Issue
How does a taxpayer work out how many of the shares they own in a company are pre-CGT and how many are post-CGT if they acquired the shares in exchange for their interests in partnership assets and elected rollover under section 160ZZN of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
If the taxpayer cannot identify which shares were acquired for particular asset interests, the number of pre-CGT and post-CGT shares the taxpayer is taken to have acquired in the company is worked out using a proportional approach based on the relative market value of the pre and post-CGT interests that the taxpayer held in the partnership assets.
Facts
The taxpayer acquired an interest in the goodwill of a partnership before 20 September 1985. The partnership acquired other assets after that time and accordingly, the taxpayer acquired post-CGT interests in these other assets.
In the 1987-88 income year the partners transferred all of their interests in the partnership assets to a company. The partners received shares in the company in consideration for their interests in the partnership assets.
The taxpayer disposed of their shares in the company in the 2003-04 income year and made a capital gain.
Reasons for Decision
Because the rollover occurred in the 1987-88 income year the relevant rollover provision is section 160ZZN of the ITAA 1936.
Consistent with the approach adopted in Taxation Ruling IT 2540 to treat partners, rather than a partnership, as the owners of partnership assets for CGT purposes, we consider rollover was available under section 160ZZN of the ITAA 1936 if all of the partners in a partnership transferred their interests in a partnership asset to a company and acquired shares in the company in the same proportion as the interests transferred. In a partnership context, the 'roll-over asset' referred to in section 160ZZN is all of the interests of the partners in a particular asset.
Where all the requirements for rollover under subsection 160ZZN(2) of the ITAA 1936 are satisfied, subsection 160ZZN(7) of the ITAA 1936 prescribes the status of shares received by a taxpayer as consideration for the transfer of their interests in a partnership asset to the company.
Where the taxpayer acquired their interest in a partnership asset before 20 September 1985, any shares acquired in respect of it are taken to have been acquired by the taxpayer before that date (paragraph 160ZZN(7)(a) of the ITAA 1936).
Where the taxpayer acquired their interest on or after 20 September 1985, the shares are taken to have been acquired by the taxpayer for a consideration equal to the indexed cost base or reduced cost base of their interests (as appropriate) (subparagraphs 160ZZN(7)(b)(i) and 160ZZN(7)(b)(ii) of the ITAA 1936).
If the shares relating to particular asset interests cannot be identified, the number of pre-CGT and post-CGT shares acquired by the taxpayer is calculated under a proportional approach, based on the comparative market value of pre and post-CGT interests that the taxpayer held in the roll-over assets. This gives a result that is consistent with the intended operation of the provision, even though the calculation may yield a fractional number of shares.
Accordingly if specific shares were not issued to the taxpayer in respect of their pre-CGT asset interests, the number of shares that they are taken to have acquired before 20 September 1985 in the company is calculated using the formula: Number of shares * (market value of pre-CGT asset interests at the time of disposal to company / market value of total asset interests at the time of disposal to company)
Where the proportional approach yields a fractional number of pre and post-CGT shares taxpayers should round down the number of their pre-CGT shares.
The taxpayer will be taken to have acquired the balance of the shares on or after 20 September 1985.