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Edited version of your written advice
Authorisation Number: 1012788718418
Ruling
Subject: CGT rollover
Question
Are you eligible to elect to rollover any capital gain made on disposal of your shares in A Company to Company 1, Company 2, Company 3 or Company 4 (known individually as the new company or collectively as the new companies)?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You and others own the total issued shares in A Company. A Company was incorporated after 20 September 1985. Two of the shareholders are undergoing a matrimonial separation. A Company owned a subsidiary company that operated a small business. The business was sold this year to a new Unit Trust which is owned by new family trusts. The trustees of the new family trusts are Company 1 and Company 2. They will act in a dual capacity (as a trustee but also in their own right) and will have separate tax file numbers for each role. The subsidiary company issued all its dividends to A Company last year, and has since merged with A Company, which then sold the business. You are an Australian resident and currently undertaking restricting for the purposes of separating your financial, business and domestic interests, and securing additional asset protection. You are approaching retirement age.
To achieve this, you intend to interpose four new companies (total shares in each company to be held by one of the original shareholders each) between you and the other shareholders, and A Company (Company 1, Company 2, Company 3 and Company 4). The new companies will be Australian residents for tax purposes and not tax exempt entities. The new companies will not hold any other assets/liabilities at the time of acquiring the A Company shares. You will exchange your shares in A Company for non-redeemable ordinary shares in the new company for which you hold shares. The shares may be distinguished as "A" and "B" class shares, in order to enable separate future payouts of dividends (e.g.; for marital separation purposes if applicable).
Dividends in A Company have been purposefully accumulated over a number of years in order to provide for retirement and reinvestment of shareholders on as required basis. Further, as a result of the sale of the business, A Company now has approximately $ to distribute in fully franked dividends. A Company intends to issue all franked dividends to the new shareholder entities. However, there is no immediate intention to distribute franked dividends onto you and the other individual shareholders, apart from the dividend entitlement and payout due to one of the shareholders because of separation.
After the distribution from A Company, it is expected that A Company will lodge a final return and ABN/GST registrations will be cancelled. A Company expects to continue as trustee of a superannuation fund.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 122-15
Income Tax Assessment Act 1997 section 122-20
Income Tax Assessment Act 1997 Section 122-25
Reasons for decision
A taxpayer makes a capital gain or a capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset.
Shares acquired on or after 20 September 1985 are considered to be CGT assets.
A disposal of a CGT asset is a CGT event A1 and includes disposals of shares by an individual to a wholly owned company. However, replacement asset roll-over relief is available under section 122-15 of the Income Tax Assessment Act 1997 (ITAA 1997), to an individual who disposes of a CGT asset, or all the assets of a business, to a company in which the individual owns all the shares.
However, there are a number of conditions in sections 122-20 and 122-25 of the ITAA 1997 which must be met before roll-over relief is available, which are as follows:
1. Under section 122-15 of the ITAA 1997, a 'trigger event', must happen involving the individual and a company. In the case of a CGT event A1, the trigger must be the disposal of a CGT asset to a company. A CGT asset is any kind of property acquired after 19 September 1985, including shares in a company.
In your case, when you dispose of your shares in A Company (acquired after September 1985) to the new company CGT event A1 will happen to your A Company shares, and therefore, this condition will be satisfied.
2. In the case of shares being the consideration you receive for the trigger event happening, under paragraph 122-20(1)(a) and subsection 122-20(2) of the ITAA 1997, the shares must be non-redeemable and in the company.
In your case, you will receive only ordinary non-redeemable shares in the new company as consideration for the transfer of your shares in A Company. Accordingly, condition 2 will be satisfied.
3. Under subsection 122-20(3) of the ITAA 1997, the market value of the shares that you will receive for the trigger event happening must be substantially the same as the asset disposed.
In your case, the market value of the shares you receive for the event will equal the market value of the shares transferred, given that the new company will have no other assets or liabilities. Therefore, you will comply with this condition.
4. Under subsection 122-25(1) of the ITAA 1997, you must own all the shares in the company immediately after the time of the trigger event and in the same capacity as you owned the assets that the company comes to own.
In your case, you will own all the shares in the new company, in the same capacity as you owned the assets prior to the transfer, and so this condition will be met.
5. Under section 122-25(2) of the ITAA 1997, it is stated that the Subdivision does not apply to disposal of assets listed in the table included under the subsection (collectables, personal use assets, precluded assets, trading stock, assets that become registered emissions units).
In your case, the shares in the new company are not assets of a type listed in the table, so this condition will be satisfied.
6. Also under subsection 122-25(6) and subsection 122-25(7) of the ITAA 1997, if you or the company, or both, are not a resident then each asset must be taxable Australian property at the time of the trigger event.
In your case, you and the new company will be residents of Australia for taxation purposes, and so this condition will be been satisfied.
7. Under subsection 122-25(5) of the ITAA 1997, the company must not be exempt from income tax on its ordinary and statutory income because it is an exempt entity for the income year of the trigger event.
In your case, the new company is not an exempt entity and its income will not be exempt, and so this condition will be met.
As all conditions have been complied with, you will be able to choose the replacement asset roll-over relief available under Subdivision 122-A of the ITAA 1997 on the disposal of your A Company shares to the new company.
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