Revaluing former grey list shares that were inherited at a nil cost

2012 act re-values some foreign shares that were inherited at a nil cost before 1 Apr 2007 and explains the tax consequences resulting from the revaluation.

Section EX 67B

The Act re-values some foreign shares that were inherited at a nil cost before 1 April 2007. This revaluation can have two tax consequences. First, the shares could enter into the FIF attribution rules. Secondly, in cases when the shares are held on revenue account and the shares have a market value that is higher than the market value on the date of inheritance, the holder will be taxed on the difference between these two values.

In cases when the shares are held on revenue account and the shares have a market value that is higher than the market value on the date of inheritance, they will be taxed on the difference between these two values.

Application date

The revaluation of these shares occurred on 7 May 2012.

Key features

New section EX 67B applies to shares in FIFs that were inherited at zero cost. It applies only if the FIF was a grey list company at the time the shares were inherited and if the shares were inherited before 1 April 2007 (when the grey list exemption was abolished for portfolio shares). These shares are subject to a deemed sale and reacquisition at market value on the 7 May 2012.

The deemed sale and reacquisition can have two tax consequences. First, the shares could enter into the FIF attribution rules. The FIF rules will not apply if the total cost of the person's FIF interests (including the newly determined market value of the re-valued shares) is less than $50,000, unless the person elects to apply the FIF rules (see subsections CQ 5(1)(d) and (e)). They will also not apply if some other exemption (for example, sections EX 31 to 39) applies to the shares.

Example

Sandy inherited some foreign shares at zero cost. The inherited shares have a market value of $20,000 on 7 May 2012 which is the date that section EX 67B re-values them. Sandy has some other foreign shares that are worth $40,000, although $5,000 of these shares are in ASX-listed companies that qualify for the section EX 31 exemption.

Excluding the ASX-listed shares, the value of Sandy's foreign shares is $55,000. This is more than $50,000, so Sandy must apply the FIF rules to the foreign shares (other than the ASX-listed foreign shares), beginning from the income year that includes 7 May 2012.

Secondly, in cases when the shares are held on revenue account, there may be a taxable gain, depending on whether the shares have become more valuable since they were inherited. If the market value of the person's shares at the time of the disposal in section EX 67B(2) is more than the market value at the time of the inheritance, any revenue account gain on the affected shares is limited to an amount equal to the difference between the market value at the time of the disposal and the market value on the date the shares were inherited. If the market value of the person's shares at the time of the disposal in section EX 67B(2) is less than the market value at the time of the inheritance, the person is treated as having no revenue account gain or loss on the shares.

If there is a revenue account gain on the shares, the resulting tax liabilities are able to be spread over three consecutive years, with at least one-third paid in the first year after the year the disposal takes effect, one-half of the remaining tax paid in the second year, and the rest in the third year.

A taxpayer can only spread revenue account income. They cannot spread FIF income that arises after the deemed reacquisition.

Example 1

John inherited shares at a zero cost on 5 January 2001. The shares had a market value of $20,000 on 5 January 2001. The shares are worth $30,000 on 7 May 2012. Because the shares are held on revenue account, John is taxed on the $10,000 difference between these two market values. The $3,300 tax liability can be spread over three years, in which case John would pay $1,100 in each of the next three years.

Example 2

Sam inherited shares at a zero cost on 6 November 2006. The shares had a market value of $200,000 on 6 November 2006. The shares are worth $100,000 on 7 May 2012. Sam would not have a tax liability under section EX 67B(2B) and this section does not create a revenue account loss.