Capital gain tax implications
Scenario:
I own shares in a private company. Three-quarters of those shares were issued to me when the company was formed. The other shares came from the acquisition of the shares of an outgoing shareholder many years later. I would like to sell some of my shares. The issue is that the disposal of some of my shares would not have a CGT cost, while the remaining shares do have CGT cost. From my understanding, since there are 2 types of shares, the one with CGT cost and the one without, is it possible for me to specify which shares to be sold?
Explanation:
Yes, each parcel of shares the shareholder acquired is a separate CGT asset. Separate calculations are required for each parcel of shares disposed of. A taxpayer is free to identify which assets are sold in a sale where the assets are among a number and are indistinguishable. The first-in, first-out approach would usually be accepted by the Commissioner. The Commissioner's approach is set out in CGT Determination TD 33. To be sure of the first-in, first-out treatment, the sale should be backed by scrupulous records. For instance, the records on the company register such as transfer, directors' resolution approving registration of the transfer, register of members and share certificates prepared in consequence of the sale should indicate precisely which parcel(s) of shares have been sold by the shareholder. Discrete share numbering is obligatory in the register of members under s 169(3) of the Corporations Act 2001. This record-keeping requirement can be used as an advantage. If the sale is under a contract, then it is also in the shareholder's interests for the parcels of shares being sold to be identified discretely in the contract. Based on the facts, last-in, first-out rather than first-in, first-out may give rise to lower CGT, assuming the shareholder has held the last acquired shares for more than 12 months and the 50% CGT discount can apply.