Capital gains tax: cost base of interest in the Tower Safe Trust

Does subsection 118-550(3) of the Income Tax Assessment Act 1997 (ITAA 1997) allow amounts paid by a taxpayer in acquiring or maintaining their membership rights in Tower Corporation to be included in the cost base of their interest in the Tower Safe Trust?

No. Subsection 118-550(3) of the ITAA 1997 does not allow amounts paid by a taxpayer in acquiring or maintaining their membership rights in Tower Corporation to be included in the cost base of their interest in the Tower Safe Trust.

In 1991 the taxpayer acquired an insurance policy with the Tower Corporation, a New Zealand mutual entity. At that time the taxpayer also acquired membership rights in Tower Corporation. Tower Corporation demutualised in 1999. Under the demutualisation scheme, the taxpayer was entitled to receive partly paid shares in Tower Limited in exchange for the membership rights ending.

The taxpayer did not subscribe for those shares prior to the time of the share issue. The share entitlement was cancelled in exchange for an interest in the Tower Safe Trust (the Trust). The trustee of the Trust became the legal owner of the partly paid shares held on behalf of the taxpayer.

Subsequently, the taxpayer directed the trustee of the Trust to sell the shares on their behalf. The partly paid shares were converted into a lesser number of fully paid shares and the taxpayer received the proceeds from the sale of the shares.

The taxpayer made a taxable capital gain under CGT event E5 (section 104-75 of the ITAA 1997) that happened to the taxpayer's interest in the Trust when they became absolutely entitled to partly paid shares held by the Trust, that is when they received their partly paid shares in Tower Limited from the trustee of the Trust.

Subdivision 118-H of the ITAA 1997 - Demutualisation of Tower Corporation provides taxpayers who were members of Tower Corporation at the time of its demutualisation with: • specific exemptions for certain CGT events that happen under the demutualisation (see Note); and • special cost base rules shares in Tower Limited and other CGT assets acquired under the demutualisation.

Subsection 118-550(3) of the ITAA 1997 removes from the cost base and reduced cost base of shares in Tower Limited or other CGT assets (including an interest in the Trust) acquired by the former member in exchange for ending their membership rights in Tower Corporation, any amounts paid by the former member in acquiring or maintaining their former membership rights.

The effect of the rule in subsection 118-550(3) is that the cost base and reduced cost base of the taxpayer's interest in the Trust, only includes incidental costs, as defined in section 110-35 of the ITAA 1997, incurred to acquire the interest in the Trust or that relate to the CGT event E5 (section 104-75 of the ITAA 1977) that happened to the interest in the Trust.

Note: Any capital gain or capital loss that the taxpayer made on CGT event C2 (section 104-25 of the ITAA 1997) happening on the surrender of their membership rights in Tower Corporation and on the cancellation of their rights to receive partly paid shares in Tower Limited in exchange for an interest in the Trust, is disregarded.