Q: A shareholder own shares in a private company. Three-quarters of those shares were issued to the shareholder when the company was formed. The other shares came from the acquisition of the shares of an outgoing shareholder many years later. The shareholder wishes to sell some but not all of their shares. The issue is that disposal of the shares acquired on issue would not have a CGT cost whereas if any part of the disposal was attributed to the later acquired shares, there would be a CGT cost.
Is the shareholder able to specify that the shares they are selling, are the shares initially issued to them upon formation of the company rather than any part of the subsequently acquired shares?
A: 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 to 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.
