Edited version of private ruling

Authorisation Number: 1011740890198

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Ruling

Subject: CGT Rollover

Question 1

Under the arrangement, will there be a capital gain made by the rulee on the admission of a capital partner to the partnership?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

The rulee is an equity partner in a business. The business has equity and non-equity partners.

The equity partners own all the assets of the partnership and have a right to the residual amount of partnership income after entitlements are paid to the non-equity partners.

The non-equity partners are entitled to a share of partnership profit but have no interest in the assets of the partnership. The non-equity partners are entitled to a fixed share of the partnership profit each year.

The equity partners own all of the assets of the partnership and also an interest in the income of the partnership remaining after non-equity partners are paid their entitlements.

It is proposed that the equity partners will become shareholders in a company and the assets of the partnership will be transferred to that company. The company then will be admitted as a capital partner into the partnership. You have provided proposed Partnership Agreement and company constitution documents along with a number of other documents which are to be read with and form part of the facts.

The object of this transaction is to have the partnership assets and a significant share of the income owned by a company. This will enable more efficient management of the capital of the partnership.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 106-5

Income Tax Assessment Act 1997 Subsection 108-5(1)

Income Tax Assessment Act 1997 Paragraph 108-5(2)(c)

Income Tax Assessment Act 1997 Paragraph 108-5(2)(d)

Income Tax Assessment Act 1997 Section 122-125

Income Tax Assessment Act 1997 Section 122-130

Income Tax Assessment Act 1997 Subsection 122-130(2)

Income Tax Assessment Act 1997 Section 122-135

Income Tax Assessment Act 1997 Subsection 995-1(1)

Income Tax Assessment Act 1997 Subsection 122-130(1)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Summary

There will be no capital gain on admission of the company as capital partner to the partnership.

Detailed reasoning

The relevant legislation is the Income Tax Assessment Act 1997 (ITAA 1997). All references to legislation are to the ITAA 1997 unless otherwise stated.

The disposal of a capital gains tax (CGT) asset will cause CGT event A1 to occur under section 104-10. A capital gain is the difference between your capital proceeds and the cost base of your CGT asset. The time of the CGT event is the date when the contract to end the ownership of the asset was entered into, or if there is no contract when the change of ownership occurs.

Section 106-5 provides that any capital gain from a CGT event happening in relation to a partnership or one of its CGT assets is made by the partners individually. Each partner's gain is calculated by reference to the partnership agreement.

Subdivision 122-B sets out when the partners in a partnership can obtain a roll-over on transferring a CGT asset, or all the assets of a business, to a company.

There are six basic conditions that must be met for the replacement asset roll-over to apply to disposals by partners in a partnership to a wholly owned company.

Under section 122-125 one of the specified CGT events, known as a trigger event, must happen involving all of the partners and a company.

The consideration the partners receive, under section 122-130, must be only shares in the company, or shares and the company undertaking to discharge a liability in respect of their interests. Subsection 122-130(2) states that the shares cannot be redeemable shares.

A redeemable share is defined in subsection 995-1(1) as:

· shares that are liable to be redeemed; or

· shares that, at the option of the company that issued them, are liable to be redeemed.

Under subsection 122-130(3) the market value of the shares each partner receives must be substantially the same as the market value of the assets transferred less any liabilities attaching to the assets.

Section 122-135 provides that the partners must own all the shares in the company just after the time of the trigger event and in the same capacity as the partners owned the assets that the company now owns.

Under subsection 122-135(5) the company must not be exempt from income tax on its ordinary and statutory income because it is an exempt entity for the year of the trigger event.

If the partners or the company, or both of them, are not Australian residents at the time of the trigger event then each asset must be taxable Australian property, and the shares in the company must be taxable Australian property just after that time, under subsection 122-135(6).

In the rulee's circumstances the equity partners are disposing of all the capital assets of the partnership which are owned by them as well as their rights to a remainder share of income from the partnership. Roll-over relief provided by Subdivision 122-B is only available if the requirement of paragraph 122-130(1)(a) is satisfied. The requirement is that the consideration the equity partners receive must be shares in company and nothing else.

The proposal involves the equity partners receiving shares only.

Taxation Ruling No IT 2540 outlines the general principle that ownership of the partnership assets is not vested in the partnership itself and that an agreement between the partners may vary the terms by which legal ownership of the partnership assets is allocated between partners. Paragraph 4 states in part that:

In terms of Part IIIA partnership assets are not owned by the partnership, but rather by the individual partners, hence any gain or loss on disposal accrues to, or is incurred by, the individual partners who owned the assets.

It is considered that the capital assets of the partnership are therefore owned by each of the individual equity partners and as such providing all the equity partners apply the rollover provisions then the rollover under subdivision 122-B is available to the rulee as all the other conditions of sections 122-130 to 122-140 are met.

Providing that the conditions in sections 122-130 to 122-140 are met, then all of the equity partners will be able to apply the rollover provisions in Subsection 122-B.

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