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Ruling

Subject: Capital gains tax: Amalgamation of non-resident subsidiaries of an Australian company

Issue 1

Question 1

Will CGT event C2 under section 104-25 of the Income Tax Assessment Act 1997 happen upon the cancellation of the C Company shares held by A Company?

Answer

Yes. Please see our 'Reasons for decision'.

Issue 2

Question 1

If CGT event C2 will happen, are there nil capital proceeds under Division 116 of the Income Tax Assessment Act 1997 from the cancellation of the C Company shares held by A Company?

Answer

Yes. Please see our 'Reasons for decision'.

Issue 3

Question 1

Will the indirect value shifting rules in Division 727 of the Income Tax Assessment Act 1997 apply to reduce the capital loss upon the cancellation of the C Company shares held by A Company, and reduce the corresponding capital gain upon a future CGT event happening in respect of the B Company shares held by A Company?

Answer

Yes. Please see our 'Reasons for decision'.

This ruling applies for the following period:

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

A Company is an Australian resident company for income tax purposes.

A Company has two foreign subsidiaries, being C Company and B Company, which are non-resident companies for income tax purposes.

C Company is wholly owned by A Company.

B Company is primarily owned by A Company with a small percentage held by C Company.

It is proposed that C Company and B Company will amalgamate with B Company as the continuing company. The effect of the amalgamation is that C Company will be absorbed by B Company. In other words, the underlying assets and liabilities of C Company will be transferred to B Company.

A resolution will be passed to the effect that all the shares in C Company will be cancelled for no consideration.

C Company will be deregistered.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-25,

Income Tax Assessment Act 1997 Division 116,

Income Tax Assessment Act 1997 Subsection 116-20(1),

Income Tax Assessment Act 1997 Subsection 116-30(1),

Income Tax Assessment Act 1997 Subsection 116-30(3A),

Income Tax Assessment Act 1997 Division 727,

Income Tax Assessment Act 1997 Subsection 727-5(1),

Income Tax Assessment Act 1997 Subsection 727-15(2),

Income Tax Assessment Act 1997 Subsection 727-15(3),

Income Tax Assessment Act 1997 Section 727-105,

Income Tax Assessment Act 1997 Subdivision 727-C,

Income Tax Assessment Act 1997 Section 727-350,

Income Tax Assessment Act 1997 Section 727-355,

Income Tax Assessment Act 1997 Subdivision 727-G and

Income Tax Assessment Act 1997 Subdivision 727-H.

Reasons for decision

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

Issue 1 Question 1

Summary

CGT event C2 under section 104-25 of the Income Tax Assessment Act 1997 will happen upon the cancellation of the C Company shares held by A Company.

Detailed reasoning

Section 104-25 provides that CGT event C2 will happen where the ownership of an intangible CGT asset, such as shares in a company, ends by the asset being cancelled.

As the C Company shares held by A Company will be cancelled, CGT event C2 under section 104-25 will happen.

Issue 2 Question 1

Summary

Upon CGT event C2 happening, there will be nil capital proceeds under Division 116 from the cancellation of the C Company shares held by A Company.

Detailed reasoning

Under subsection 116-20(1) the capital proceeds from a CGT event (including CGT event C2) are the total of the money received (or entitled to be received) and the market value of property received (or entitled to be received) in respect of that CGT event.

As A Company is not entitled to receive any payment or other consideration from B Company in respect of the cancellation of the C Company shares, the capital proceeds received from CGT event C2 are nil. 

Where no capital proceeds are received from a CGT event, the market value substitution rule in subsection 116-30(1) applies to substitute the market value of the CGT asset (worked out at the time of the event) as the capital proceeds. As the CGT event that happens to A Company is CGT event C2, subsection 116-30(3A) requires the market value of the C Company shares to be worked out on the basis that the cancellation of the C Company shares had not occurred and was never proposed to occur.

However in this case, as the transfer of C Company's assets and liabilities to B Company is treated as separate and unrelated to the share cancellation, it is the Commissioner's view that subsection 116-30(3A) only ignores the share cancellation. On this basis, the market value of the C Company shares at the time of CGT event C2 (i.e. the cancellation) will be nil. Thus the market value substitution rule in subsection 116-30(1) will treat A Company as having received nil capital proceeds.

Issue 3 Question 1

Summary

The indirect value shifting rules in Division 727 of the Income Tax Assessment Act 1997 will apply to reduce the capital loss upon the cancellation of the C Company shares held by A Company, and reduce the corresponding capital gain upon a future CGT event happening in respect of the B Company shares held by A Company.

Detailed reasoning

Relevantly, Division 727 prevents losses and gains from arising on the realisation of direct equity interests in related losing and gaining entities that are attributable to the net shift of value between those entities.

Based on the relevant facts, Division 727 will apply because of the following:

· As C Company (the losing entity) will transfer all of its net assets to B Company (the gaining entity) for no payment or other consideration, there will be an indirect value shift as per subsection 727-5(1).

· C Company, as the losing entity, is a company as required by subsection 727-15(2).

· As both C Company and B Company are both foreign subsidiaries of A Company, the "arm's length dealing" exception under subsection 727-15(3) does not apply as they are not dealing with each other at arm's length.

· Both C Company and B Company satisfy the ultimate controller test in section 727-105, as A Company is the ultimate controller of both companies as per section 727-350 via its 100% ownership of both companies satisfying the 50% stake test as per section 727-355.

· None of the exclusions within Subdivision 727-C apply.

A Company will then have the choice to apply either:

· the realisation time method in Subdivision 727-G to reduce the capital loss upon the cancellation of the C Company shares, and reduce the corresponding capital gain upon a future CGT event happening in respect of the B Company shares, or

· the adjustable value method in Subdivision 727-H, which will the reduce the CGT reduced cost base of the C Company shares (and therefore reduce the capital loss upon the cancellation of the C Company shares) and increase the CGT cost base of the B Company shares (and therefore reducing the capital gain upon a future CGT event happening in respect of the B Company shares) in a way that takes account of the indirect value shift.

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