Issue
Will CGT event C1 under section 104-20 of the Income Tax Assessment Act 1997 (ITAA 1997) happen on the sale of shares in a company, without the consent of the owner of the shares, to a bona fide purchaser of the shares for value and without notice of the owner's prior interest in the shares?
Decision
Yes. The sale of shares without the owner's consent, to a bona fide purchaser of the shares for value and without notice of the owner's prior interest in the shares, means that the shares are lost and CGT event C1 will happen.
Facts
The taxpayer owned shares in a company which they acquired after 19 September 1985. The taxpayer had no intention of selling these shares.
The taxpayer mortgaged the shares to a lender as security for a loan. To effect the mortgage, the taxpayer transferred legal title to the shares to the lender, while retaining an equity of redemption in the shares.
Under the terms of the mortgage, the lender had the power to sell the shares in certain circumstances, in which case they had to apply the sale proceeds to reduce the loan balance.
The lender purported to exercise this power of sale under the mortgage, and sold the shares to a third party who had no notice of the mortgage. The third party was a bona fide purchaser of the shares for value and without notice of the taxpayer's prior equitable interest in the shares.
The sale proceeds were applied in reduction of the loan balance.
The taxpayer instituted civil proceedings against the lender. The court found that the exercise of the power of sale under the mortgage was improper.
Reasons for Decision
CGT event C1 happens if a CGT asset you own is lost or destroyed (subsection 104-20(1) of the ITAA 1997).
Shares are intangible CGT assets. Paragraph 7 of Taxation Determination TD 1999/79 states that CGT event C1 does not distinguish between tangible and intangible assets. Section 104-20 refers to 'CGT asset' and this includes intangible CGT assets.
Paragraph 2 of Taxation Determination TD 1999/79 states that: The word 'lost' in its context in subsection 104-20(1) does not contemplate voluntary actions.
The shares were sold to a third party without the taxpayer's consent. The taxpayer was involuntarily and permanently deprived of ownership of the shares as the result of the unauthorised sale by another party to a third party who was a bona fide purchaser of the shares for value and without notice of the taxpayer's prior equitable interest in the shares.
In all the circumstances, the shares were 'lost' within the meaning of section 104-20 of the ITAA 1997. Therefore, CGT event C1 happened.
CGT event A1 also happened on the sale of the shares to a third party (disposal of a CGT asset - section 104-10 of the ITAA 1997). Under subsection 102-25(1) of the ITAA 1997, if more than one CGT event can happen to your situation, you use the one that is the most specific to your situation. In the circumstances, the most specific CGT event is CGT event C1.
The time of CGT event C1 is when compensation is first received for the loss. If no compensation is received, the time of the event is when the loss is discovered (subsection 104-20(2) of the ITAA 1997). Note : if the taxpayer receives some form of compensation for the loss of the shares, they may be eligible for CGT roll-over under Subdivision 124-B of the ITAA 1997.