Edited version of private advice

Authorisation Number: 1052058615724

Date of advice: 19 January 2023

Ruling

Subject: CGT rollovers

Issue 1

Question 1

Will the Applicant Shareholders be eligible to choose to obtain roll-over relief under Division 615 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the exchange of their shares in Company A for shares in Company B?

Answer

Yes.

Question 2

If an Applicant Shareholder chooses to obtain the roll-over under Division 615 of the ITAA 1997:

(i)    will any capital gain or capital loss the Applicant Shareholder makes in relation to the transfer of their shares in Company A to Company X be disregarded pursuant to subsection 124-15(2) and section 615-40 of the ITAA 1997, and

(ii)   will the Applicant Shareholder's cost base for the ordinary shares in Company X acquired in exchange for the disposal of their shares in Company A be determined in accordance with subsection 124-15(3) and section 615-40 of the ITAA 1997?

Answer

(i)    Yes

(ii)   Yes

Question 3

Pursuant to subsection 615-65(4) of the ITAA 1997, will the first element of the cost base of the Company A shares transferred to Company X, in the hands of Company X, equal the total of the cost bases of Company A's assets at the completion time less any liabilities in respect of those assets?

Answer

Yes

Issue 2

Question 1

Will Company A be eligible to choose to obtain roll-over relief under Subdivision 126-B of the ITAA 1997 to disregard the capital gain it will make in respect of the transfer of the shares in Company B to Company X?

Answer

Yes

This ruling applies for the following periods:

1 January 20XX to 31 December 20XX

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

Current group structure

Company A is a private company incorporated in Country A.

Company A only has ordinary shares on issue.

All of Company A's shareholders are non-residents of Australia for tax purposes.

A number of shareholders of Company A hold a direct participation interest of greater than 10% (the Applicant Shareholders).

Company A owns 100% of the ordinary shares and voting rights in Company B. Company A acquired its shares in Company B from an unrelated party after 20 September 1985 and did not access any CGT rollovers when it acquired them. Company A's only asset is its shareholding in Company B.

Company B was incorporated in Australia and is an Australian resident for tax purposes.

Company B owns all the ordinary shares and voting rights in Company C, representing $X of paid-up capital.

Company B and Company C's assets are principally comprised of Australian real property. The market value of Company B's and Company C's Australian real property assets exceeds the market value of its assets which are not Australian real property.

Company X is a company incorporated in Country X. Company X did not have any assets prior to the proposed restructure.

The proposed restructure

Company A is proposing to undertake the following steps to reorganise its organisational structure:

Step 1: Interposition of Company X

Pursuant to the terms of a Share Sale and Purchase Agreement to be executed by each shareholder of Company A, the Company A shareholders will sell all of their shares in Company A to Company X in exchange for the issue of the same number of ordinary shares in Company X, issued to each shareholder in the same proportions that they held their shares in Company A.

Immediately after the completion of the share exchange set out above (the completion time), Company X will:

•         have fully paid ordinary shares on issue

•         own all the shares in Company A, and

•         not hold any assets or liabilities other than holding the Company A shares.

Step 2: Transfer of Company B to Company X

Company A will transfer all its shares in Company B to Company X.

Step 3: Removal of Company A from the corporate group

Company X will transfer the shares in Company A to an unrelated third party for nominal consideration, who will then commence the process to deregister or liquidate Company A.

Company A will not have any assets at the time of this transfer.

Step 4: Listing on the stock exchange of Country X

Company X intends to list its shares on the stock exchange of Company X and undertake an initial public offering (IPO) to raise additional capital to fund the business activities of Company B and Company C.

Company X has engaged an independent party to act as its sponsor and placement agent for the IPO. The capital raising will be done at market value and be open to all former Company A shareholders and participation will be voluntary.

Steps 1 to 3 will be implemented contemporaneously, or as close together as possible. The timing of the implementation of Step 4 will be dependent on commercial conditions.

Assumptions

Company X will choose that section 615-65 of the ITAA 1997 applies for the purposes of subsection 615-30(1) of the ITAA 1997 and will make the choice within the required time stipulated under subsection 615-30(3) of the ITAA 1997.

The transfer of the shares in Company B by Company A to Company X under Step 2 and will result in Company A making a capital gain.

Both Company A and Company X will choose to obtain the roll-over under Subdivision 126-B pursuant to paragraph 126-55(1)(b) of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 124-A

Income Tax Assessment Act 1997 Section 124-15

Income Tax Assessment Act 1997 Subdivision 126-B

Income Tax Assessment Act 1997 Section 126-45

Income Tax Assessment Act 1997 Section 126-50

Income Tax Assessment Act 1997 Subsection 126-55(1)

Income Tax Assessment Act 1997 Division 615

Income Tax Assessment Act 1997 Subdivision 615-B

Income Tax Assessment Act 1997 Subdivision 615-C

Income Tax Assessment Act 1997 Subdivision 615-D

Income Tax Assessment Act 1997 Subsection 615-5(1)

Income Tax Assessment Act 1997 Section 615-15

Income Tax Assessment Act 1997 Section 615-20

Income Tax Assessment Act 1997 Section 615-25

Income Tax Assessment Act 1997 Section 615-30

Income Tax Assessment Act 1997 Section 615-40

Income Tax Assessment Act 1997 Section 615-65

Income Tax Assessment Act 1997 Section 855-15

Income Tax Assessment Act 1997 Subsection 855-25(1)

Income Tax Assessment Act 1997 Section 855-30

Income Tax Assessment Act 1997 Section 960-195

Income Tax Assessment Act 1997 Section 975-500

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

Reasons for decision

Issue 1

Question 1

Summary

The Applicant Shareholders are eligible to choose to obtain roll-over relief under Division 615 of the ITAA 1997 for the disposal of their shares Company A in exchange for ordinary shares in Company X.

Detailed reasoning

Section 615-1 of the ITAA 1997 states:

You can choose for transactions under a scheme to restructure a company's or unit trust's business to be tax neutral, if under the scheme:

(a)  You cease to own shares in the company or units in the unit trust; and

(b)  In exchange, you become the owner of new shares in another company.

Subsection 615-5(1) of the ITAA 1997 states that you can choose to obtain the roll-over if:

(a)  you are a member of a company or a unit trust (the original entity), and

(b)  you and at least one other entity (the exchanging members) own all of the shares or units in it, and

(c)   under the scheme for reorganising its affairs, the exchanging members dispose of all their shares or units in it to a company (the interposed company) in exchange for shares in the interposed company (and nothing else), and

(d)  the requirements of Subdivision 615-B are satisfied.

The Company A shareholders (the exchanging members) are shareholders of Company A (the original entity) and they own all the shares in Company A. Therefore, the conditions in paragraphs 615-5(1)(a) and (b) of the ITAA 1997 are satisfied.

Paragraph 615-5(1)(c) of the ITAA 1997 requires that, under a scheme for reorganising its affairs, the exchanging members dispose of all their shares in the original entity to another company (the interposed company) in exchange for shares in the interposed company (and nothing else).

Company A has undertaken a scheme for reorganising its affairs for the purposes of paragraph 615-5(1)(c) of the ITAA 1997. Under this scheme, the exchanging members dispose of all their shares in Company A in exchange for shares in Company X (and nothing else). Therefore paragraph 615-5(1)(c) is satisfied.

Further requirements are imposed by Subdivision 615-B of the ITAA 1997. They are:

•         the interposed company must own all the original interests (section 615-15 of the ITAA 1997)

•         requirements relating to the interests in the original entity (subsections 615-20(1), (2) and (3) of the ITAA 1997)

•         special requirement relating to the interposed company (section 615-25 of the ITAA 1997), and

•         the interposed company must make a particular choice under section 615-30 of the ITAA 1997.

Interposed company must own all the original interests

Section 615-15 of the ITAA 1997 states that the interposed company must own all the shares or units in the original entity immediately after the time (the completion time) all the exchanging members have had their shares or units in the original entity disposed of, redeemed or cancelled under the scheme.

This requirement is satisfied because Company X will own all the shares in Company A immediately after the exchanging members dispose of their shares in Company A.

Requirements relating to the interests in the original entity

Subsection 615-20(1) of the ITAA 1997 requires that just after the completion time, each exchanging member must own:

• a whole number of shares in the interposed company, and
• a percentage of the shares in the interposed company that were issued to all the exchanging members that is equal to the percentage of the shares or units in the original entity (that were owned by the member and disposed of, redeemed or cancelled under the scheme).

These requirements are also satisfied because each exchanging member will exchange their shares in Company A for shares in Company X in a one-for-one exchange. Therefore, immediately after the completion time, each exchanging member will have a whole number of shares and the percentage of shares they hold in Company X will be the same as the percentage of shares they held in Company A.

Subsection 615-20(2) of the ITAA 1997 relevantly requires that the ratio of the market value of each exchanging member's shares in the interposed company to the market value of the shares in the interposed company issued to all the exchanging members (worked out immediately after the completion time) is equal to the ratio of the market value of that member's shares in the original entity that were disposed of under the scheme to the market value of all the shares or units in the original company that were disposed of under the scheme (worked out immediately before the first disposal).

As the proportionate market value of the interest of each shareholder in Company X after the completion time is the same as the proportionate market value of the prior interest that was held by the exchanging member in Company A before the first disposal, this condition will be satisfied. Company X was incorporated as a shelf company, with no other assets other than nominal initial share capital. As all the shares in Company X carry the same rights and obligations, and each exchanging member owns shares in Company X equal to the percentage of shares they originally owned in Company A, it follows that the market value ratio will be maintained.

Paragraph 615-20(3)(b) of the ITAA 1997 sets out further requirements for an exchanging member that is a foreign resident at the time their shares or units in the original entity are disposed of, redeemed or cancelled under the scheme. It provides:

(b)  if you are a foreign resident at that time:

(i)      your shares or units in the original entity were taxable Australian property immediately before that time; and

(ii)     your shares in the interposed company are taxable Australian property immediately after the completion time.

Broadly, taxable Australian property includes an indirect Australian real property interest (section 855-15 of the ITAA 1997).

The Applicant Shareholders' interests in Company A and the interests they will acquire in Company X under the scheme will be an indirect Australian real property interest if it passes the non-portfolio interest test (per section 960-195 of the ITAA 1997) and the principal asset test (per section 855-30 of the ITAA 1997) (section 855-25 of the ITAA 1997).

As the Applicant Shareholders each hold a direct participation interest of greater than 10% in Company A immediately before they dispose of their shares in Company A and will continue to hold a greater than 10% direct participation interest in Company X immediately after the completion time, the Applicant Shareholders' shares in Company A and its shares in Company X will satisfy the non-portfolio interest test. The Applicant Shareholders' interests in Company A will pass the principal asset test immediately before the share exchange at Step 1 occurs on the basis that Company A's only assets at that time will be its interest (100% of the shares) in Company B, and, the sum of the market value of Company B's assets that are taxable Australian real property assets will exceed the sum of the market values of its assets that are not taxable Australian real property assets. The interests that the Applicant Shareholders acquire in Company X under the scheme will also pass the principal asset test immediately after the completion time as Company X's only assets at this time will be the shares in Company A. Therefore, the Applicant Shareholders' shares in Company A will be taxable Australian property immediately before the time their shares in Company A will be disposed of, and their shares in Company X will continue to be taxable Australian property immediately after the completion time. Subsection 615-20(3) of the ITAA 1997 is satisfied.

Requirements relating to the interposed company

Subsection 615-25(1) states that shares in the interposed company must not be redeemable shares. The shares issued in Company X will not be redeemable shares. Therefore, this condition is satisfied.

Subsection 615-25(2) of the ITAA 1997 requires that each exchanging member who is issued shares in the interposed company must own the shares from the time they are issued to the completion time. This condition is also satisfied as each exchanging member who is issued shares in Company X holds those shares from the time they are issued until at least the completion time.

Subsection 615-25(3) of the ITAA 1997 requires that just after the completion time:

(a)  the exchanging members must own all the shares in the interposed company; or

(b)  entities other than those members must own no more than 5 shares in the interposed company and the market value of those shares expressed as a percentage of the market value of all the shares in the interposed company must be such that it is reasonable to treat the exchanging members as owning all the shares.

Paragraph 615-25(3)(b) of the ITAA 1997 is satisfied in this case. Immediately after the completion time, the exchanging members will hold all the shares in Company X.

Finally, as Company A is not the head company of a consolidated group immediately before the completion date, subsection 615-30(2) of the ITAA 1997 will not apply in this case. Company X must therefore choose that section 615-65 of the ITAA 1997 applies (subsection 615-30(1) of the ITAA 1997). It is assumed for the purpose of this Ruling that Company X will make the choice for section 615-65 of the ITAA 1997 to apply and will make the choice within the required time stipulated under subsection 615-30(3) of the ITAA 1997.

As all the requirements in Subdivision 615-B of the ITAA 1997 will be satisfied as detailed above, paragraph 615-5(1)(d) of the ITAA 1997 will also be satisfied.

Conclusion

As all the requirements of subsection 615-5(1) of the ITAA 1997 are satisfied, the Applicant Shareholders will be eligible to choose to obtain roll-over relief under Division 615 of the ITAA 1997 in relation to the exchange of their shares in Company A for shares in Company X under the scheme.

Question 2

Summary

If an Applicant Shareholder chooses to obtain the roll-over under Division 615 of the ITAA 1997:

(i)            any capital gain or capital loss the Applicant Shareholder makes in relation to the transfer of their shares in Company A to Company X will be disregarded pursuant to subsection 124-15(2) and section 615-40 of the ITAA 1997, and

(ii)           the Applicant Shareholder's cost base for the ordinary shares in Company X acquired in exchange for the disposal of their shares in Company X will be determined in accordance with subsection 124-15(3) and section 615-40 of the ITAA 1997.

Detailed reasoning

The consequences for entities choosing a roll-over under Division 615 of the ITAA 1997 are set by Subdivisions 615-C, 615-D and 124-A of the ITAA 1997. Broadly, section 615-40 and Subdivision 124-A of the ITAA 1997 are relevant for the exchanging members.

Section 615-40 of the ITAA 1997 states that the consequences set out in Subdivision 124-A of the ITAA 1997 (which applies to roll-overs covered by Division 124 of the ITAA 1997) also apply to a roll-over covered by Division 615 of the ITAA 1997.

Specifically, section 124-15 of the ITAA 1997 sets out the consequences for an entity if it can obtain a roll-over when its ownership of more than one CGT asset (the original assets) ends and it acquires one or more CGT assets (the new assets).

Relevantly, subsection 124-15(2) of the ITAA 1997 provides that a capital gain or a capital loss the entity makes from each original asset is disregarded and subsection 124-15(3) of the ITAA 1997 provides that if all the original assets were acquired on or after 20 September 1985, the first element of each new asset's cost base (or reduced cost base) is determined as follows:

As confirmed in the reasoning to Question 1 of this Ruling, the Applicant Shareholders will be eligible to choose to obtain a rollover under Division 615 of the ITAA 1997 in relation to the exchange of their shares in Company A (the original assets) for shares in Company X (the new assets).

Therefore, if an Applicant Shareholder chooses to obtain that roll-over under Division 615 of the ITAA 1997:

• the Applicant Shareholder will disregard any capital gain or capital loss they make from the disposal of their shares in Company A to Company X, and
• the Applicant Shareholder's first element of the cost base of each of the shares in Company X issued to them will be equal to the aggregate cost base of the Company A shares disposed of by them to Company X (worked out at the time of the disposal), divided by the number of Company X shares issued to them.

Question 3

Summary

Pursuant to subsection 615-65(4) of the ITAA 1997, the first element of Company X's shares in Company A will be worked out as the total of the cost bases of Company A's assets at the completion time less any liabilities in respect of those assets.

Detailed reasoning

Section 615-65 of the ITAA 1997 sets out the consequences for the interposed company of the rollover under Division 615 of the ITAA 1997. Section 615-65 of the ITAA 1997 applies if the interposed company so chooses under subsection 615-30(1) of the ITAA 1997.

Under section 615-65 of the ITAA 1997, the cost base of the original company's post-CGT assets transfers to the interposed company's post-CGT shares. Subsection 615-65(4) of the ITAA 1997 provides:

The first element of the cost base of the interposed company's shares or units in the original entity that are not taken to have been acquired before 20 September 1985 is:

(a)    the total of the cost bases (as at the completion time) of the original entity's assets that it acquired on or after that day; less

(b)    its liabilities (if any) in respect of those assets.

As discussed in the reasoning to Question 1 above, subsection 615-30(2) of the ITAA 1997 does not apply in this case as Company X is not a member of an income tax consolidated group and it has been assumed for the purpose of this Ruling that Company X will choose that section 615-65 of the ITAA 1997 applies and will make the choice within the required time stipulated under subsection 615-30(3) of the ITAA 1997.

Company A's only assets are its interests in Company B, which were acquired after 20 September 1985. Accordingly, none of the shares in Company A acquired by Company X will be taken to have been acquired before 20 September 1985 pursuant to subsection 615-65(2) of the ITAA 1997. Pursuant to subsection 615-65(4) of the ITAA 1997, the first element of the cost base of the Company A shares transferred to Company X, in the hands of Company X, will equal the total of the cost bases of Company A's assets at the completion time less any liabilities in respect of those assets. Where a liability of Company A is not a liability in respect of a specific asset or assets of Company A, it will be taken to be a liability in respect of all the assets of Company A (subsection 615-65(5) of the ITAA 1997).

Issue 2

Question 1

Summary

Company X will satisfy the requirements to choose to obtain roll-over relief under Subdivision 126-B of the ITAA 1997 to disregard the capital gain it will make in respect of the transfer of its shares in Company B to Company X.

Detailed reasoning

The provisions of Subdivision 126-B provide CGT roll-over to a company (the originating company) that transfers a CGT asset to, or creates a CGT asset in, another company (the recipient company) that is a member of the same 'wholly-owned group' (subsection 126-50(1) of the ITAA 1997).

Trigger Event

Subsections 126-45(1) and (2) of the ITAA 1997 relevantly states:

126-45(1)

There may be a roll-over if a CGT event (the trigger event) happens involving a company (the originating company) and another company (the recipient company) in the circumstances set out in section 126-50.

126-45(2)

Only these CGT events are relevant:

(a)  CGT events A1...; and

(b)  ...

Subsections 126-45(1) and (2) require that a CGT event of a specified type happened to the originating company. CGT event A1 is one of the listed CGT events in paragraph 126-45(2)(a) of the ITAA 1997 for the roll-over.

When Company A transfers its interest in Company B to Company X, CGT event A1 (the trigger event) will happen.

Section 126-50 requirements for roll-over

Subsection 126-50(1) of the ITAA 1997 requires that the originating company (Company A) and recipient company (Company X) must be members of the same wholly-owned group at the time of the trigger event.

Section 975-500 of the ITAA 1997 (as referred to by subsection 995-1(1) of the ITAA 1997) provides the definition of 'wholly-owned group' as:

Two companies are members of the same wholly-owned group if:

(a)  one of the companies is a 100% subsidiary of the other company; or

(b)  each of the companies is a 100% subsidiary of the same third company.

At the time of the trigger event, Company X will own all the shares in Company A. As such, Company A will be a 100% subsidiary of Company X and they are members of the same wholly-owned group.

The CGT assets are not trading stock or a registered emissions unit

Subsection 126-50(2) of the ITAA 1997 states that the roll-over asset must not be trading stock of the recipient company, or a registered emissions unit held by the recipient company, just after the time of the trigger event.

The roll-over assets are the shares in Company B, which will not be trading stock in the hands of Company X just after the transfer (trigger event), nor are they registered emissions units as defined under section 420-10 of the ITAA 1997. Accordingly, the condition in subsection 126-50(2) of the ITAA 1997 is met.

Right or convertible interest

Subsection 126-50(3) of the ITAA 1997 contains conditions where the rollover asset is a right or convertible interest referred to in Division 130 of the ITAA 1997. As the shares in Company B are not such assets, the subsection is not applicable.

Option

Subsection 126-50(3A) of the ITAA 1997 contains conditions where the rollover asset is an option of the kind referred to in Division 134. As the shares in Company B are not such assets, the subsection is not applicable.

Recipient not an exempt entity

Subsection 126-50(4) of the ITAA 1997 provides that the ordinary income and statutory income of the recipient company must not be exempt from income tax because it is an exempt entity for the income year of the trigger event.

Subsection 995-1(1) of the ITAA 1997 defines 'exempt entity' as:

(a)  an entity all of whose ordinary income and statutory income is exempt from income tax because of this Act or because of another Commonwealth law, no matter what kind of ordinary income or statutory income the entity might have; or

(b)  an untaxable Commonwealth entity.

Note: See section 11-5 for a list of entities of the kind referred to in paragraph (a).

Company X is not an exempt entity, within the definition of that term in subsection 995-1(1) of the ITAA 1997. Accordingly, subsection 126-50(4) of the ITAA 1997 is met.

Taxable Australian property

Subsection 126-50(5) of the ITAA 1997 relevantly provides that where both the originating company and the recipient company are foreign residents, the relevant CGT asset must be taxable Australian property just before and just after the trigger event.

As set out in the reasoning to Question 1 above, taxable Australian property includes an indirect Australian real property interest pursuant to section 855-15 of the ITAA 1997 and an indirect Australian real property interest is a membership interest that passes both the non-portfolio interest test and the principal asset test.

The shares in Company B will be indirect Australian real property interests and constitute taxable Australian property as defined under section 855-15 of the ITAA 1997 just before the trigger event as the shares in Company B satisfy the non-portfolio interest test in the hands of Company A immediately before the trigger event and in the hands of Company X immediately after the trigger event, and the shares will also pass the principal asset test (it is as the sum of the market value of Company B's assets that are taxable Australian real property assets exceeds the sum of the market values of its assets that are not taxable Australian real property assets). Accordingly, subsection 126-50(5) of the ITAA 1997 will be satisfied.

Requirements where the originating company or recipient company is an Australian resident

Subsection 126-50(6) of the ITAA 1997 provides that if the originating company or the recipient company is an Australian resident at the time of the trigger event, that company must either be a member of a consolidated group or MEC group at that time, or not be a member of a consolidatable group at that time.

This requirement is not relevant as neither Company A nor Company X are Australian residents.

Requirements where the originating company is a foreign resident

Subsections 126-50(7) to (9) of the ITAA 1997 sets out further requirements where the originating company is a foreign resident. Relevantly, subsections 126-50(7) and (8) of the ITAA 1997 provides that if the originating company is a foreign resident, it must not have acquired the CGT asset that was involved in the trigger event in a disposal case because of:

(a)  a single CGT event giving rise to a roll-over under a previous application of this Subdivision (as amended by the New Business Tax System (Consolidation) Act (No. 1) 2002) involving an Australian resident originating company other than the company that is the recipient company for the current application of this Subdivision; or

(b)  a series (whether or not it is the longest possible series) of consecutive CGT events giving rise to roll-overs under previous applications of this Subdivision (as amended by the New Business Tax System (Consolidation) Act (No 1) 2002), the earliest involving an Australian resident originating company other than the company that is the recipient company for the current application of this Subdivision.

Company A did not access any CGT rollovers when it acquired the shares in Company B. Therefore, this requirement is satisfied.

Capital gain

Paragraph 126-55(1)(a) of the ITAA 1997 limits the roll-over under Subdivision 126-B of the ITAA 1997 to the following three circumstances:

• the originating company makes a capital gain under the trigger event,
• the originating company makes no capital loss and is not entitled to a deduction, or
• the originating company acquired the roll-over asset before 20 September 1985.

Additionally, pursuant to paragraph 126-55(1)(b) of the ITAA 1997, the roll-over will only apply if the originating company and the recipient company both choose to obtain it.

It is assumed for the purpose of this Ruling that Company A will make a capital gain under CGT event A1 as a result of the transfer of the shares in Company B to Company X and that both Company A and Company X will choose to obtain the Subdivision 126-B roll-over under paragraph 126-55(1)(b) of the ITAA 1997.

Accordingly, the requirements for roll-over relief under Subdivision 126-B are satisfied.

Section 126-60 of the ITAA 1997 sets out the consequences of the roll-over under Subdivision 126-B of the ITAA 1997 applying. Subsection 126-60(1) of the ITAA 1997 provides that a capital gain the originating company makes from the trigger event is disregarded. Company A will therefore be able to disregard any capital gain that arises from the transfer of its interest in Company B to Company X.

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