Edited version of your written advice

Authorisation Number: 1012715078114

Ruling

Subject: Capital Gains Tax roll-over relief and Part IVA

Question 1

Will the capital gain derived by Company A as a result of the transfer of its beneficial interest in the Company A Trust to Company B be disregarded pursuant to Subdivision 126-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the Commissioner make a determination under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) to include in the assessable income of Company A the amount of any disregarded capital gain made in respect of the transfer by Company A of its beneficial interest in the Company A Trust to Company B?

Answer

No.

This ruling applies for the following period:

1 July 2014 to 30 June 2015

Relevant facts and circumstances

Overview

Company C is a foreign company incorporated in Country C and various other countries around the world.

Only one shareholder (Shareholder A), has held an interest of 10% or more in Company C. The precise percentage holding has varied but has not exceeded a small percentage holding during the relevant period, being from 1 July 200X to 30 June 20XX.

Relevant structure

Country C resident

Company C owns 100% of Company D which is resident in the Country C.

Country A residents

Company D has always owned at least greater than 50% of the rights to dividends, capital and voting power in Property Fund A which is resident in Country A.

Property Fund A owns 100% of Holding Company A which is resident in Country A.

Holding Company A owns 100% of Company E which is resident in Country A.

(The entities controlled by the parent entity of Company E in the overseas region are referred to as the Property Fund Group.)

Country B resident

Company E owns 100% of Company A. Important facts about Company A that are relevant for the purposes of this ruling are:

• Company A is a company resident in Country B

• the only asset held by Company A is its beneficial interest in an Australian bare trust, known as the Company A Trust

• the trustee of the Company A Trust is Company A Pty Limited

• Company A Trust holds some of the units in an Australian resident unit Trust, ABC Trust and

• ABC Trust indirectly holds (through an interposed trust) 100% of the interest in the Australian real property asset Property C - the remaining units in ABC Trust are held by an unrelated entity

Country C resident

Company E also owns 100% of Entity A. Important facts about Entity A that are relevant for the purposes of this ruling are:

• Entity A is a company resident in Country C

• Entity A currently holds a direct interest in Property A

• Property A has undergone significant redevelopment

• during redevelopment, Entity A remitted interest withholding tax to the ATO in respect of its borrowings from Company E attributable to Property A and

• as at 30 June 2013, Entity A had tax losses and net capital losses

Restructure - 3 Transactions

Overview

The following three transactions are designed to ensure that three main Australian investment property interests forming part of Property Fund A's Australian property portfolio are held by Entity A after the restructure.

Transaction Number 1 - transfer of Entity A's direct interest in Property A to the Property A Trust

Entity A has established a wholly owned Australian unit trust named the Property A Trust.

Entity A has agreed to transfer its interest in Property A to the Property A Trust. The consideration for the transfer was the issue of additional units in the Property A Trust to Entity A and the creation of a receivable due to Entity A.

A taxable gain may be derived in Australia by Entity A on the transfer of its direct interest in Property A to the Property A Trust. Based on the current information as at the date of this ruling application no gain should arise but in the event it does, this will be negligible and will be offset by the significant carried forward capital losses available to Entity A.

The Property A Trust will pay Entity A a cash amount over time by drawing down from pre-committed loan funding provided by Australian Bank. These funding commitments will allow the Property A Trust to repay the receivable due to Entity A. The security provided to Australian Bank will be limited to the interest in Property A. Borrowing direct from Australia Bank ensures that only Property A is provided as security for the finance provided whereas other means, such as raising overseas external debt, would require providing and risking additional security such as Property B, another Australian property acquired pursuant to Transaction 2 detailed below.

Furthermore, the decision for the Property A Trust to borrow from Australian Bank (as opposed to borrowing from overseas or funds being provided as an intercompany loan) was primarily driven by regional investment allocations (i.e. the fund has target levels in respect of which jurisdictions its investments should be made. The location of investment in turn impacts on where external debt is raised). Raising external Australian debt allows for a natural currency hedge against the asset and therefore lowers the currency exposure for Property Fund A.

The net effect of the above transaction is that the new wholly-owned subsidiary trust, the Property A Trust, will hold Property A (instead of Entity A) and it will be the borrowing party to the loan with Australian Bank.

Income

The Property A Trust is not a Managed Investment Trust (MIT) and will have a 30% withholding tax on any income to which Entity A is presently entitled pursuant to subsections 98(3) and (4) of the ITAA 1997.

Transaction Number 2 - acquisition of Property B by the Property B Trust

Entity A has established a wholly owned Australian unit trust named Property B Trust.

Entity A will use a portion of the cash consideration received from the sale of its interest in the Property A to the Property A Trust to subscribe for new units in the Property B Trust to allow for the Property B Trust to complete its acquisition of Property B. Accordingly, there will be no external debt funding for this acquisition.

Income

Accordingly, as with Property A, the Property B Trust is not a MIT so it will have a 30% withholding tax on any income to which Entity A becomes presently entitled pursuant to subsections 98(3) and (4) of the ITAA 1997.

This acquisition will ensure that the thin capitalisation capacity of Entity A will be below the new 60% threshold.

Transaction Number 3 (proposed) - Transfer of Company A's beneficial interest in the Company A Trust, to Entity A

It is proposed that the beneficial interest held by Company A in the Company A Trust will be transferred to Entity A. At the time of transfer, there will be a valuation so that the transfer occurs at market value.

Entity A will fund the acquisition of the beneficial interest in the Company A Trust by way of financing from Company E and Holding Company A as follows:

• Company E will make an equity contribution to Entity A by way of promissory note (PNote)

• Entity A will then acquire the Company A interest for a fixed dollar amount. Consideration will be given in the form of two PNotes from Company E (both when combined representing the fixed dollar amount agreed to)

• Company A will then be placed into liquidation and will make a distribution of the PNote from the sale of its Company A Trust interest, to Company E, which is then cancelled

There is currently no debt funding for Company A Trust or at any level below this entity

Income

Rental income from Property C, previously returned by Company A will now be derived by and assessed to Entity A. As with Transactions 1 and 2 above, the Company A Trust is not a MIT so it will have a 30% withholding tax on any income to which Entity A becomes presently entitled pursuant to subsection 98(3) and (4) of the ITAA 1997.

Company A will make an election pursuant to Subdivision 126-B of the ITAA 1997 to obtain rollover relief and disregard any capital gains made on the transfer. There will be no stamp duty on this transfer and no Country A or Country B tax payable on the transfer or distribution.

Outcome summary of new structure - commercial benefits

The key outcomes of the above three transactions will be that:

• the Australian property assets of the Property Fund Group will be increased (Entity A will have an interest in three trusts (two unit trusts and one bare trust))

• external funding will be introduced but with security limited to a single asset, namely Property A (The Company A Trust and Property B Trust investments will have no debt funding and the Property A Trust will hold the loan with the bank) and

• Entity A will maintain the current intercompany loan (from Company E ), and the loan balance may be varied but will not breach thin capitalisation limits

In addition, the management time, material compliance costs and Country B tax risks associated with the Company A structure will be removed, the thin capitalisation position of Property Fund Group in Australia will be brought into line with new lower safe harbour thresholds and the Australian ownership structure will be in a more traditional form which may allow new investors at some future point in time (this is not currently under contemplation).

The tax profile for the structure at this time is that a taxable distribution will be payable by each of the Company A Trust, Property A Trust and Property B Trust (on which withholding tax will be payable at 30%). Entity A will lodge a return including these amounts as assessable income, whilst deducting interest on the loan from Company E and nominal corporate costs.

As part of the reorganisation Entity A will review its transfer pricing documentation for its current loan from its parent company, Company E.

Finally, for the purposes of rollover relief:

• Company A's beneficial interest in the Company A Trust will not be trading stock in the hands of Entity A

• the interest in the Company A Trust will satisfy the non-portfolio test and principal asset test for the purposes of section 855-25 of the ITAA 1997 both just before and just after the trigger event and

• a capital gain will be realised by Company A in respect of the transfer of its beneficial interest in the Company A Trust to Entity A

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 126-45

Income Tax Assessment Act 1936 Section 126-50

Income Tax Assessment Act 1936 Section 126-55
Income Tax Assessment Act 1936 Subsection 126-50

Income Tax Assessment Act 1936 Section 855-15

Income Tax Assessment Act 1936 Section 855-25

Income Tax Assessment Act 1936 Section 975-500

Income Tax Assessment Act 1936 Subsection 975-505(1)

Income Tax Assessment Act 1936 Section 995

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Section 177CB

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177F

Reasons for decision

Question 1

Subsections 126-45(1) and (2) of Subdivision 126-B of the ITAA 1997 state:

126-45(1)

There may be a roll-over if a *CGT event (the trigger event) happens involving a company (the originating company) and another company (the recipient company) in the circumstances set out in section 126-50.

126-45(2)

Only these *CGT events are relevant:

(a) CGT events A1 and B1 (a disposal case); and

(b) CGT events D1, D2, D3 and F1 (a creation case).

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 roll-over.

When Company A transfers its beneficial interest in the Company A Trust, CGT event A1 (the trigger event) will happen.

Section 126-50 requirements for roll-over

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

Section 975-500 of the ITAA 1997 (as referred to by section 995-1 of the ITAA 1997) provides the definition of 'wholly-owned group' as:

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 then defines a 100% subsidiary as:

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 A and Entity A are members of the same wholly-owned group because Company A and Entity A are both wholly-owned subsidiaries of Company E. 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 roll-over asset being trading stock of the recipient company just after the time of the trigger event.

The roll-over asset will not be trading stock in the hands of the recipient company just after the transfer (trigger event). Accordingly, the condition in subsection 126-50(2) of the ITAA 1997 is met.

Not a right or convertible interest

Subsection 126-50(3) of the ITAA 1997 contains conditions where the relevant asset is a right or convertible interest referred to in Division 130 of the ITAA 1997. As the interest in Company A Trust is not such an asset, the subsection is satisfied.

Option

Subsection 126-50(3A) of the ITAA 1997 contains conditions where the relevant asset is an option of the kind referred to in Division 134 of the ITAA 1997. As the interest in Company A Trust is not such an asset, the subsection is satisfied.

Recipient not an 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' as:

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).

Entity A is not an exempt entity, 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 where both the originating company and the recipient company are foreign residents, the relevant CGT asset must be taxable Australian property just before and just after the trigger event.

Section 855-15 of the ITAA 1997 lists five categories of CGT assets that are taxable Australian property. In this case, the relevant category is that referred to as indirect Australian real property interests.

Under section 855-25 of the ITAA 1997, an indirect Australian real property interest includes a membership interest held by a foreign resident in an entity at a time if the interest passes the non-portfolio interest test and the principal asset test at that time. As these tests will be satisfied, the interest in Company A Trust will be taxable Australian property both just before and just after the trigger event.

Remaining provisions

Subsections 126-50(6)-(9) of the ITAA 1997 are not relevant to the current transaction.

Therefore, all the requirements for roll-over in section 126-50 of the ITAA 1997 have been met.

Capital gain

Subsection 126-55(1)(a) of the ITAA 1997 limits the roll-over 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; or

• the originating company makes no capital loss and is not entitled to a deduction; or

• the originating company acquired the roll-over asset before 20 September 1985.

Company A will make a capital gain under CGT event A1 as a result of the transfer. Both Company A and Entity A will choose to obtain the Subdivision 126-B roll-over relief.

Accordingly, Company A can disregard any capital gain that arises from the transfer of its beneficial interest in the Company A Trust to Entity A.

Question 2

Law Administration Practice Statement PS LA 2005/24 deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise his discretion to make a determination in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met. These are:

• there must be a scheme within the meaning of section 177A of the ITAA 1936

• a tax benefit must arise based on whether a tax effect would have occurred, or might reasonably be expected to have occurred, if the scheme had not been entered into or carried out, and

• having regard to the matters in paragraph 177D(b) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies (dominant purpose)

On the basis of an analysis of these requirements, the Commissioner will not make a determination under Part IVA to include in the assessable income of Company A the amount of any disregarded capital gain made in respect of the transfer by Company A of its beneficial interest in the Company A Trust to Entity A.

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