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1 Did the provisions of section 104-230 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the sale of the shares in Company X by the Shareholder as part of the Share Sale?

1 Yes. Question 2 In calculating the capital gain made by the Shareholder from CGT event K6 under subsection 104-230(6) of the ITAA 1997, will the amount of the capital proceeds be reduced by a portion of the notified leakage amount? Answer 2 No. Question 3 Will the portion of the Commission paid by the Shareholder upon completion of the Share Sale be included in the calculation of the capital gain from CGT event K6 under subsection 104-230(6) of the ITAA 1997? Answer 3 No. Question 4 Does the proposed approach to the calculation of the capital gain made by the Shareholder from CGT event K6, as set out in the facts, constitute a reasonable attribution of the capital proceeds in accordance with subsection 104-230(6) of the ITAA 1997? Answer 4 Yes. Question 5 Is the capital gain the Shareholder made from CGT event K6 a discount capital gain with a discount percentage of 50% under Division 115 of the ITAA 1997? Answer 5 Yes. This private ruling applies for the following period: Income year ended 30 June 20XX The scheme commenced on: 1 July 20XX

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. Find out more about when you can rely on your private ruling at ato.gov.au/relyonprivateruling . The Shareholder is an individual and an Australian resident for tax purposes. The Shareholder acquired shares in Company X before 20 September 1985. Company X held 100% of the shares in Company Y. Company Y carried on a business. The Shareholder entered into a sale agreement (Parent SPA) to sell all their shares in Company X to an unrelated third party (Purchaser) at arm's length (Share Sale). The Share Sale effectively resulted in the Purchaser acquiring the business carried on by Company Y. Upon direction by the Shareholder, the Initial Consideration the Shareholder was entitled to receive from the Share Sale was reduced by the Notified Leakage Amount in accordance with the terms of the Parent SPA. The Notified Leakage Amount was an amount of transaction costs incurred in respect of the Share Sale for the benefit of the Shareholder.

Upon completion of the Share Sale, the Shareholder paid a Commission to an entity for services it provided in respect of the Share Sale. The property directly owned by Company X comprises the shares held in Company Y, which it acquired after 20 September 1985. The property indirectly owned by Company X comprises the business assets held by Company Y. 100% of the business assets were acquired after 20 September 1985. As this is a muti-tier structure, the Shareholder proposes to calculate the capital gain from CGT event K6 under subsection 104-230(6) of the ITAA 1997 by attributing the capital proceeds to the underlying property of the business carried on by Company Y, rather than to the interest that Company X holds in Company Y. As 100% of the capital proceeds relate to post-CGT property, this approach specifically considers the nature of each category of property owned by Company Y and the market value excess associated with this property.

Income Tax Assessment Act 1997 subsection 103-10(1) Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 paragraph 104-10(5)(a) Income Tax Assessment Act 1997 section 104-230 Income Tax Assessment Act 1997 subsection 104-230(1) Income Tax Assessment Act 1997 subsection 104-230(2) Income Tax Assessment Act 1997 subsection 104-230(5) Income Tax Assessment Act 1997 subsection 104-230(6) Income Tax Assessment Act 1997 subsection 104-230(9) Income Tax Assessment Act 1997 subsection 104-230(10) Income Tax Assessment Act 1997 section 110-25 Income Tax Assessment Act 1997 subsection 110-25(2) Income Tax Assessment Act 1997 section 110-35 Income Tax Assessment Act 1997 subsection 110-35(2) Income Tax Assessment Act 1997 Division 115 Income Tax Assessment Act 1997 section 115

Question 1 Summary The provisions of section 104-230 of the ITAA 1997 applied to the sale of the shares in Company X by the Shareholder and consequently CGT event K6 happened. Detailed reasoning Subsection 104-230(1) provides that CGT event K6 happens if: (a)   you own shares in a company that you acquired before 20 September 1985; (b)   CGT event A1, C2, E1, E2, E3, E5, E6, E7, E8, J1 or K3 (the other event) happens in relation to the shares; (c)   there is no roll-over for the other CGT event; and (d)   one of the requirements in subsection 104-230(2) is satisfied. The requirements in subsection 104-230(2) of the ITAA 1997 are that just before the other event happened: (a)   the *market value of property of the company or trust (that is not its *trading stock) that was *acquired on or after 20 September 1985; or (b)   the market value of interests the company or trust owned through interposed companies or trusts in property (except trading stock) that was *acquired on or after 20 September 1985; must be at least 75% of the *net value of the company or trust.

Subsection 104-230(5) of the ITAA 1997 provides that the time of CGT event K6 is when the other CGT event referred to in paragraph 104-230(1)(b) happens. The Shareholder acquired the shares in Company X before 20 September 1985. This satisfies paragraph 104-230(1)(a). CGT event A1 happened under section 104-10 of the ITAA 1997 when the Shareholder entered into the contract to sell their shares in Company X to the Purchaser. The Shareholder was not eligible for roll-over for CGT event A1. This satisfies paragraphs 104-230(1)(b) and 104-230(1)(c). 100% of the property directly and indirectly held by Company X was acquired after 20 September 1985. Accordingly, the market value of both the direct and indirect property was more than 75% of the net value of Company X just before CGT event A1 happened. This satisfies paragraph 104-230(1)(d) of the ITAA 1997. The exemptions outlined in subsections 104-230(9) and 104-230(10) of the ITAA 1997 are not applicable in this situation as the Company X shares were not listed on an Australian or foreign stock exchange, and the Shareholder was not eligible for scrip for scrip roll-over under Subdivision 124-M.

As all the requirements of subsection 104-230(1) of the ITAA 1997 have been satisfied and no exemptions apply, CGT event K6 happened under section 104-230 when the Shareholder entered into the contract to sell the Company X shares to the Purchaser under the Share Sale. Question 2 Summary The capital proceeds under Division 116 of the ITAA 1997 will not be reduced by the Notified Leakage Amount. Detailed reasoning The capital proceeds from a CGT event are calculated in accordance with the rules set out in Division 116 of the ITAA 1997. Section 116-5 explains that section 116-20 sets out the general rules about capital proceeds. Subsection 116-10(1) states there are 6 modifications to the general rules that may be relevant. The general rule under subsection 116-20(1) of the ITAA 1997 provides that the capital proceeds from a CGT event are the total of the money and the market value of any other property you have received, or are entitled to receive, in respect of the event happening. Note 2 to subsection 116-20(1) of the ITAA 1997 states that in some situations you are treated as having received money or other property, or being entitled to receive it: see section 103-10.

Subsection 103-10(1) of the ITAA 1997 states that the CGT provisions apply to you as if you had received money or other property if it has been applied for your benefit (including by discharging all or part of a debt you owe) or as you direct. In this situation, the amount of money the Shareholder was originally entitled to receive was their portion of the Initial Consideration in accordance with the terms. The amount of money the Shareholder actually received was their portion of the Completion Payment, which was calculated by subtracting the Notified Leakage Amount from the Initial Consideration. As the transaction costs which gave rise to the Notified Leakage Amount were legal costs that were incurred for the benefit of the Shareholder in respect of the Share Sale, the CGT provisions apply as if the Shareholder had received their portion of this amount in accordance with subsection 103-10(1) of the ITAA 1997. Consequently, the portion of the Notified Leakage Amount will be included in the capital proceeds the Shareholder received under subsection 116-20(1) of the ITAA 1997.

The capital proceeds calculated under subsection 116-20(1) of the ITAA 1997 will be modified if any of the 6 modifications in section 116-10 listed below apply: 1.     The market value substitution rule in section 116-30 will substitute the capital proceeds for the market value of the CGT asset if: (a)   you receive no capital proceeds from a CGT event; or (b)   some or all of the capital proceeds cannot be valued; or you did not deal at arm ' s length with another entity in connection with the event. 2.     The apportionment rule in section 116-40 will apportion the capital proceeds if they relate to more than one CGT event or only partly to a CGT event. 3.     The non-receipt rule in section 116-45 will reduce the capital proceeds by an amount that you are not likely to receive (the unpaid amount). Under paragraphs 116-45(1)(b) and (c), the amount must not be unpaid because of anything you (or your associate) did or omitted to do, and you took all reasonable steps to recover the unpaid amount. 4.     The repaid rule in section 116-50 will reduce the capital proceeds by any non-deductible amount you have to repay.

5.     The assumption of liability rule in section 116-55 will increase the capital proceeds by the amount of any liability in connection with the asset. 6.     The misappropriation rule in section 116-60 will reduce the capital proceeds by amounts misappropriated by an employee or agent. Section 116-25 of the ITAA 1997 confirms that all 6 modifications may be relevant where CGT event K6 happens. It is considered that none of the 6 modifications will apply to reduce the capital proceeds the Shareholder received by Notified Leakage Amount. As subsection 103-10(1) of the ITAA 1997 included the Notified Leakage Amount in the capital proceeds under subsection 116-20(1) and none of the 6 modifications in subsection 116-10 applied, the capital proceeds will not be reduced by a portion of the Notified Leakage Amount. Question 3 Summary The Commission paid by the Shareholder upon completion of the Share Sale cannot be included in the calculation of the capital gain from CGT event K6 under subsection 104-230(6) of the ITAA 1997. Detailed reasoning

Subsection 104-230(6) of the ITAA 1997 provides that you make a capital gain from CGT event K6 equal to that part of the capital proceeds from the share or interest that is reasonably attributable to the amount by which the market value of the property referred to in subsection 104-230(2) is more than the sum of the cost bases of that property. The Commission may be included in the calculation of the capital gain under subsection 104-230(6) of the ITAA 1997 if it reduces the capital proceeds from the sale of the shares or if it is included in the cost base of the relevant CGT asset. Capital proceeds As discussed in question 2, the general rule regarding capital proceeds in subsection 116-20(1) of the ITAA 1997 provides that capital proceeds are equal to the total of the money and the market value of any other property you have received, or are entitled to receive, in respect of the event happening.

Note 3 to subsection 116-20(1) of the ITAA 1997 refers to section 103-10. Subsection 103-10(1) ensures that if money or property has been applied for your benefit or as you direct, the CGT provisions apply as if you had actually received the money or property. This includes discharging all or part of a debt owed by you. As determined in question 2, the capital proceeds includes the Shareholder's portion of the Completion Payment and the Notified Leakage Amount in accordance with the application of subsection 116-20(1) and subsection 103-10(1) of the ITAA 1997. The Commission was incurred for various services in respect of the Share Sale. The payment of the Commission did not reduce the amount of money the Shareholder received from the Share Sale as it was paid after the Shareholder received the Completion Payment. Therefore, the capital proceeds under subsection 116-20(1) of the ITAA 1997 will not be reduced by the amount of the Commission.

For completeness, if the Shareholder had directed the Purchaser to pay part of the Completion Payment in satisfaction of their obligation to pay the Commission, subsection 103-10(1) of the ITAA 1997 would apply to ensure this amount is included in the capital proceeds under subsection 116-20(1). It is also considered that none of the 6 modifications listed in section 116-10 of the ITAA 1997 will apply to reduce the capital proceeds by the amount of the Commission. Consequently, the capital proceeds the Shareholder received under Division 116 of the ITAA 1997 will not be reduced by their portion of the Commission. Cost base Section 110-25 of the ITAA 1997 provides that the cost base of a CGT asset consists of the following 5 elements: 1.     The first element is the total of the money you paid or must pay for acquiring it, and the market value of any property you gave or must give for acquiring it. 2.     The second element is incidental costs you incurred to acquire the asset, or in relation to a CGT event for the asset. 3.     The third element is the costs of owning the asset you incurred (but only if the asset was acquired after 20 August 1991).

4.     The fourth element is capital expenditure you incurred to increase or preserve the asset's value, or that relate to installing or moving the asset. 5.     The fifth element is capital expenditure you incurred to establish, preserve or defend your title to, or rights over the asset. Section 110-35 of the ITAA 1997 states there are ten incidental costs included in the second element of the cost base. This includes remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser under subsection 110-35(2). The calculation of the capital gain made from CGT event K6 under subsection 104-30(6) of the ITAA 1997 has regard to the cost base of the property referred to in subsection 104-230(2). If the event happens in respect of shares in a company, this is the cost base of all property (except trading stock) directly or indirectly owned by the company that it acquired on or after 20 September 1985.

As the Commission was incurred by the Shareholder for various services they received in respect of the Share Sale, it is considered to be remuneration for the services of a consultant in accordance with subsection 110-35(2) of the ITAA 1997. Consequently, the Commission is included in the second element of the cost base of the Company X shares. However, a capital gain made from CGT event K6 is calculated by reference to the cost bases of the property referred to in subsection 104-230(2) and not the cost base of the pre-CGT shares. The Commission is not a cost that was incurred in relation to the relevant property of Company X. Consequently, it cannot be included in the second element of the cost base of that property under subsection 110-25(3). As the Commission paid by the Shareholder upon completion of the Share Sale does not reduce the capital proceeds and is also not included in the cost base of the relevant property of Company X, it cannot be included in the calculation of the capital gain under subsection 104-230(6) of the ITAA 1997. Question 4 Summary

The proposed approach to the calculation of the capital gain from CGT event K6, as outlined in the facts, constitutes a reasonable attribution of the capital proceeds for the purposes of subsection 104-230(6) of the ITAA 1997. Detailed reasoning Subsection 104-230(6) of the ITAA 1997 provides that you make a capital gain from CGT event K6 equal to that part of the capital proceeds from the share or interest that is reasonably attributable to the amount by which the market value of the property referred to in subsection 104-230(2) is more than the sum of the cost bases of that property. You cannot make a capital loss from CGT event K6. The property referred to in subsection 104-230(2) of the ITAA 1997 is all property that is directly and indirectly owned by the company or trust that was acquired on or after 20 September 1985 (except trading stock). Taxation Ruling TR 2004/18 Income tax: capital gains: application of CGT event K6 (about pre-CGT shares and pre-CGT trust interests) in section 104-230 of the Income Tax Assessment Act 1997 considers the application of CGT event K6 and provides guidance on the calculation of the capital gain under subsection 104-230(6) of the ITAA 1997.

Paragraph 22 of TR 2004/18 confirms that the phrase 'the property in subsection (2)' is a reference to both directly held property in paragraph 104-230(2)(a) and indirectly held property in paragraph 104-230(2)(b), irrespective of whether a particular item of property is essential to the conclusion that the 75% test is satisfied. The statutory text does not direct one to have regard to only a subset of the property referred to in subsection 104-230(2). Paragraph 24 of TR 2004/18 recognises that what constitutes a reasonable attribution of the capital proceeds for the purposes of calculating the capital gain under subsection 104-230(6) of the ITAA 1997 will depend on the facts in each case, and is to be informed by the legislative purpose to which section 104-230 is directed.

Paragraph 24 of TR 2004/18 confirms that this includes the purpose of bringing to account, as a capital gain, 'that part of the disposal proceeds ... that is attributable to an increase in the value of underlying property acquired on or after 20 September 1985'. No formula or other methodology can supplant the statutory requirement which merely provides that the attribution must be reasonable. Paragraph 119 of TR 2004/18 also confirms that it is possible that, on the facts of a given case, more than one amount might be considered 'reasonable'. In most cases involving a single tier structure, paragraph 25 of TR 2004/18 confirms that the Tax Office considers that a reasonable attribution of the capital proceeds is achieved by applying the two step approach outlined in paragraphs 27 to 33 of that ruling. It is recognised that this approach may not give the only reasonable attribution. In respect of multi-tier structures, paragraph 35 of TR 2004/18 recognises that the process of reasonable attribution is complicated by having both the interests in lower tier entities and the property of lower tier entities (the underlying property

) in the pool of property taken into account in calculating the capital gain. It is important to approach this process in a way that avoids attributing capital proceeds to both the interests and the underlying property. What constitutes a reasonable attribution in a multi-tier structure will depend on the facts in each case.

Paragraph 35A of TR 2004/18 states that in most situations, it would be reasonable to attribute the capital proceeds to the value of the underlying property, rather than to the value of interests in the lower tier-entity. This approach ensures that consistent with the purpose of section 104-230, the pre-CGT and post-CGT status of the underlying property is properly reflected in the calculation of the capital gain. As this is a muti-tier structure, the Shareholder proposes to calculate the capital gain from CGT event K6 under subsection 104-230(6) of the ITAA 1997 by attributing the capital proceeds to the underlying property of the business carried on by Company Y, rather than to the interest that Company X holds in Company Y. As 100% of the capital proceeds relate to post-CGT property, this approach specifically considers the nature of each category of property owned by Company Y and the market value excess associated with this property.

This proposed approach to the calculation of the capital gain from CGT event K6 when the Shareholder sold their shares in Company X to the Purchaser constitutes a reasonable attribution of the capital proceeds in accordance with subsection 104-230(6) of the ITAA 1997. Question 5 Summary The capital gain the Shareholder made from CGT event K6 will be a discount capital gain with a discount percentage of 50% under Division 115 of the ITAA 1997. Reasons for decision Section 115-1 of the ITAA 1997 provides that a discount capital gain remaining after the application of any capital losses and net capital losses from previous income years is reduced by the discount percentage when working out your net capital gain. Section 115-5 of the ITAA 1997 states that a discount capital gain is a capital gain that meets the requirements of sections 115-10, 115-15, 115-20 and 115-25. The note to section 115-5 states that sections 115-40, 115-45 and 775-70 identify capital gains that are not discount capital gains.

Paragraph 43 of TR 2004/18 confirms that a capital gain made under CGT event K6 will potentially be a discount capital gain where the requirements of sections 115-10, 115-15, 115-20 and 115-25 are met in the following circumstances: •       CGT event K6 happened to a pre-CGT share owned by an individual, a complying superannuation entity, a trust or, in the circumstances set out in paragraph 115-10(d), a life insurance company: section 115-10; •       the CGT event happened after 11.45 am (by legal time in the Australian Capital Territory) on 21 September 1999: section 115-15; •       the cost base of property was not indexed for the purposes of calculating the capital gain under subsection 104-230(6): section 115-20; •       the pre-CGT share in the company was acquired at least 12 months prior to the time of the CGT event: section 115-25. In this situation, the Shareholder met the above requirements as follows: •       The Shareholder is an individual. •       The Shareholder made a capital gain from CGT event K6 after 21 September 1999 when they sold the Company X shares under the Share Sale.

•       The cost base of the direct or indirect property of Company X that was included in the proposed approach to the calculation of the capital gain under subsection 104-230(6) of the ITAA 1997 was not indexed. •       The Shareholder acquired the shares in Company X at least 12 months before CGT event K6 happened. A capital gain is not a discount capital gain under section 115-40 of the ITAA 1997 if the CGT event occurred under an agreement made within 12 months of acquiring the CGT asset. This section does not apply as the Shareholder has not entered into such an agreement. Where the capital gain is from a CGT event happening to a share in a company, subsection 115-45(2) of the ITAA 1997 provides that the capital gain will not be a discount capital gain if all of the following conditions are met; •       you and your associates beneficially owned at least 10% by value of the shares in the company just before the CGT event: subsection 115-45(3);

•       the total of the cost bases of the CGT assets owned by the company at the time of the CGT event that it had acquired less than 12 months before the event, is more than half of the total of the cost bases of all the CGT assets owned by the company at the time of the event: subsection 115-45(4); and •       the notional net capital gain made by the company just before the CGT event on CGT assets it owned for less than 12 months under subsection 115-45(6), is more than half of the notional net capital gain made just before the CGT event on all assets under subsection 115-45(7): subsection 115-45(5). Paragraph 43 of TR 2004/18 confirms that where a capital gain is made from CGT event K6, section 115-45 of the ITAA 1997 applies to the company referred to in paragraph 104-230(2)(a). This is the company you own the shares in, not any interposed company referred to in paragraph 104-230(2)(b). In this situation, the relevant company referred to in section 115-45 of the ITAA 1997 is Company X, not Company Y. As the Shareholder owned at least 10% of the shares in Company X just before the Share Sale, the requirement in subsection 115-45(3) is satisfied.

The cost base of the Company Y shares that Company X acquired more than 12 months before CGT event K6 happened, is more than half of the cost bases of all the CGT assets of Company X. Accordingly, the condition in subsection 115-45(4) is not met. As subsection 115-45(2) of the ITAA 1997 requires all three conditions listed above to be met, section 115-45 does not apply to deny the capital gain from CGT event K6 from being a discount capital gain. Consequently, it is not necessary to consider whether the condition in subsection 115-45(5) has been met. Section 775-70 of the ITAA 1997 does not apply as the capital gain is not a forex realisation gain. Paragraph 115-100(a) of the ITAA 1997 states that the discount percentage for a discount capital gain made by an individual who is not a foreign or temporary resident is 50%. As the Shareholder is an Australian resident, their discount percentage amount is 50%. As the capital gain the Shareholder made from CGT event K6 satisfies the requirements to be a discount capital gain, the Shareholder can reduce the capital gain by the discount percentage of 50%.