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Edited version of private ruling
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Ruling
Subject: Replacement asset roll-over
Question 1
Can the taxpayer obtain roll-over relief under Subdivision 124-G of the Income Tax Assessment Act 1997 ('ITAA 1997')?
Answer
Yes. The taxpayer can choose to obtain roll-over relief under Subdivision 124-G of the ITAA 1997.
Question 2
If the taxpayer chooses to obtain roll-over relief under subdivision 124-G of the ITAA 1997, how will the cost base of the shares which the taxpayer owns in company C be calculated?
Answer
The cost base of the shares is calculated in accordance with the formula set out in subsection 124-15(6) of the ITAA 1997.
This ruling applies for the following period:
1 July 2010 to 30 June 2012
Relevant facts and circumstances
Under a proposed scheme shareholders in companies A and B (the original companies) will dispose of all their shares to company C (the interposed company) in exchange for shares in company C.
The shareholders will own shares in company C in the same proportions that they held shares in companies A and B.
The shares in the interposed company will have the same rights as the shares previously held in the original companies.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subdivision 124-G.
Reasons for decision
Question 1
Division 124 -Replacement asset rollovers
A rollover may be available under Division 124 of the ITAA 1997 when a taxpayer who owns a CGT asset gives up, or surrenders that asset, or the taxpayer's ownership of the asset comes to an end in some other way, and as part of the same transaction or circumstances the taxpayer receives another CGT asset to replace the original asset. If a rollover is available, the effect is to defer to a later CGT event any capital gain or loss which would otherwise be triggered by the event which brings the taxpayer's ownership of the original asset to an end. If the original asset was acquired by the taxpayer before 20 September 1985, the usual effect of the rollover will be to treat the replacement asset as a pre-CGT asset.
Sections 124-10 and 124-15 of the ITAA 1997 set out the general rules for replacement asset rollovers. If a taxpayer chooses to apply a rollover, the capital gain or capital loss from the original asset(s) is disregarded (subsections 124-10(2) and 124-15(2) of the ITAA 1997).
If the original asset(s) was acquired before 20 September 1985 the new asset(s) are taken to have been acquired before that day (subsections 124-10(4) and 124-15(4) of the ITAA 1997). However this general rule is qualified by a note in each of the subsections:
A capital gain or loss you make from a CGT asset you acquired before 20 September 1985 is generally disregarded: see Division 104. This exemption is removed in some situations: see Division 149.
Division 149 of the ITAA 1997 sets out the circumstances in which an asset stops being a pre-CGT asset.
Subdivision 124-G - Exchange of shares in one company for shares in another company
A taxpayer who is a shareholder in a company (the "original company") can elect to obtain a rollover when the company reorganises its affairs. The taxpayer will be eligible for rollover relief if:
The taxpayer and all other shareholders in the company dispose of all their shares to a second company (the "interposed company") in exchange for shares in that second company; and
The conditions in section 124-365 of the ITAA 1997 are satisfied.
The requirements of section 124-365 of the ITAA 1997 are as follows:
· The interposed company owns all of the shares in the original company when the exchanging members have disposed of their shares (the "completion time")
· At that time, each exchanging member now owns a whole number of shares in the interposed company in the same percentage as that member owned in the original company
· The ratio of the market value of each exchanging member's shareholding in the interposed company to the total market value of shares in that company must be the same as the ratio of the market value of that member's shareholding in the original company to the total market value of the shares in the original company; and
· The taxpayer must be an Australian resident at the time the shares in the original company are disposed of or if not, the shares in the original company must be "taxable Australian property" just before that time and the share in the interposed company must be "taxable Australian property" just after the completion time.
Outcome of the proposed scheme
Under the terms of the proposed Share Sale Agreement (SSA) the shareholders in companies A and B will dispose of all their shares in companies A and B to company C in the same transaction in exchange for shares in company C.
As a result of the transaction, company C ('the interposed company') will own all of the shares in companies A and B. The former shareholders ('exchanging members') will then be shareholders of company C and, according to the SSA, own a whole number of shares in the interposed company in the same percentage as the shareholders owned in the original companies.
It is considered that the proposed scheme will meet the requirements of sections 124-360, 124-365 and 124-380 of the ITAA 1997. Therefore the taxpayer will be able to choose the roll-over relief provided for in Subdivision 124-G of the ITAA 1997.
Question 2
Cost base of shares in Company C
The rules for determining the cost base of new assets acquired under a roll-over are set out in Subdivision 124-A of the ITAA 1997. In this instance all of the taxpayer's original shares were acquired after 20 September 1985. The formula for determining the first element of the new asset's cost base is set out in subsection 124-15(3) of the ITAA 1997. The first element of the new asset's cost base is:
The total of the cost bases of all the original assets(worked out when your ownership of them ended)
Number of new assets
No other elements of the cost base of the new asset are affected by the roll-over.
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