Edited version of private ruling

Authorisation Number: 1011599797557

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Ruling

Subject: Roll-over relief under Division 124 of the Income Tax Assessment Act 1997

Issue 1

Question

Can X, Y and Z as trustees for the X Trust, Y Trust and Z Trust apply the roll-over under Subdivision 124-G of the Income Tax Assessment Act 1997 (ITAA 1997) upon the exchange of their one share in B Co Pty Ltd for new shares in A Co Pty Ltd?

Answer

Yes.

Issue 2

Question

If the answer to question 1 is yes, will the requirement in subsection 124-380(7) of the ITAA 1997 be satisfied if the directors of A Co Pty Ltd sign a minute within 28 days of the exchange of shares confirming its choice that section 124-385 of the ITAA 1997 applies?

Answer

Yes.

Issue 3

Question

If the answer to question 1 of issue 1 is no, can X, Y and Z as trustees for the X Trust, Y Trust and Z Trust choose to apply the roll-over relief under Subdivision 124-M of the ITAA 1997?

Answer

Not applicable.

Relevant facts and circumstances

B Co Pty Ltd has two ordinary shares. D Co Pty Ltd as trustee for C Family Trust holds one share. Until recently, the late W held the other share.

W passed away recently.

Prior to W's death, B Co Pty Ltd intended to restructure. Under that restructure, a new holding company, A Co Pty Ltd, was to be interposed between B Co Pty Ltd and B Co's shareholders, D Co Pty Ltd and W. D Co Pty Ltd as trustee for C Family Trust and W were to receive a whole number of shares each in A Co Pty Ltd in exchange for their shares in B Co Pty Ltd. A Co Pty Ltd is currently a shelf company with no assets other than a nominal sum of paid up capital. W and D Co Pty Ltd as trustee for C Family Trust each own one share in A Co Pty Ltd and A Co Pty Ltd has no other shares on issue. Therefore, W and D Co Pty Ltd as trustee for C Family Trust each would hold a whole number of shares of A Co Pty Ltd after the proposed restructure.

However, before the restructure could occur, W passed away. W's shares in B Co Pty Ltd and A Co Pty Ltd are now held by W's legal personal representatives on behalf of W's estate, which is currently under solvent administration.

Under the terms of W's Will, W's share in B Co Pty Ltd and W's share in A Co Pty Ltd will pass to W's children, X, Y and Z to hold as trustees for their respective family trusts being X Trust, Y Trust and Z Trust. They will hold W's shares in B Co Pty Ltd and A Co Pty Ltd equally as tenants in common.

Once the administration is completed, the restructure will commence. At that time, the share in B Co Pty formerly held by W will be held by X, Y and Z as trustees for the X Trust, Y Trust and Z Trust equally as tenants in common. After the completion of the restructure, X, Y and Z as trustees for the X Trust, Y Trust and Z Trust will hold all their shares in A Co Pty Ltd equally as tenants in common.

D Co Pty Ltd as trustee for C Family Trust will hold 50% of the shares in A Co Pty Ltd while the Children's Trusts will hold the remaining 50% of the shares in A Co Pty Ltd equally as tenants in common once the restructure is complete. These are the same percentages as the shareholders' previous ownership in B Co Pty Ltd.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 103-25

Income Tax Assessment Act 1997 Subdivision 124-G

Income Tax Assessment Act 1997 section 124-360

Income Tax Assessment Act 1997 subsection 124-360(1)

Income Tax Assessment Act 1997 section 124-365

Income Tax Assessment Act 1997 subsection124-365(1)

Income Tax Assessment Act 1997 subsection124-365(2)

Income Tax Assessment Act 1997 subsection124-365(3)

Income Tax Assessment Act 1997 subsection124-365(4)

Income Tax Assessment Act 1997 section 124-380

Income Tax Assessment Act 1997 subsection 124-380(1)

Income Tax Assessment Act 1997 subsection 124-380(2)

Income Tax Assessment Act 1997 subsection 124-380(3)

Income Tax Assessment Act 1997 subsection 124-380(4)

Income Tax Assessment Act 1997 subsection 124-380(5)

Income Tax Assessment Act 1997 subsection 124-380(6)

Income Tax Assessment Act 1997 subsection 124-380(7)

Application of Part IVA

Part IVA of the Income Tax Assessment Act 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 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 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

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Issue 1

Question

Summary

You (X, Y and Z as trustees for the X Trust, Y Trust and Z Trust) are eligible to choose to apply the roll-over relief under Subdivision 124-G as you will satisfy all the required conditions of sections 124-360, 124-365 and 124-380.

Detailed reasoning

Subdivision 124-G determines whether you can obtain a roll-over where you own shares in a company and there is a reorganisation of its affairs so that you become the owner of new shares in another company.

Under subsection 124-360(1), you can choose to obtain a roll-over under Subdivision 124-G if:

· you are a member of a company (the original company ); and

· you and at least one other entity (the exchanging members ) own all the shares in it; and

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

· and the requirements in sections 124-365 and 124-380 are satisfied.

You will satisfy the requirements of:

· paragraph 124-360(1)(a) as you (X, Y and Z as trustees for the X Trust, Y Trust and Z Trust holding one share equally as tenants in common) are a member of B Co Pty Ltd (the original company);

· paragraph 124-360(1)(b) as you and D Co Pty Ltd as trustee for C Family Trust (the exchanging members) own all the shares in it; and

· paragraph 124-360(1)(c) as under the group restructure, the exchanging members dispose of all their shares in it to A Co Pty Ltd (the interposed company) in exchange for shares in A Co Pty Ltd (and nothing else).

Under subsection 124-360(1), you are also required to satisfy the additional requirements in section 124-365. These requirements are:

The interposed company must own all the shares in the original company just after all the exchanging members have disposed of their shares in the original company (the completion time).

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 in the original company (that were disposed of to the interposed company) that the member owned.

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 just after the completion time);

must equal the ratio of:

the market value of that member's shares in the original company that were disposed of to the interposed company to the market value of all the shares in the original company that were disposed of to the interposed company (worked out just before the first disposal).

Either:

· you are an Australian resident at the time you disposed of your shares in the original company; or

· if you are a foreign resident at that time:

· your shares in the original company were taxable Australian property just before that time; and

· your shares in the interposed company are taxable Australian property just after the completion time.

You will satisfy the requirements of subsection 124-365(1) as A Co Pty Ltd will own all the shares in B Co Pty Ltd just after all the exchanging members disposed of their shares in B Co Pty Ltd.

Subsection 124-365(2) states 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 interposed company are equal to the shares in the original company.

Taxation Ruling TR 97/18 Income tax: capital gains: roll-over relief following reorganisation of the affairs of a unit trust or company establishes the ATO view on roll-over relief following reorganisation of the affairs of a unit trust or company.

Paragraph 6 of TR 97/18 provides that roll-over relief is available for certain business reorganisation where no change occurs in the economic ownership of a particular underlying asset, or where the underlying assets in which the taxpayer has an economic interest do not change.

In your case, D Co Pty Ltd as trustee for C Family Trust will hold 50% of the shares in A Co Pty Ltd while X, Y and Z as trustees for the X Trust, Y Trust and Z Trust will hold the remaining 50% of the shares in A Co Pty Ltd equally as tenants in common once the restructure is complete. These are the same percentages as the shareholders' previous ownership in B Co Pty Ltd. As there is no change in the economic ownership of A Co Pty Ltd after the restructure, you will satisfy the requirement set out in subsection 124-365(2).

ATO Interpretative Decision 2005/217 Capital gains tax: roll-over relief: exchange of share owned jointly for shares owned individually in an interposed company (ATO ID 2005/217) furthers the ATO view on the requirement in subsection 124-365(2), particularly the interpretation of the word, "each". The word, "each" includes joint ownership as shown in this ATO ID. It states that there is no requirement that an entity own a share in the original company in its own right in order to be an exchanging member. Joint ownership of shares is allowed so long as the percentage of shares in the original company before the reorganisation and in the interposed company after the reorganisation is maintained. In your case X, Y and Z as trustees for the X Trust, Y Trust and Z Trust though includes three individuals, they will jointly own a whole number of share, namely one share, in the original company and after the completion time, they will own a whole number of shares in the interposed company. The percentage of shares in the original and the interposed company between the exchanging members will be maintained after reorganisation. Therefore, subsection 124-365(2) is satisfied.

You also satisfy the requirements of:

· subsection 124-365(3) as the ratio of relative market values of the D Co Pty Ltd as trustee for C Family Trust and X, Y and Z as trustees for the X Trust, Y Trust and Z Trust newly issued shares in A Co Pty Ltd after the restructure will be the same as the ratio of relative market values of their shares in B Co Pty Ltd prior to the restructure; and

· subsection 124-365(4) as D Pty Ltd as trustee for C Family Trust and X, Y and Z as trustees for the X Trust, Y Trust and Z Trust are Australian residents.

Under subsection 124-360(1), you are also required to satisfy the additional requirements in section 124-380. These requirements are:

· 123-380(1) The shares issued in the interposed company must not be redeemable shares.

· 124-380(2) 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.

· 124-380(3) Just after the completion time:

· the exchanging members must own all the shares in the interposed company; or

· 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 is such that it is reasonable to treat the exchanging members as owning all the shares.

· 124-380(4) (Repealed by No 168 of 2006)

Choice to be made by interposed company

124-380(5)

· immediately before the completion time, the original company is the head company of a consolidated group; and

· immediately after the completion time, the interposed company is the head company of a consolidatable group consisting only of itself and the members of the group immediately before the completion time;

· 124-380(6) If subsection (5) of this section does not apply, the interposed company must choose that section 124-385 apply.

· 124-380(7) In either case, the interposed company must make the choice within 28 days after the completion time, or within such further time as the Commissioner allows. The choice cannot be revoked.

You will satisfy the requirements of:

· subsection 124-380(1) whereby A Co Pty Ltd will issue ordinary shares to D Co Pty Ltd as trustee for C Family Trust and X, Y and Z as trustees for the X Trust, Y Trust and Z Trust;

· subsection 124-380(2) as those shares will be held by D Co Pty Ltd as trustee for C Family Trust and X, Y and Z as trustees for the X Trust, Y Trust and Z Trust at all times; and

· subsection 124-380(3) as D Co Pty Ltd as trustee for C Family Trust and the X, Y and Z as trustees for the X Trust, Y Trust and Z Trust will hold 100% of the shares in A Co Pty Ltd after the restructure is completed.

It is acknowledged that as B Co Pty Ltd is not a member of a consolidated group, the requirement in subsection 124-380(5) will not be applicable in your case.

A Co Pty Ltd will make the choice within the relevant 28 days that section 124-385 applies and consequently both subsections 124-380(6) and 124-380(7) will be satisfied.

You will meet all the relevant requirements of sections 124-360, 124-365 and 124-380 and therefore you are eligible to choose to obtain a roll-over relief under Subdivision 124-G.

Issue 2

Question

Summary

Minutes signed by the directors of A Co Pty Ltd within 28 days of the exchange of shares confirming its choice that section 124-385 applies will satisfy the requirement in subsection 123-380(7).

Detailed reasoning

Under subsection 124-380(7), it is required that the interposed company make the choice that section 124-385 applies within 28 days after the completion time, or within such further time as the Commissioner allows.

Section 103-25 specifies the method of making elections when a CGT event occurs. However, it is clear that section 103-25 does not apply as it is specifically stated that subsection 124-380(7) is an exception to this provision.

There is no particular form prescribed in which the choice under subsection 124-380(7) is to be made by A Co Pty Ltd. However, we advise that you prepare formal documentation that would make it clear to a person investigating your circumstances that this choice was made.

The draft minute of A Co Pty Ltd's choice under subsection 124-380(6) which you have sent to us states your choice of section 124-385 applying. As it will be signed by the directors of A Co Pty Ltd within 28 days of the exchange of shares, this will be sufficient to satisfy the requirement in subsection 124-380(7).

Issue 3

Question

Subsection 124-795(3) states that you cannot obtain the roll-over under Subdivision 124-M if you can choose a roll-over under Subdivision 124-G. As we have confirmed above that you can choose to apply for the roll-over relief under Subdivision 124-G, Subdivision 124-M is not applicable in your case.

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