ATO Interpretative Decision
ATO ID 2003/1137 (Withdrawn)
Income Tax
Capital gains tax: shares - non assessable paymentFOI status: may be released
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This ATO ID is a straight application of the law and does not contain an interpretive decision.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Does a CGT event in Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when a payment is made to the taxpayer in respect of a share that they previously owned in a company?
Decision
Yes. CGT event C2 in section 104-25 of the ITAA 1997 happens in respect of the right of the former shareholder to receive the payment, because the right is discharged or satisfied.
Facts
The taxpayer acquired shares in a company after 19 September 1985.
The taxpayer owned the shares at the record date for a return of capital to shareholders.
The taxpayer sold those shares after the record date but before the payment date.
The taxpayer received the payment on the payment date.
Reasons for Decision
The capital gains tax consequences of a payment made by a company in respect of a share are founded on the legal nature of a share as a bundle of rights; see for example, the description of the legal nature of a share by Farwell J in Borland's Trustee v. Steele Bros & Co Ltd [1901] 1 Ch 279 at 288.
As a result, to the extent that the constituent rights attaching to a share are a bundle of rights that cannot be dealt with separately, those rights are not treated as separate CGT assets to which capital gains tax consequences can apply (see Taxation Ruling TR 94/30). Accordingly, CGT event C2 will not happen in respect of the right of a continuing shareholder to receive a distribution from a company that ends because it is discharged or satisfied by payment.
However, where a former shareholder retains a right to receive a distribution after they have ceased to own a share, the right has been separated and is no longer a part of the bundle of rights that make up the share. In these circumstances, the right to payment is a separate asset to which capital gains tax consequences can apply.
When the company makes the payment to the former shareholder, CGT event C2 happens as the right is discharged or satisfied (paragraph 104-25(1)(b) of the ITAA 1997).
If the full cost base (or reduced cost base) of the share has previously been applied in working out a capital gain or loss made when a CGT event happened to that share - for example, when the former shareholder disposed of the share - then, in applying subsection 104-25(3) of the ITAA 1997 to work out the capital gain for the ending of the right, the right will have a nil cost base.
Because the right to payments from the company was inherent in the share during the time that it was owned, then for the purposes of Subdivision 109-A of the ITAA 1997 the right is considered to have been acquired at the time when the share was acquired. Consequently, if the share was originally acquired by the former shareholder at least 12 months before the payment, a capital gain from the right may qualify as a discount capital gain under subsection 115-25(1) of the ITAA 1997 (provided the other conditions in Subdivision 115-A of the ITAA 1997 are satisfied).
No other CGT event happens when the payment is made. CGT event G1 does not happen as one of the requirements for that event is that you own the share at the time when the company makes a payment to you: paragraph 104-135(1)(a) of the ITAA 1997.
Date of decision: 3 December 2003Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
section 104-25
paragraph 104-25(1)(b)
subsection 104-25(3)
paragraph 104-135(1)(a)
Subdivision 109-A
subsection 115-25(1)
Subdivision 115-A
Case References:
Borland's Trustee v. Steele Bros & Co Ltd
[1901] 1 Ch 279
Related Public Rulings (including Determinations)
Taxation Ruling TR 94/30
Keywords
CGT cost base
CGT discount
CGT events C1-C3 - end of a CGT asset
CGT events G1-G3 - shares
Return of capital on shares
Shares
ISSN: 1445-2782
| Date: | Version: | |
| 3 December 2003 | Original statement | |
| You are here | 18 December 2009 | Archived |