Income tax: capital gains: if there is more than one increased value share in a share value shift, can the formulas in Division 19B of Part IIIA of the Income Tax Assessment Act 1936 be applied to just one of the increased value shares?
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| This Determination, to the extent that it is capable of being a 'public ruling' in terms of Part IVAAA of the Taxation Administration Act 1953 , is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Determination is a public ruling and how it is binding on the Commissioner. Unless otherwise stated, this Determination applies to years commencing both before and after its date of issue. However, this Determination does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).
1. No. The formulas contained in sections 160ZZRP and 160ZZRQ have to be applied in turn to each
of the increased value shares.
2. Subsection 160ZZRP(1) applies (assuming the requirements of section 160ZZRL are satisfied) if 'a particular increased value share' is a pre-CGT share. If there is more than one increased value share which is a pre-CGT share, the formulas contained in section 160ZZRP have to be applied to each of those shares in turn. Similarly, subsection 160ZZRQ(1) refers to 'a particular increased value share' which is a post-CGT share so that, if there is more than one such share, the formulas in section 160ZZRQ have to be applied to each one.
The controller of a company has two classes of shares:
- 100 Class A shares which are post-CGT shares (i.e., acquired after 19 September 1985) worth $100 each with an indexed cost base of $80; and
- 50 Class B shares which are pre-CGT shares.
There is a share value shift by changing the dividend rights attached to the two classes. As a result of the shift, each Class A share decreases in value by $15 and each Class B share increases by $30.
Section 160ZZRP applies because a particular increased value share (i.e., each of the Class B shares) is a pre-CGT share. The formulas in the section apply as follows.
If a part of each Class A share was disposed of for a consideration calculated under subparagraph 160ZZRP(2)(a)(ii), the consideration would be:
(Increase in market value of each Class B share / Total market value increase of all Class B shares) x Decrease in market value of the Class A share
($30 / $1500) x $15 = 30 cents
The indexed cost base used against this consideration is calculated under paragraph 160ZZZRP(2)(a)(iii) as follows:
$80 x (30 cents / $100) = 24 cents
Therefore, the capital gain taken to accrue to the holder of each Class A share in respect of the part of each Class A share in relation to the value shift to each Class B share is:
30 cents - 24 cents = 6 cents
However, there are 50 Class B shares which means that the formulas in section 160ZZRP have to be applied 50 times. This results in a total capital gain in respect of the part of each Class A share in relation to the value shift to all Class B shares of:
6 cents x 50 shares = $3.00
The indexed cost base of each Class A share ($80) is to be reduced under subsection 160ZZRP(3) by the following fraction:
(Increase in market value of each Class B share / Total market value increase of all Class B shares) x (Decrease in market value of the Class A share / Market value of Class A share before the decrease)
($30 / $1500) x ($15 / $100)
Therefore the indexed cost base of each Class A share is to be reduced by 3/1000 in relation to the value shift to each Class B share.
Because there are a total of 50 Class B shares, the indexed cost base of each Class A share is to be reduced by:
$80 * (3/1000 * 50) = $12
Commissioner of Taxation
Previously issued as Draft TD 94/D104
NO 94/4369-0 (CGDET 107)
ISSN 1038 - 8982
increased value share;
share value shift
ITAA Pt IIIA-Div 19B;
ITAA 160ZZP(2)(a)(ii); [rewritten as ITAA 97 114-10]
ITAA 160ZZRL; [rewritten as ITAA 97 140-10; 104-140]
ITAA 160ZZRP(1); [rewritten as ITAA 97 140-90(1)]
ITAA 160ZZRQ(1) [rewritten as ITAA 97 140-55(1)]