

Reasons for decision: Summary: Question 1 and 2 Subsection 109-5(1) Income Tax Assessment Act 1997 (ITAA 1997) provides that you acquire a CGT asset when you become its owner. Section 102-20 of the ITAA 1997 states, a capital gain or loss can only be made if a Capital Gains Tax (CGT) event happens. Subsection 102-25(1) of the ITAA 1997 provides that where more than one of the CGT events outlined in Division 104 of the ITAA 1997 can apply in a situation, the CGT event that is most specific to the situation is used. Given the facts of the case, the relevant CGT events to consider here are CGT events A1 and E2. CGT event A1 happens if you dispose of a CGT asset (subsection 104-10(1) of the ITAA 1997). Disposal of a CGT asset requires there to be a change of ownership from you to another entity (subsection 104-10(2) of the ITAA 1997). CGT event E2 happens under section 104-60 of the ITAA 1997 if you transfer a CGT asset to an existing trust. The time of the event is when the asset is transferred. | Detailed Reasoning - Application to your circumstances: On xx xx xx a valid share transfer form was completed to transfer shares from Trust 2 to the Trust. The share transfer form was sent to the Company solicitors. The Company constitution provides that; A transferor of shares remains the holder of the shares transferred until the transfer is registered and the name of the transferee is entered in the register of members as the holder of the shares. On xx xx xx the Company issued a share certificate to the Trust. The Company lodged a Form, dated xx xx xx, to register the transfer of shares to the Trust. Under subsection 104-60(2) of the ITAA 1997 it specifies that the time of the CGT event is when the asset is transferred. The transfer of shares from Trust 2 to the Trust triggered CGT event E2. The time of the CGT event was the date the register of members showed the change in ownership of the shares. Accordingly, the Trust acquired the shares from Trust 2 on xx xx xx. Question 4 and 5 Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property; or a legal or equitable right that is not property. A Put Option is a CGT asset and a share is a CGT asset. Former section 160U of the Income Tax Assessment Act 1936 provided that, for an asset acquired under a contract, the date of acquisition was the date the contract was made. The equivalent provision in subsection 109-5(1) of the ITAA 1997 provides that you acquire a CGT asset when you become its owner. Under subsection 104-10(3) of the ITAA 1997, the time of CGT event A1 is when you enter into the contract for the disposal. Subsection 115-25(1) of the ITAA 1997 provides that; for an asset to be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event. Under section 115-40 of the ITAA 1997 a capital gain on a CGT asset from a CGT event is not a discount capital gain (despite section 115-5 of the ITAA 1997) if the CGT event occurred under an agreement you made within 12 months of acquiring the CGT asset. Taxation determination TD 16 discusses the date of acquisition of an asset acquired on the exercise of an option. Where an option is exercised, the date of acquisition of the asset is the date of the transaction entered into as a result of the exercise of the option. In Van v FC of T 2002 ATC 2325 the nature of an agreement of an option to purchase shares and the interaction of such a facility with the CGT provisions, in particular the application of the 50% CGT discount, was considered. The AAT held that the taxpayer acquired the shares the date the option was exercised. | Detailed Reasoning - Application to your circumstances: It has been established that the Trust acquired the shares from Trust 2 on xx xx xx, when the transfer was registered with the Company. On xx xx xx the Company granted the Trust a Put Option; the Exercise Period is between xx xx xx and xx xx xx. When the Trust provided the Company with an executed Option Notice the Company and the Trust are immediately bound under contract for the sale and purchase of the Option Shares. As discussed in TD16, the date of disposal of the shares under a Put Option will be the date the option is exercised. Accordingly, the disposal date is the date the Trust exercised the Put Option during the Exercise period between xx xx xx and xx xx xx. Consequently, the Trust will have owned the shares for more than 12 months and may apply the 50% CGT discount. Question 6 Part IVA of the ITAA 1936 (Part IVA) is a general anti-avoidance provision that can apply in certain circumstances if you obtain a tax benefit 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. In order for Part IVA to apply, the following requirements must be satisfied: • There must be a scheme as defined by section 177A of the ITAA 1936. • There must be a tax benefit as defined by section 177C of the ITAA 1936, obtained in connection with the scheme. • The scheme must be one to which Part IVA applies, as determined by section 177D of the ITAA 1936, where it would be concluded that the taxpayer (or any other person involved in the scheme) had the sole or dominant purpose of entering into the scheme to obtain the tax benefit. | Detailed Reasoning - Scheme: Subsection 177A(1) of the ITAA 1936 defines 'scheme' as any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, by legal proceedings; and any scheme, plan, proposal, action, course of action or course of conduct. In the current case, the proposed arrangement, being the Trust choosing not to sell down % of its shares into the IPO; taking up the grant of a Put Option and exercising the Put Option, falls within this definition. It is therefore a scheme in accordance with the definition in subsection 177A(1) of the ITAA 1936. | Detailed Reasoning - Tax benefit: Part IVA cannot apply unless a taxpayer has obtained, or would but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with a scheme. Under section 177C of the ITAA 1936 a tax benefit received in relation to a scheme will include an amount not being included in assessable income where that amount would have been included, or might reasonably be expected to have been included if the scheme had not been entered into. In the current case, the Trust acquired its shares in the Company on xx xx xx. If the Trust had chosen to sell down up to % of its shareholding into the IPO on or around xx xx xx it would not have held those shares for greater than 12 months and therefore would not be eligible to apply the CGT discount to any capital gain made on that disposal. However, if the Trust exercises the Put Option between xx xx xx and xx xx xx, or disposes of its shares at some later date, it will be eligible to apply the % discount to any capital gain made on the disposal. Therefore there is a tax benefit under the scheme. | Detailed Reasoning - Dominant purpose: In considering the 8 matters in 177D of the ITAA 1936, there is nothing that leads the Commissioner to conclude that there is a dominant purpose of obtaining a tax benefit. In particular: • The Group Z shareholders as a group, has only % of the issued share capital prior to listing; they are not a majority shareholder. • The Put Option was offered because the existing monetisation clause in the Shareholders Deed lapses at the time of the IPO. Accordingly, Part IVA does not apply to the arrangement.