ATO Interpretative Decision

ATO ID 2004/578 (Withdrawn)

Income Tax

• This ATO ID is a straight application of the law and does not contain an interpretative decision.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the taxpayer, a proper authority holder, eligible for rollover relief under section 124-915 of the Income Tax Assessment Act 1997 (ITAA 1997) when the taxpayer's contract is replaced with a new contract entered into by the taxpayer's company when the taxpayer moved to the financial services reform (FSR) regime?

Decision

Yes. The taxpayer is eligible for the rollover relief provided by section 124-915 of the ITAA 1997, when the taxpayer's contract is replaced with a new contract entered into by the taxpayer's company.

Facts

The taxpayer is a proper authority holder of an entity that is a regulated principal under section 1430 of the Corporations Act 2001. The taxpayer had entered into the contract with the regulated principal after 19 September 1985.

The FSR regime came into effect on 11 March 2002. The taxpayer has a two year transition period ending on 10 March 2004 to move to the FSR regime. The taxpayer's contract with the regulated principal was terminated when the taxpayer moved to the FSR regime during the transition period.

At the same time the taxpayer incorporated a company, of which the taxpayer is the only shareholder. The company applied to the Australian Securities & Investments Commission (ASIC) for the AFS licence during the transition period. ASIC granted the AFS licence to the company.

The company entered into a new contract with the same entity in full substitution of the contract that was cancelled. The taxpayer became an authorised representative of the company to provide financial services.

Reasons for Decision

CGT event C2, section 104-25 of the ITAA 1997, happened when the taxpayer's intangible CGT asset, the rights under the original contract, was cancelled when the taxpayer moved to the FSR regime.

Section 124-910 of the ITAA 1997 sets out the conditions to be satisfied for a taxpayer to be entitled to the rollover relief:

1.

an intangible CGT asset owned by a taxpayer ceases to exist during the FSR transition period;

2.

the asset ceases to exist because of the termination of a contract;

3.

the termination is directly connected with the taxpayer choosing a new owner to conduct the taxpayer's business in relation with Chapter 7 of the Corporations Act 2001 (as amended by the Financial Services Reform Act 2001) beginning to apply to the taxpayer;

4.

the new owner acquires an intangible CGT asset(s) by entering into contract(s) in substitution (wholly or partly) for the contract(s) that were terminated; and

5.

the further conditions under sub-section 124-910(2) or subsection 124-910(3) of the ITAA 1997 are satisfied. In this case, subsection 124-910(3) of the ITAA 1997 contains the relevant conditions that need to be satisfied:

•

the new owner is a company;

•

all of the membership interests in the company are owned by the original owner;

•

the new owner acquires the AFS licence; and

•

the original owner becomes an authorised representative, an employee, or a director of the new owner.

The taxpayer satisfies conditions 1 to 4. The taxpayer also satisfies condition 5 as the taxpayer and the company have met the requirements at subsection 124-910(3) of the ITAA 1997.

Where the conditions of section 124-910 of the ITAA 1997 are satisfied, the consequences in section 124-915 of the ITAA 1997 apply.

Subsection 124-915(1) of the ITAA 1997 provides that where:

•

the taxpayer's ownership of the original asset (the right under the original contract) has come to an end; and

•

the new owner has acquired the replacement asset(s) (the right under the new contract),

the provisions of subsection 124-915(2) of the ITAA 1997 will apply.

Subsection 124-915(2) of the ITAA 1997 states:

•

any capital gain or capital loss made from CGT event C2 happening to each of their rights under the original contract is disregarded; and

•

if the original right was acquired before 20 September 1985, the new right(s) are taken to have been acquired before 20 September, 1985; or

•

if the original right was acquired on or after 20 September 1985, the first element of the cost base of each new right is the cost base of the related original right plus any amount the taxpayer paid to get the new right. The first element of the reduced cost base is worked out similarly.

As the taxpayer has satisfied the conditions at section 124-910 of the ITAA 1997, the taxpayer is eligible for the new owner rights rollover relief.

Note: The company can be an existing company wholly owned by the taxpayer.

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   section 104-25
   section 124-910
   subsection 124-910(2)
   subsection 124-910(3)
   section 124-915
   subsection 124-915(1)
   subsection 124-915(2)

Related ATO Interpretative Decisions
ATO ID 2004/573
ATO ID 2004/574
ATO ID 2004/575
ATO ID 2004/576
ATO ID 2004/577

Keywords
Australian financial services licence
Authorised representative
Capital gains tax
CGT assets
CGT events C1-C3 - end of a CGT asset
Contractual rights asset
Financial services reform regime
Financial services reform transition period
FSR regime
FSR transition period
New owner roll-over
Regulated principal
Rights roll-over

Business Line:  Losses and Capital Gains Tax Centre of Expertise

Date of publication:  16 July 2004

ISSN: 1445-2782