CGT event C1: sale of shares without the owner's consent - stockbroker's mistake

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 lack of consent to the sale, as the result of a stockbroker's mistake?

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 lack of consent to the sale, as the result of a stockbroker's mistake, means that the shares are lost and CGT event C1 will happen.

The taxpayer owned 10,000 shares in a company which they acquired after 19 September 1985. The shares were held in a stockbroker's account.

The taxpayer instructed their stockbroker to sell 1,000 of the shares.

The stockbroker mistakenly sold all 10,000 of the shares to a third party. The third party was a bona fide purchaser of the shares for value and without notice of the taxpayer's lack of consent to the sale. The taxpayer received a cheque for the sale proceeds of all 10,000 shares.

The sale of shares had settled by the time the stockbroker discovered the mistake.

To rectify the mistake, the stockbroker purchased 9,000 shares in the same company on behalf of the taxpayer. The original cheque issued to the taxpayer was cancelled, and the taxpayer received a new cheque for the sale proceeds of 1,000 shares.

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 9,000 shares were sold to a third party without the taxpayer's consent. The taxpayer was involuntarily and permanently deprived of ownership of the 9,000 shares as the result of the unauthorised sale by another party to a third party who was a bona fide purchaser of the 9,000 shares for value and without notice of the taxpayer's lack of consent to the sale of the shares.

In all the circumstances, the 9,000 shares were 'lost' within the meaning of section 104-20 of the ITAA 1997. Therefore, CGT event C1 happened to the 9,000 shares.

CGT event A1 also happened on the sale of the 9,000 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).

CGT event A1 happened in respect of the sale of the 1,000 shares which the taxpayer authorised. Note : as the taxpayer received replacement shares as compensation for the loss of the 9,000 shares, they may be eligible for CGT roll-over under Subdivision 124-B of the ITAA 1997.