Issue
How is the cost base to be determined for the shares in a private company that are acquired by beneficiaries upon the vesting of the trust, with the beneficiaries becoming absolutely entitled to the trust assets, for the purposes of Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
When an asset of the trust (shares it owns in a company) is acquired by a beneficiary who is absolutely entitled to the asset as against the trustee, for no consideration, upon the vesting of the trust, the cost base of the shares will be determined under section 112-20 of the ITAA 1997
Facts
A discretionary trust was established prior to 20 September 1985. The trust property comprises shares (acquired prior to 20 September 1985) in a private company. It is proposed to vest the trust, with the beneficiaries becoming absolutely entitled to the shares.
Reasons for Decision
When a beneficiary becomes absolutely entitled to a CGT asset of the trust (in this case, shares) as against the trustee, any capital gain or capital loss the beneficiary makes is calculated under subsection 104-75(5) of the ITAA 1997.
The beneficiary acquires the shares when the beneficiary becomes absolutely entitled as against the trustee (subsection 109-5(2) of the ITAA 1997).
If the beneficiary did not incur expenditure to acquire the shares, then the first element of the cost base or reduced cost base of the shares is the market value of the shares at the time of acquisition (subsection 112-20(1) of the ITAA 1997). This cost base or reduced cost base will be used in the calculation of any capital gain or capital loss arising from a subsequent CGT event affecting the shares.