Originally published August 26 2005
Previously, in cases where a taxpayer bought several tranches of the same shares at different times and at differing acquisition costs, it was impossible to determine which specific shares were being sold if only one or some of the shares were disposed of. Since capital gains from the sale of shares are subject to taxation only if the shares were held for less than one year, it was therefore difficult to clarify whether the shares sold had been held for less than one year and whether there was consequently a tax liability in respect of the capital gain. Further, calculation of this capital gain was problematic since it is unclear what acquisition costs are attributable to the sold shares.
According to prior case law and prevailing opinion on the matter, in such cases it was assumed that those shares acquired first were sold first. It was thus to be assumed in the taxpayer's favour that it was the longest-held shares which were sold and, this being the case, that the period of capital gains tax liability had expired. To calculate the taxable capital gain which might nevertheless exist, the cost of acquiring the sold shares had to be calculated by estimating the average acquisition costs of all shares in the portfolio.
However, under the revised legal position brought about by the EU Directive Implementation Act, for the purposes of checking whether capital gains tax liability applies and also for attributing the acquisition costs, it is now to be assumed that the shares acquired first are also sold first (the 'first in, first out' principle). Therefore, the first in, first out principle now also applies to attibuting the costs of acquisition.
However, the temporal scope of application is unclear: most likely as a result of an oversight, the relevant application-time regulation was not adjusted accordingly (Section 52(39) of the Income Tax Act), and as a result the revised arrangements already apply to disposals from January 1 1999 onwards. The Federal Ministry of Finance has directed in a letter that the previous method should apply up to and including the 2004 assessment period.1 However, the taxpayer is given the option of applying the new first in, first out arrangement to the 2004 assessment period if this is more advantageous.
Since the statutory arrangements cannot simply be overruled by the Ministry of Finance letter, taxpayers should be able to invoke the new arrangement for the 1999 to 2003 assessment periods too, if this leads to more favourable results. However, it is likely that recourse will have to be made to the courts for this view to prevail.
(1) Federal Ministry of Finance, letter of April 5 2005 (as yet unpublished).