ATO Interpretative Decision
ATO ID 2014/14 (Withdrawn)
Income Tax
Cost base of pre-CGT assets acquired by a company subject to a roll-over under Subdivision 122-A of the Income Tax Assessment Act 1997-
Status of this decision:
This interpretative decision is currently being reviewed as a result of a recent court/tribunal decision. Refer to Decision Impact Statement : Financial Synergy Holdings Pty Ltd v Federal Commissioner of Taxation (VID 88 of 2015; M46 of 2016).However, the decision continues to represent the Tax Office view on this issue unless or until it is withdrawn.This ATO ID is withdrawn because it contains a view in respect of a provision of the Income Tax Assessment Act 1997 (ITAA 1997) that was found to be incorrect by the Full Federal Court in Financial Synergy Holdings Pty Ltd v FC of T [2016] FCAFC 31. The deeming rule in subsection 122-70(3) of the ITAA 1997 only applies for the purpose of exempting a pre-CGT asset from the operation of the CGT provisions. Subsection 122-70(3) does not determine the acquisition time of a pre-CGT asset for the purpose of calculating its cost base under paragraph 110-25(2)(b) of the 1997 Act.This document has changed over time. View its history.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the cost base of pre-CGT assets acquired by a company from an individual or trustee equal to the market value of the shares issued as consideration for the pre-CGT assets worked out as at the time of the transfer where the individual or trustee has chosen a roll-over under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. When an individual or trustee chooses a roll-over under Subdivision 122-A of the ITAA 1997 for the disposal of pre-CGT assets to a company, the cost base of the pre-CGT assets acquired by the company is worked out based on an acquisition time of before 20 September 1985 and not the day the pre-CGT assets were transferred. The cost base of the pre-CGT assets acquired by the company is the market value of the shares before 20 September 1985.
Facts
A trustee acquires units in a unit trust before 20 September 1985.
In 2007 the trustee disposes of all the units in the unit trust to a company that is wholly-owned by the trustee.
The trustee receives shares issued by the company as consideration for the disposal of the pre-CGT units.
The units and shares were held by the relevant entities on capital account at all times.
Following the transfer, the trustee owned all the shares in the company and the unit trust became a wholly-owned subsidiary of the company.
The trustee elects to obtain the CGT roll-over available under Subdivision 122-A of the ITAA 1997 in respect of the transfer of units to the company.
All the conditions for the availability of the replacement asset CGT roll-over under Subdivision 122-A of the ITAA 1997 were satisfied.
Reasons for Decision
CGT event A1 happens when the trustee disposes the pre-CGT units in the unit trust for newly issued shares in the company (section 104-10 of the ITAA 1997).
The trustee can choose a CGT roll-over under Subdivision 122-A of the ITAA 1997 in respect of the disposal of the pre-CGT units. Where the CGT roll-over is chosen, the shares issued by the company are taken to have been acquired by the trustee before 20 September 1985.
There are also consequences for the company (section 122-5 of the ITAA 1997). The cost base of the units in the unit trust acquired by the company is worked out under Division 110 of the ITAA 1997. Subsection 110-25(2) of the ITAA 1997 provides that:
The first element is the total of:
In this case, the company issued shares to the trustee in respect of acquiring the units in the unit trust. It is therefore the value of these shares that is relevant to determining the cost base of the units at the time of the acquisition.
Where the CGT roll-over has been chosen, there are other specific acquisition rules in section 122-70 of the ITAA 1997 in respect of the time of acquisition of the rolled-over asset (item 8 in the table in section 109-55 of the ITAA 1997). Subsection 122-70(3) modifies the acquisition time as follows:
If you acquired the asset before 20 September 1985, the company is taken to have acquired it before that day.
Therefore, the relevant time of acquisition referred to in paragraph 110-25(2)(b) of the ITAA 1997 for the purposes of determining the market value of the shares issued to the trustee is before 20 September 1985.
Accordingly, the cost base of the units in the unit trust acquired by the company will be the market value of the issued shares determined before 20 September 1985.
Date of decision: 1 April 2014Year of income: Year ended 2014
Legislative References:
Income Tax Assessment Act 1997
section 104-10
section 109-55
Division 110
subsection 110-25(2)
Subdivision 122-A
subsection 122-70(3)
Keywords
Capital gains tax
CGT event A1 - disposal of a CGT asset
CGT cost base
CGT cost base modification rules
CGT roll-over relief
Pre-CGT assets
Wholly owned
Date reviewed: 27 October 2015
ISSN: 1445-2782
| Date: | Version: | |
| 1 April 2014 | Original statement | |
| You are here | 13 January 2017 | Archived |