Edited version of private ruling

Authorisation Number: 1011566242423

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Ruling

Subject: Capital Gains Tax: Subdivision 126-B rollover

Ruling

Issue 1

Question:

Can a foreign agency created and operating under foreign legislation be regarded as a company under subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) for taxation law purposes in Australia?

Answer:

Yes.

Issue 2

Question:

Will company F qualify for the rollover under Subdivision 126-B of the ITAA 1997 for the transfer of capital gains tax (CGT) assets?

Answer:

Yes.

This ruling applies for the following period(s):

Year ended 30 June 2011

The scheme commences on:

1 June 2010

Relevant Facts and Circumstances

A foreign agency (the agency) is established under foreign legislation which authorises the agency to:

§ be a body corporate which shall have perpetual succession and may sue and be sued in its own name

§ have a common seal

§ have a board of directors

The agency beneficially owns all shares in two foreign companies; company F and company G. Company F has one taxable Australian real property (TARP). Company G wholly owns an Australian company; company X, which does not have any TARP.

The agency proposes to restructure their asset holdings in Australia. You have provided relevant details of the proposed restructure.

None of the rollover assets will become trading stock in the hands of the recipient companies following the respective transfers or have obtained the Subdivision 126-B of the ITAA 1997 rollover before.

Company F and company G will make a capital gain in relation to each of the transactions. The parties involved in the transfer of different CGT assets choose to obtain the Subdivision 126-B of the ITAA 1997 rollover.

Relevant Legislative Provisions

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

Income Tax Assessment Act 1997 Subsection 126-45(2).

Income Tax Assessment Act 1997 Section 126-50.

Income Tax Assessment Act 1997 Subsection 126-50(1).

Income Tax Assessment Act 1997 Subsection 126-50(2).

Income Tax Assessment Act 1997 Subsection 126-50(4).

Income Tax Assessment Act 1997 Subsection 126-50(5).

Income Tax Assessment Act 1997 Subsection 126-45(1).

Income Tax Assessment Act 1997 Paragraph 126-45(2)(a).

Income Tax Assessment Act 1997 Paragraph 126-55(1)(a).

Income Tax Assessment Act 1997 Subsection 126-60(1).

Income Tax Assessment Act 1997 Subsection 719-5(1).

Income Tax Assessment Act 1997 Subsection 719-10(1).

Income Tax Assessment Act 1997 Subsection 719-15(3).

Income Tax Assessment Act 1997 Section 719-20.

Income Tax Assessment Act 1997 Section 703-20.

Income Tax Assessment Act 1997 Section 855-15.

Income Tax Assessment Act 1997 Subsection 855-30(2).

Income Tax Assessment Act 1997 Section 855-25.

Income Tax Assessment Act 1997 Section 960-195.

Income Tax Assessment Act 1997 Section 855-20.

Income Tax Assessment Act 1997 Section 975-500.

Income Tax Assessment Act 1997 Subsection 975-505(1).

Income Tax Assessment Act 1997 Paragraph 975-505(1)(b).

Income Tax Assessment Act 1997 Paragraph 975-500(b).

Income Tax Assessment Act 1997 Subsection 719-50(1).

Income Tax Assessment Act 1936 Subsection 350(1).

Does Part iva of the Income Tax Assessment Act 1936 (ITAA 1936) apply to this ruling?

Part IVA of the 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 of the ITAA 1936, go to our website www.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-avoidance rule for income tax.

Reasons For Decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Issue 1:

The term 'company' is defined in subsection 995-1(1) of the ITAA 1997 to mean:

a) a body corporate; or

b) any other unincorporated association or body of persons;

but does not include a partnership or a non-entity joint venture.

Note: Division 830 treats foreign hybrid companies as partnership.

The term 'body corporate' is not defined in the ITAA 1936 or the ITAA 1997.

The Commissioner has considered the meaning of the term 'body corporate' in Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1):

30. 'Body corporate' is not a defined term. The term takes its meaning from the general law. 'Body corporate' is a general term to describe an artificial entity having a separate legal existence. A body corporate has the ability to continue in existence indefinitely and to keep its identity regardless of changes to its membership. It also has the power to act, hold property, enter into legal contracts, sue and be sued in its own name, just as a natural person can.

The foreign legislation establishes clearly that the foreign agency is a body corporate and has the characteristics of a body corporate mentioned in paragraph 30 of the MT 2006/1. Accordingly, the agency is a company under section 995-1 of the ITAA 1997 for taxation law purposes in Australia.

Issue 2:

Rollover relief under Subdivision 126-B of the ITAA 1997 (Subdivision 126-B rollover) will be available if:

§ a CGT event (the trigger event) happens involving a company (the originating company) and another company (the recipient company) that are members of the same wholly-owned group at the time of the trigger event

§ the CGT event is one of the events listed in subsection 126-45(2) of the ITAA 1997, and

§ the requirements set out in section 126-50 of the ITAA 1997 are satisfied

Trigger event

Subsections 126-45(1) and 126-45(2) of the ITAA 1997 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 rollover.

When company F disposes of the real property to company X and then the shares in company X to the agency, CGT event A1 will happen on the transfer of each asset.

Wholly-owned group

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

Section 975-500 of the ITAA 1997 provides the definition of 'wholly-owned group':

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.

Subsection 975-505(1) of the ITAA 1997 defines a 100% subsidiary:

A company (the subsidiary company) is a 100% subsidiary of another company (the holding company) if all the shares in the subsidiary company are beneficially owned by:

(a) the holding company; or

(b) one or more 100% subsidiaries of the holding company; or

(c) the holding company and one or more 100% subsidiaries of the holding company.

Company F and company Y are members of the same wholly-owned group because company F owns 100% of company Y pursuant to paragraph 975-500(b) of the ITAA 1997. Company F is also a 100% subsidiary of the agency.

The agency, company F, and company Y are members of the same wholly-owned group. Accordingly the condition in subsection 126-50(1) of the ITAA 1997 is met.

Not trading stock

Subsection 126-50(2) of the ITAA 1997 prohibits the rollover asset being trading stock of the recipient company just after the time of the trigger event.

It is confirmed that the rollover asset will not be trading stock in the hands of the recipient companies just after the respective transfer. Accordingly the condition in subsection 126-50(2) of the ITAA 1997 is met.

Non 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':

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).

The applicant confirms that the agency and company Y are not exempt entities, 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 provides that there must be a foreign resident in the transaction and the rollover must be taxable Australian property.

Section 855-15 of the ITAA 1997 lists five categories of CGT assets that are taxable Australian property. The first two categories are taxable Australian real property and indirect Australian real property interests.

Real property

Under section 855-20 of the ITAA 1997, taxable Australian real property includes real property situated in Australia and certain mining, quarrying or prospecting rights.

Where the originating company is a foreign resident and the recipient company is an Australian resident but not a prescribed dual resident, item 2 of subsection 126-50(5) of the ITAA 1997 requires that at the time of the trigger event the rollover asset must be a taxable Australian property just before the trigger event.

Just before the transfer, company F is a foreign resident and company Y is an Australian resident, the real property is an Australian real property. Consequently, the requirement in subsection 126-50(5) of the ITAA 1997 is satisfied.

Shares in company Y

Under section 855-25 of the ITAA 1997, an indirect Australian real property interest means that a membership interest held by a foreign resident in an entity at that time if the interest passes the non-portfolio interest test and the principal asset test.

Non-portfolio test

Under section 960-195 of the ITAA 1997, an interest held by an entity (the holding entity) in another entity (the test entity) passes the non-portfolio interest test at a time if the sum of the direct participation interests held by the holding entity and its associates in the test entity at that time is 10% or more.

Section 960-190 of the ITAA 1997 explains how to work out the direct participation interest in a company by calculating a direct control interest in a company, that is the greater or the greatest of percentages of the total paid-up share capital, rights of shareholders to vote, or participate in any decision-making concerning a number of matters or rights to distributions listed in subsection 350(1) of the ITAA 1936.

Company F holds 100% of the total paid-up share capital of company Y and has direct control interest of 100% in company Y. Therefore company F has the direct participation interest of 100% in company Y. Since the direct participation interest is more than 10%, shares in company Y held by company F pass the non-portfolio interest test.

Principal asset test

The test is used to determine when an entity's underlying value is principally derived from Australian real property.

Subsection 855-30(2) of the ITAA 1997 provides that a membership interest held by an entity (the holding entity) in another entity (the test entity) passes the principal asset test if the sum of the market values of the test entity's assets that are taxable Australian real property exceeds the sum of the market values of its assets that are not taxable Australian real property.

Company Y will only hold one taxable Australian real property. The applicant confirms that the market value of the taxable Australian real property held by company Y will exceed the market values of all assets that are not taxable Australian real properties.

Interests in company Y pass the non-portfolio test and the principal asset test and therefore are taxable Australian properties pursuant to section 855-15 of the ITAA 1997.

Where the originating company and the recipient company are foreign residents, item 1 of subsection 126-50(5) of the ITAA 1997 requires that at the time of the trigger event the rollover asset must be a taxable Australian property just before and just after the trigger event.

Company F and the agency are foreign residents. Just before and just after the transfers, shares in company Y are taxable Australian properties. Consequently, the requirement in subsection 126-50(5) of the ITAA 1997 is satisfied.

Member of a multiple entry consolidated (MEC) group

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 (b) not be a member of a consolidatable group at that time.

For the transfer of the CGT assets, company Y is an Australian resident. We have to consider whether company Y is a member of a MEC group.

A MEC group comes into existence when a choice, by two or more eligible tier-1 companies of a top company, that the potential MEC group derived from those companies be consolidated starts to have effect: subsection 719-5(1) of the ITAA 1997.

Section 719-20 of the ITAA 1997 defines the terms 'top company' and 'tier-1 company'. A company is a top company if it is a foreign resident and is not a wholly-owned subsidiary of another company (other than a dual resident or an Australian resident that fails the income tax treatment requirements for a tier-1 company).

A tier-1 company of a top company is generally an eligible tier-1 company unless two conditions under subsection 719-15(3) of the ITAA 1997. A tier-1 company of a top company:

§ must have all or some of its taxable income (if any) taxed at a rate that is or equals the corporate tax rate

§ must not be covered in the items in the table in section 703-20 of the ITAA 1997

§ must be an Australian resident (but not a prescribed dual resident)

§ must be a wholly-owned subsidiary of the top company, and

§ must not be a wholly-owned subsidiary of an Australian resident company

Company X and company Y are Australian resident companies and are wholly owned by the agency, the foreign resident top company. None of them are entities specified in the table in section 703-20 of the ITAA 1997. These companies have all of their taxable income (if any) taxed at a rate that is the corporate tax rate. Therefore company X and company Y are eligible tier-1 companies and are members of a potential MEC group under paragraph 719-10(1)(a) of the ITAA 1997.

These eligible tier-1 companies of the agency choose to consolidate under subsection 719-50(1) of the ITAA 1997 with company X as the provisional head company. A MEC group is formed.

Company Y being the recipient company is an Australian resident at the time of the transfer and it is also the member of a MEC group at that time. Accordingly, the requirement in subsection 126-50(6) of the ITAA 1997 is met.

Capital gain

Subsection 126-55(1)(a) of the ITAA 1997 limits the rollover to the following three circumstances if the originating company and recipient company both choose to obtain it:

§ 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 rollover asset before 20 September 1985

Company F will make a capital gain under CGT event A1 as a result of each transfer. Both company F and the recipient company for each of the transfers chooses to obtain the Subdivision 126-B of the ITAA 1997 rollover.

Accordingly, company F can disregard any capital gain that arises from the transfer of the CGT assets to the relevant companies under subsection 126-60(1) of the ITAA 1997.

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