Cost base of pre-CGT assets acquired by a company subject to a roll-over under Subdivision 122-A of the Income Tax Assessment Act 1997

Is the cost base of pre-CGT assets acquired by a company from an individual or trustee equal to the market value of the shares issued as consideration for the pre-CGT assets worked out as at the time of the transfer where the individual or trustee has chosen a roll-over under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. When an individual or trustee chooses a roll-over under Subdivision 122-A of the ITAA 1997 for the disposal of pre-CGT assets to a company, the cost base of the pre-CGT assets acquired by the company is worked out based on an acquisition time of before 20 September 1985 and not the day the pre-CGT assets were transferred. The cost base of the pre-CGT assets acquired by the company is the market value of the shares before 20 September 1985.

A trustee acquires units in a unit trust before 20 September 1985.

In 2007 the trustee disposes of all the units in the unit trust to a company that is wholly-owned by the trustee.

The trustee receives shares issued by the company as consideration for the disposal of the pre-CGT units.

The units and shares were held by the relevant entities on capital account at all times.

Following the transfer, the trustee owned all the shares in the company and the unit trust became a wholly-owned subsidiary of the company.

The trustee elects to obtain the CGT roll-over available under Subdivision 122-A of the ITAA 1997 in respect of the transfer of units to the company.

All the conditions for the availability of the replacement asset CGT roll-over under Subdivision 122-A of the ITAA 1997 were satisfied.

CGT event A1 happens when the trustee disposes the pre-CGT units in the unit trust for newly issued shares in the company (section 104-10 of the ITAA 1997).

The trustee can choose a CGT roll-over under Subdivision 122-A of the ITAA 1997 in respect of the disposal of the pre-CGT units. Where the CGT roll-over is chosen, the shares issued by the company are taken to have been acquired by the trustee before 20 September 1985.

There are also consequences for the company (section 122-5 of the ITAA 1997). The cost base of the units in the unit trust acquired by the company is worked out under Division 110 of the ITAA 1997. Subsection 110-25(2) of the ITAA 1997 provides that: The first element is the total of: (a) the money you paid, or are required to pay, in respect of acquiring it, and (b) the market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition).

In this case, the company issued shares to the trustee in respect of acquiring the units in the unit trust. It is therefore the value of these shares that is relevant to determining the cost base of the units at the time of the acquisition.

Where the CGT roll-over has been chosen, there are other specific acquisition rules in section 122-70 of the ITAA 1997 in respect of the time of acquisition of the rolled-over asset (item 8 in the table in section 109-55 of the ITAA 1997). Subsection 122-70(3) modifies the acquisition time as follows: If you acquired the asset before 20 September 1985, the company is taken to have acquired it before that day.

Therefore, the relevant time of acquisition referred to in paragraph 110-25(2)(b) of the ITAA 1997 for the purposes of determining the market value of the shares issued to the trustee is before 20 September 1985.

Accordingly, the cost base of the units in the unit trust acquired by the company will be the market value of the issued shares determined before 20 September 1985.