Edited version of private advice

Authorisation Number: 1052262527644

Date of advice: 14 June 2024

Ruling

Subject: Transfer of incorporation

Question 1

Will the Association be considered the same 'entity' for the purposes of section 995-1 and 960-100 under the Income Tax Assessment Act 1997 (ITAA 1997) after it converts to a company limited by guarantee via the relevant section of the relevant Act?

Answer

Yes.

Question 2

Does a CGT event under Division 104 of the ITAA 1997 occur when the assets of the Association vest in a company limited by guarantee pursuant to the relevant section of the relevant Act?

Answer

No.

Question 3

Will the Association (as a company limited by guarantee) continue as the head company of the tax consolidated group of which the Association (the incorporated association) was the head company, under section 703-15 of the ITAA 1997, following its conversion from an association to a company limited by guarantee via the relevant section of the relevant Act?

Answer

Yes.

Question 4

Will the Association (as a company limited by guarantee) remain the representative member of the GST Group of which the Association (the incorporated association) was the representative member under section 48-5 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth)., following its conversion from an association to a company limited by guarantee via the relevant section of the relevant Act?

Answer

Yes.

This ruling applies for the following periods:

1 July 2023 to 30 June 2027

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

The Association was incorporated in a specified year.

The Association currently operates in various states.

The Association has a specified number of wholly owned subsidiaries.

Tax attributes

The Association is an Australian resident for income tax purposes.

The Association is the head company of the tax consolidated group.

The Association and Subsidiary 1 are grouped for GST purposes, with The Association being the representative member.

Arrangement

The Association is considering undertaking a corporate restructure, which will involve converting from its current structure as an incorporated association to a company limited by guarantee.

The conversion will be undertaken pursuant to the relevant section of the relevant Act.

The commercial rationale behind the corporate restructure is the expectation it will enable the Association to

•         modernise its corporate governance structure, aligning it with other similar organisations nationally.

•         access additional sources of funding and capital

Not for profit

The Association operates on a not-for-profit basis, and the nature and objects of the Association were provided and included:

•         providing such other services as the Board from time to time thinks fit

•         affiliating and working in conjunction with kindred organisations

•         use the influence of the Association for the benefit of members and the community generally.

The Constitution of the Association dictates the Association is not carried on for the purpose of profit or gain to individual members and no distribution may be made to a member.

The relevant section of the relevant Act prevents an incorporated association from conducting its affairs in a manner calculated to secure a pecuniary profit for the members of the association or any of them, or for the associates of the members of any of them.

The Association's activities

The Association has several specified activities.

Income

The Association's income consists principally of various specified sources.

Membership

The Association has approximately xx members.

Membership is divided into classes as determined by the board of the Association (Board), which also determines the fees payable by the members, qualifications for membership, and whether any concessions or exemptions may be provided to members or classes of members.

The Association has several classes of members.

The qualifications for the membership classes are determined by the Board.

Not all categories of membership carry voting rights. Under the relevant clause of the Association's Constitution only "Eligible Members" may vote at a general meeting.

The Board determines who is an Eligible Member under the Constitution.

Information provided

The applicant has provided information in a number of documents including:

•         the private ruling application

•         Constitution

•         Letter to the Australian Taxation Office on a specified date, including some additional documents.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 48-5

A New Tax System (Goods and Services Tax) Act 1999 section 48-10

A New Tax System (Goods and Services Tax) Act 1999 section 190-1

A New Tax System (Goods and Services Tax) Act 1999 section 190-5

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Income Tax Assessment Act 1997 section 100-20

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 paragraph 703-5(2)(a)

Income Tax Assessment Act 1997 section 703-15

Income Tax Assessment Act 1997 section 703-20

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 section 960-100

Corporations Act 2001 subsection 601BM(1)

Associations Incorporations Act 1985 (SA) subsection 20(3)

Associations Incorporations Act 1985 (SA) section 42

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA 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 applies, we will 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 ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for decision

Question 1

Summary

The Association is the same body corporate and 'entity' for the purposes of the Income Tax Assessment Act 1997 both before and after it completes the conversion from associate incorporated to a company limited by guarantee.

Detailed reasoning

Relevant law

Under the relevant Act upon incorporation the association becomes a body corporate.

Subsection 601BM(1) of the Corporations Act 2001 (Corporations Act) states Registration under this Part does not:

(a) create a new legal entity; or

(b) affect the body's existing property, rights or obligations (except as against the members of the body in their capacity as members); or

a.   render defective any legal proceedings by or against the body or its members.

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines an 'entity' to have the meaning in section 960-100 of the ITAA 1997.

An 'entity' is defined to mean any of the following:

(a) an individual;

(b) a body corporate;

(c) a body politic;

(d) a partnership;

(e) any other incorporated association or body of persons;

(f) a trust;

(g) a superannuation fund.

In addition, section 995-1 of the ITAA 1997 defines a 'company' to mean:

(a) a body corporate; or

(b) any other unincorporated association or body or persons; but does not include a partnership...

Application of the law

The Association is an association incorporated under the relevant Act. Pursuant to the relevant section of the relevant Act upon incorporation the association became a body corporate under that Act and at general law.

Relevant to both definitions is the meaning of 'body corporate' which takes its meaning at general law. However, for the purposes of the ITAA 1997, the Association as incorporated under the relevant Act is an 'entity' as defined in paragraph 960-100(1)(b) of the ITAA 1997. It is also a 'company' as defined in section 995-1 of the ITAA 1997.

If the Association is registered under the Corporations Act, it will continue to be a 'body corporate', 'company' and 'entity' as relevantly defined in the ITAA 1997. Notwithstanding the Association's transfer of incorporation to a separate Act, the Association will preserve its identity and continue to be the same legal entity.

The provisions in the Corporations Act provide for the continuation of the Association as the 'same entity as the body corporate' which was the incorporated association, and the act of registration as a company limited by guarantee (CLG) under the Corporations Act will not create a new legal entity (paragraph 601BM(1)(a) of the Corporations Act).

In addition, the property, rights and liabilities of the Association will vest in the CLG and are preserved when the taxpayer is registered under the Corporations Act pursuant to the relevant section of the relevant Act. This indicates that the identity of the body corporate is preserved and continues with the same assets, rights and liabilities, albeit as a CLG by registration.

The Association is the same body corporate and 'entity' for the purposes of the ITAA 1997 both before and after it completes the conversion from associate incorporated to a company limited by guarantee.

Question 2

Summary

The conversion of the Association'sincorporation status from an incorporated association to a company limited by guarantee will not result in a disposal (and subsequent reacquisition) of its assets and therefore no capital gain (or loss) will arise pursuant to section 104-10 of the ITAA 1997, or any other CGT event.

Detailed reasoning

Relevant law

Section 100-20 of the ITAA 1997 provides that you can only make a capital gain or capital loss if a CGT event happens. The CGT events are provided in Division 104 of the ITAA 1997.

The only relevant CGT event that may be applicable to this case happens if you dispose of a CGT asset and CGT event A1 occurs pursuant to subsection 104-10(1) of the ITAA 1997.

Subsection 104-10(2) of the ITAA 1997 explains that you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.

Application of the law

Paragraph 601BM(1)(a) of the Corporations Law 2001 provides that registration under this Part does not create a new legal entity. As such, there is no CGT event under Division 104 of the ITAA 1997 that happens to an association incorporated under the relevant act on the change in registration to a company under the Corporations Law.

In this case, the conversion of the entity from an association incorporated under the relevant actto an incorporated entity limited by guarantee under the Corporations Act will not result in the occurrence of a CGT event under Division 104 of the ITAA 1997 in respect of assets held by the entity.

Question 3

Summary

The Association (as a CLG) will continue to be the head company of the tax consolidated group.under section 703-15 of the ITAA 1997.

Detailed reasoning

Relevant law

Under paragraph 703-5(2)(a) of the ITAA 1997 a consolidated group continues to exist until the head company of the group ceases to be a head company.

Section 703-15 of the ITAA 1997 an entity is a head company at a particular time in an income year if all the requirements of item 1 in the table are met in relation to the entity. Under Item 1 in the table the entity must

•         be a company (but not one covered by section 703-20 of the ITAA 1997) that has some or all of its taxable income (if any) taxed at a rate that is or equals the corporate tax rate.

•         be an Australian resident (but not a prescribed dual resident).

•         not be a wholly owned subsidiary of another entity that meets the income tax and residency requirement as above, or if it is it must not be a subsidiary member of a consolidatable group or consolidated group.

Section 703-20 of the ITAA 1997 states the entity cannot be

•         exempt from income tax under Division 50 of the ITAA 1997

•         recognised as a medium credit union as defined in section 6H of the Income Tax Assessment Act 1936 (ITAA 1936)

•         an approved credit union for the income year for the purposes of section 23G of the ITAA 1936

•         a CCIV

•         a PDF.

Application of the law

The Association (as a CLG) will continue to meet the requirements of section 703-15 of the ITAA 1997 and additionally, the Association is not and will not be an entity that is excluded under section 703-20.

As detailed in Question 1 above the entity is the same entity before and after it completes the transfer of incorporation and therefor the Association continues to be a head company after the conversion from associate incorporated to a company limited by guarantee.

Question 4

Summary

As long as the Association (as a CLG) continues to meet the GST Grouping membership requirements, being that the Association has at least a 90% stake in the GST Group Member as per section 190-5 of the GST Act.

Detailed reasoning

Relevant law

Under Division 48 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth), (GST Act), entities with common ownership that meet certain conditions are eligible to form a GST group.

Subsection 48-5(1) of the GST Act states:

(1) A member of a GST group is an entity that:

a)    formed the group under section 48-5, or was added to the group under section 48-70; and

b)    satisfies the membership requirements of the group.

In relation to satisfying the membership requirements stated in subsection 48-5(1)(b) of the GST Act, subsection 48-10(1) states:

(1) An entity satisfies the membership requirements of a GST group, or a proposed GST group, if the entity:

a)    is:

                             ii.        a company; or

                            iii.        a partnership, trust or individual that satisfies the requirements specified in the regulations; and

b)    is, if the entity is a company, a company of the same 90% owned group as all the other members of the GST group or proposed GST group that are also companies; and...

Section 195-1 of the GST Act provides that the term "90% owned group" has the meaning given by section 190-1 of the GST Act.

Section 190-1(a) of the GST Act states two companies are members of the same 90% owned group if:

a)    one of the companies has at least a 90% stake in the other company;

Section 195-1 of the GST Act provides that the term "at least a 90% stake" in a company has the meaning given by section 190-5.

Section 190-5 of the GST Act explains when a company has "at least a 90% stake" in another company:

A company (the holding company) has at least a 90% stake in another company (the subsidiary company) if the holding company:

a)    controls, or is able to control, at least 90% of the voting power in the subsidiary company (whether directly, or indirectly through one or more interposed companies); and

b)    has the right to receive (whether directly, or indirectly through one or more interposed companies) at least 90% of any dividends that the subsidiary company may pay; and

c)    has the right to receive (whether directly, or indirectly through one or more interposed companies) at least 90% of any distribution of capital of the subsidiary company.

Application of the law

Therefore, if you change your organisational structure from an association to a company limited by guarantee, as long as you continue to hold at least a 90% stake in Subsidiary A as per section 190-5 of the GST Act, then section 48-10(1)(b) of the GST Act would be satisfied.

If the Association (as a CLG) satisfies all the membership requirements in section 48-10(1) you are eligible to remain the representative member of the GST Group of which the Association (the incorporated association) is the current GST Group Representative member.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).