Private ruling: CGT events C2 and K6
Published: February 2015
Ruling period: Year ended 30 June 20YY | Year ended 30 June 20XX
Date scheme commenced: 1 July 2014

Ruling: 1. Is your private company loan deemed a dividend under section 109D of the Income Tax Assessment Act 1936 if it is repaid before the lodgement day for the financial year ended 30 June 2016? | No | 2. Will CGT event C2 happen to the Trust when the X shares are cancelled in the financial year ended 30 June 20XX? | Yes | 3. Will the Trustee make a capital gain on the occurrence of CGT event C2? | No | 4. Will CGT event K6 happen for the trustee when the X shares are cancelled? | Yes | 5. Will the Trustee, make a capital gain on the occurrence of CGT event K6 | No | 6. Will the capital gain be a discount capital gain under Division 115 of the ITAA 1997? | Not applicable

Relevant facts and circumstances: The capital of the Trust is Z shares in the X Pty Ltd. The only income of the trust is dividends from the X shares in X Pty Ltd. X Pty Ltd holds as its assets and investment portfolio of listed shares. The trust The trust was settled on before 20 September 1985. The trust property was to be invested in X Pty Ltd, this is known as the "trust fund" in the trust deed. X Pty Ltd was registered in the 19X0s. The trustee proposes wind up of the Trust in the financial year ended 30 June 20ZZ. There is no power in the Trust Deed for the Trustee to make distributions of income to the taxpayers and no further duties for the Trustee to carry out. The Company The Company's share structure is composed of multiple classes of shares. The shares are pre-CGT and the cost base of each of the shares is $2. In 20XX, X Pty Ltd sold T% of the investment portfolio. X Pty Ltd will pay CGT on the sale of T% of the investment portfolio from funds in escrow. X Pty Ltd will distribute the funds, minus CGT and costs to the Trust (and subsequently the beneficiaries) as follows: a) a fully franked dividend b) an unfranked dividend c) a private company loan The private company loan will be undocumented but will be repaid in full in July 20XX, or before X Pty Ltd lodges its tax return for the 20YY income year. On 1 July 20XX, X Pty Ltd investment will again declare: a) a fully franked dividend (2015 dividend) b) an unfranked dividend. You will instruct X Pty Ltd to repay the private company loan with the proceeds of the dividends. Immediately after that time, X Pty Ltd will cancel the shares that the Trust holds. As the shares will have no value other than their subscription price at this time, the capital proceeds received by the Trust will be initial amount paid. Immediately after this time, the Trustee will wind up the Trust.

Relevant legislative provisions: Section 109D(1) of the Income Tax Assessment Act 1936 | Section 104-25 of the Income Tax Assessment Act 1997 | Section 104-35 of the Income Tax Assessment Act 1997 | Section 104-230 of the Income Tax Assessment Act 1997 | Section 116-30 of the Income Tax Assessment Act 1997

Reasons for decision: Detailed Reasoning - Company loans taken to be a dividend: A private company may be taken to pay a dividend to an entity at the end of one of the private company's years of income under subsection 109D(1) of the ITAA 1936 where: (a) the private company makes a loan to the entity during the current year; and (b) the loan is not fully repaid before the lodgement day for the current year; and (c) Subdivision D does not prevent the private company from being taken to pay a dividend because of the loan at the end of the current year; and (d) either: (i) the entity is a shareholder in the private company, or an associate of such a shareholder, when the loan is made; or (ii) a reasonable person would conclude (having regard to all the circumstances) that the loan is made because the entity has been such a shareholder or associate at some time. A loan is defined in subsection 109D(3) of the ITAA 1936. The section extends the definition of the term 'loan' beyond its ordinary meaning to include advances of money, provision of credit, provision of other forms of financial accommodation and any transaction which effects a loan of money (and is an in substance loan). The company loan was made in the current financial year, the loan will be repaid before the lodgement day for the current year financial year, therefore the loan will not be deemed to be a dividend under section 109D of the ITAA 1936. | Detailed Reasoning - CGT event C2: Section 104-25 of the ITAA 1997 contains the rules dealing with CGT event C2. CGT event C2 happens if a taxpayer's ownership of an intangible CGT asset ends because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited (section 104-25(1) of the ITAA 1997). CGT event C2 will happen for the Trust when the shares are cancelled in the financial year ended 30 June 20YY. Section 104-25(5)(a) of the ITAA 1997 provides that any capital gain or capital loss that arises as a result of CGT event C2 happening is disregarded if the taxpayer acquired the asset before 20 September 1985. The assets were acquired before 20 September 1985 therefore there will be no capital gain or loss to be included in the Trust's income. | Detailed Reasoning - CGT event K6: Under section 104-230of the ITAA 1997, CGT event K6 happens if: • a taxpayer owns shares in a company or an interest in a trust the taxpayer acquired before 20 September 1985 • a relevant CGT event (in your case event C2) happens in relation to the shares or interest • there is no roll-over for the other CGT event, and • the market value of the property of the company was acquired on or after 20 September 1985. The company is pre 20 September 1985, the market value of the property of the company was post 20 September 1985. CGT event K6 will occur. You make a capital gain equal to that part of the capital proceeds from the share that is reasonably attributable to the amount by which the market value of the property referred to in subsection (2) is more than the sum of the cost bases of that property. As the disposal value of the share is the original subscription fee of $2 per share, there will be no capital gain as a result of CGT event K6.