Edited version of your written advice

Authorisation Number: 1012845723091

Date of advice: 30 July 2015

Ruling

Subject: CGT event K6

It is noted that the questions and answers to Questions 1 to 3 below are, for the purposes of this Ruling, relevant to the Taxpayer as they may affect whether a tax liability arises to the Taxpayer as a result of CGT event K6 happening (which is addressed in Question 4 below):

Question 1

Are the shares in Company A pre-CGT assets of the Taxpayer?

Answer

Yes, in respect of the D class shares and D class bonus shares that the Taxpayer holds in Company A.

No, in respect of the G class share that the Taxpayer holds in Company A.

Question 2

Are the shares in Company B pre-CGT assets of Company A?

Answer

Yes

Question 3

Is the goodwill held by Company B a pre-CGT asset of Company B?

Answer

Yes

Question 4

Would CGT event K6 apply to the divestment of the Company A shares, assuming the value of the shares in Company B (and indirectly, the value of the goodwill held by Company B) exceeds % of the net value of Company A?

Answer

No

This ruling applies for the following period:

The income year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1. Company A is an Australian resident holding company for the group's operations that was incorporated before 20 September 1985.

2. The Taxpayer is the trustee of a discretionary trust which was settled before 20 September 1985.

3. Company A, through its subsidiary companies (primarily Company B and Company C), provides various products to food service and retail customers in Australia and internationally.

Operations and assets of the group

4. Company B is the primary operating entity in the group.

5. The business of Company B was started before 20 September 1985.

The nature of Company B's business prior to 20 September 1985

6. Prior to 20 September 1985, the core business activities of Company B focussed on the wholesaling, distributing, processing and marketing of its various products.

7. Its product range at this time was comprised of a number of distinguishable product categories.

8. Prior to 20 September 1985, Company B distributed it products through a couple of main sales channels, being food service operators and via retail. It also exported its products internationally. At this time, its customers were primarily part of the food service sector, hotels, restaurants and fast food operators.

9. Since its inception, Company B's business has been headquartered continuously in the same location where it has maintained its administration, procurement, information technology, production, warehousing, distribution and primary marketing activities.

10. As at March 1985, Company B had total assets which comprised of property, plant and equipment, motor vehicles, stock and goodwill.

The nature of Company B's business immediately prior to divestment

11. Just prior to divestment, Company B's core business activities continue to focus on the wholesaling, distributing, processing and marketing of its various products.

12. Its product range is still made up of a number of distinguishable product categories however since 20 September 1985, the specific products supplied in each product category have expanded.

13. The contribution of each product category to Company B's revenue has not materially changed as a percentage of its total revenue.

14. Company B now operates through less than five sales channels, being food service, retail and international.

15. Company B's headquarters are still housed in the same city, where it has maintained and developed its only processing, warehousing and distribution facility. Company B has 'in-market' offices throughout Australia and overseas.

16. As at June 20XX, Company B's total assets have grown and are still comprised of plant and equipment, inventory, cash, receivables and goodwill. It also has a significant number of full time equivalent employees.

Other operations and assets

Active business operations

17. Company C undertakes international operations in conjunction with Company B whereby it purchases and exports products.

Other assets

Non-business assets

18. Company A directly holds a % interest in a property. The property is a development property held by the group and is not considered to be a core asset of businesses of Company B and Company C. % of the % interest (i.e. %) in the development property was acquired before 20 September 1985, and the remaining % of the % interest (i.e. %) was acquired after 20 September 1985. The remaining % interest in the development property is held by a related party.

Other business assets

19. Company A also holds % of a property upon which are warehouses used by the business. The warehouse property was acquired in two tranches, at separate times after 20 September 1985.

20. Company also owns share in Company D. All shares in Company D were issued to Company A before 20 September 1985. Of the assets held by Company D, only goodwill is a CGT asset acquired before 20 September 1985.

21. Company E and the Trust F are dormant entities. 2/3rds of the shares in Company E were issued to Company A before 20 September 1985. All units in the Trust F were issued to Company A on or after 20 September 1985.

22. Company B and Company C also hold other business assets, which were all acquired on or after 20 September 1985, which they primarily use to obtain a rental income stream.

23. Company B also owns shares in listed and unlisted companies, inventory and property, plant and equipment (including leasehold improvements, plant and equipment and computer software) which were acquired on or after 20 September 1985.

24. All other assets of the Company A group were acquired on or after 20 September 1985.

Shareholdings

Company A and Company B shareholdings

25. Company B was incorporated prior to 20 September 1985.

26. The shareholding of Company B currently consists of ordinary shares held by Company A consisting of:

• an ordinary share issued before 20 September 1985 to an individual that the individual subsequently began holding as nominee for Company A before 20 September 1985;

• an ordinary share issued before 20 September 1985 to an individual which was legally transferred to Company A before 20 September 1985;

• other ordinary shares issued before 20 September 1985; and

• bonus shares issued after 20 September 1985.

27. The bonus shares issued after 20 September 1985 were issued as fully paid $1 shares wholly in respect of the existing shares on issue at that time. The share capital account was debited by the full issue price of the bonus shares.

28. The shareholding of Company A currently consists of:

• D class shares beneficially held by the Taxpayer which issued as D class shares issued before 20 September 1985 and D class bonus shares issued after 20 September 1985;

• a B class share held by an individual that issued before 20 September 1985;

• a C class share held by an individual that issued before 20 September 1985;

• a E class share held by an individual that issued before 20 September 1985;

• a F class share held by an individual that issued before 20 September 1985;

• a G class share beneficially held by the Taxpayer that issued after 20 September 1985;

• a H class share held by an individual that issued before 20 September 1985; and

• a J class share held by an individual that issued before 20 September 1985.

29. The bonus D class shares issued after 20 September 1985 were issued as fully paid $1 shares wholly in respect of the existing D class shares on issue at that time. The share capital account was debited by the full issue price of the bonus shares.

Proposed Divestment

30. After many years of business together, the group are looking to liquidate their respective interests in the business for the purposes of succession.

31. To liquidate their interests, the group wish to divest some or all of their interest in Company A and its subsidiaries.

32. Broadly, the divestment is proposed to be undertaken by way of a sale of % of the shares in Company A to a special purpose vehicle (SPV) in exchange for cash, or a combination of cash and a minority shareholding in the SPV (Transaction).

33. As Company A holds both business and non-business assets of the group, there is to be some pre-Transaction restructuring to remove certain non-business and other assets (Retained Assets) from the sale group, including:

• the development property; and

• the interests in Company D, Company E and Trust F.

34. Company A also holds certain other business assets for the group, which are essentially passive assets (Passive Assets) - for example, the development property.

35. Notwithstanding the group's intention to liquidate their interests in the business operations, the group wish to provide flexibility with respect to these Passive Assets. Each bidder may place different values on those assets, and this value may fall short of the group's expectations of value for these assets. Depending on the values offered by bidders, the group may decide to retain those assets, in which case, the assets would be transferred out of Company A, B and C as part of the pre-Transaction restructuring. The decision to retain or divest of the Passive Assets will only be made once bids have been received.

Assumption

36. The value of the shares in Company B (and indirectly, the value of the goodwill held by Company B) will exceed % of the net value of Company A at the time of the divestment of the D class shares.

Relevant legislative provisions

Section 104-10 of the ITAA 1997;

Subsection 104-230(1) of the ITAA 1997;

Subsection 104-230(2) of the ITAA 1997;

Section 108-5 of the ITAA 1997;

Section 109-10 of the ITAA 1997;

Section 130-20 of the ITAA 1997;

Subsection 130-20(1) of the ITAA 1997;

Subsection 130-20(3) of the ITAA 1997;

Subsection 995-1(1) of the ITAA 1997; and

Subsection 6(1) of the ITAA 1936.

Reasons for decision

Question 1

Summary

37. The D class shares and D class bonus shares that the Taxpayer holds in Company A are shares in a company that the Taxpayer acquired before 20 September 1985.

38. The G class share that Taxpayer holds in Company A is a share in a company that the Taxpayer acquired after 20 September 1985.

Detailed reasoning

39. As part of the proposed Transaction, the Taxpayer will dispose of its shares in Company A to a third party.

40. Whether the shares disposed of by the Taxpayer in Company A were acquired before 20 September 1985 will affect the CGT consequences and specifically whether:

(a) any capital gain or capital loss from CGT event A1 happening will be disregarded in accordance with paragraph 104-10(5)(a) of the ITAA 1997; and

(b) CGT event K6, as detailed in section 104-230 of the ITAA 1997, may happen.

41. In the current circumstances, the Taxpayer holds D class shares in Company A that were issued before 20 September 1985 and D class bonus shares that were issued after 20 September 1985. The Taxpayer also owns 1 G class share that was issued after 20 September 1985.

D class shares

42. When assessing the acquisition date of the D class shares, section 109-10 of the ITAA 1997 is relevant as it prescribes when a CGT asset is acquired, otherwise than as a result of a CGT event happening.

43. In this regard, item 2 of the table in section 109-10 of the ITAA 1997 states that where a company issues or allots equity interests or non-equity shares in a company, you are considered to have acquired this CGT asset when the contract is entered into or, if none, when the equity interests or non-equity shares are issued or allotted.

44. In the current circumstances, a contract was not entered into and therefore the D class shares that the Taxpayer holds in Company A are considered to be acquired when the shares were issued. As a result, the D class shares that the Taxpayer holds in Company A are shares in a company that the Taxpayer acquired before 20 September 1985.

D class bonus shares

45. The D class bonus shares that the Taxpayer holds in Company A were issued after 20 September 1985.

46. In issuing these bonus shares, Company A debited its 'Capital reserve' by the full issue price of the bonus shares.

47. Subdivision 130-A of the ITAA 1997 set-outs the acquisition time of 'bonus shares and units' and is therefore relevant to the current circumstances.

48. Subsection 130-20(1) of the ITAA 1997 provides that section 130-20 of the ITAA 1997 sets out what happens if a shareholder owns shares in a company (the 'original equities') and the company issues other shares (the 'bonus equities') to the shareholder in relation to the original equities. The D class shares which the Taxpayer owned before being issued with D class bonus shares are the original equities. The bonus D class shares issued are the bonus equities.

49. Subsection 130-20(3) of the ITAA 1997 sets-out the acquisition date of bonus shares where none of the shares are a dividend, or taken to be a dividend under subsections 45(2) or 45C(1) of the ITAA 1936.

50. In this case, this provision will apply because, in issuing the D class bonus shares to the Taxpayer, Company A debited its capital account and therefore the bonus D class shares will not be taken to be a dividend (as per paragraph (d) of the definition of dividend in subsection 6(1) of the ITAA 1936). The shares are also not taken to be a dividend under subsections 45(2) or 45C(1) of the ITAA 1936.

51. Items 2 to 4 of the table in subsection 130-20(3) of the ITAA 1997 outline the acquisition date of bonus equities where the original equities were acquired before 20 September 1985.

52. In the current circumstances, Item 3 of the table in subsection 130-20(3) of the ITAA 1997 will apply as the bonus shares in Company A that were issued to the Taxpayer were fully paid. Therefore, in accordance with this provision, the bonus shares are taken to have been acquired when the Taxpayer acquired the original shares i.e. before 20 September 1985.

1 G class share

53. The Taxpayer also owns 1 G class share that was issued after 20 September 1985.

54. Item 2 of the table in section 109-10 of the ITAA 1997 states that where a company issues or allots equity interests or non-equity shares in a company, you are considered to have acquired this CGT asset when the contract is entered into or, if none, when the equity interests or non-equity shares are issued or allotted.

55. In the current circumstances, a contract was not entered into and therefore the G class share that the Taxpayer holds in Company A is considered to be acquired when the share was issued. As a result the G class share that the Taxpayer holds in Company A is a share in a company that the Taxpayer acquired after 20 September 1985.

Question 2

Summary

56. The shares that Company A holds in Company B are shares in a company that it acquired before 20 September 1985.

Detailed reasoning

57. CGT event K6 is on face value relevant to the proposed Transaction because the Taxpayer will dispose of shares in Company A that were acquired before 20 September 1985.

58. When considering whether the requirements of CGT event K6 are met (as detailed in section 104-230 of the ITAA 1997), it is necessary, in part, to identify whether property owned by Company A was acquired on or after 20 September 1985.

59. In the current circumstances, Company A holds ordinary shares in Company B that comprise:

• an ordinary share issued before 20 September 1985 to an individual that the individual subsequently began holding as nominee for Company A before 20 September 1985;

• an ordinary share issued before 20 September 1985 to an individual which was legally transferred to Company A before 20 September 1985);

• other ordinary shares issued before 20 September 1985; and

• bonus shares issued after 20 September 1985.

60. It is therefore necessary to determine whether the various parcels of shares held by Company A were acquired on or after 20 September 1985.

ordinary shares acquired via transfer

61. Section 109-5 of the ITAA 1997 sets out the specific rules for determining the acquisition time of a CGT asset where it is acquired as a result of a CGT happening.

62. This provision is relevant for the ordinary shares in Company B that Company A acquired from individuals as CGT event A1 would have occurred as a result of the acquisition of these shares by Company A.

63. The table in subsection 109-5(2) of the ITAA 1997 states that where a CGT asset is acquired as a result of CGT event A1 the acquisition date is when the contract is entered into or, if none, when the entity stop's being the asset's owner. In this instance, the transfers occurred before 20 September 1985, and therefore it is clear that the acquisition date of these shares will be prior to 20 September 1985.

Other ordinary shares

64. In relation to the other ordinary shares in Company B, section 109-10 of the ITAA 1997 is relevant as it prescribes when a CGT asset is acquired otherwise than as a result of a CGT event happening.

65. In this regard, item 2 of the table in section 109-10 of the ITAA 1997 states that where a company issues or allots equity interests or non-equity shares in a company, you are considered to have acquired this CGT asset when the contract is entered into or, if none, when the equity interests or non-equity shares are issued or allotted.

66. In the current circumstances, a contract was not entered into and therefore the other ordinary shares held by Company A in Company B will be considered to be acquired when the shares were issued. As a result these ordinary shares held by Company A will also be shares in a company that were acquired before 20 September 1985.

Bonus shares

67. The bonus shares that Company A holds in Company B were issued after 20 September 1985.

68. In issuing these bonus shares, Company A debited its 'Capital reserve' by the full issue price of the bonus shares.

69. Subdivision 130-A of the ITAA 1997 set-outs the acquisition time of 'bonus shares and units' and is therefore relevant to the current circumstances.

70. Subsection 130-20(1) of the ITAA 1997 provides that section 130-20 of the ITAA 1997 sets out what happens if a shareholder owns shares in a company (the 'original equities') and the company issues other shares (the 'bonus equities') to the shareholder in relation to the original equities. The ordinary shares in Company B which Company A owned before being issued with the bonus shares are the 'original equities'. The bonus ordinary shares in Company B issued are the 'bonus equities'.

71. Subsection 130-20(3) of the ITAA 1997 sets-out the acquisition date of bonus shares where none of the shares are a dividend, or taken to be a dividend under subsections 45(2) or 45C(1) of the ITAA 1936.

72. In this case, this provision will apply because, in issuing the bonus shares in Company B to Company A, Company B debited its capital account and therefore the bonus shares will not be taken to be a dividend (as per paragraph (d) of the definition of dividend in subsection 6(1) of the ITAA 1936). The shares are also not taken to be a dividend under subsections 45(2) or 45C(1) of the ITAA 1936.

73. Items 2 to 4 of the table in subsection 130-20(3) of the ITAA 1997 outline the acquisition date of bonus equities where the original equities were acquired before 20 September 1985.

74. In the current circumstances, Item 3 of the table in subsection 130-20(3) of the ITAA 1997 will apply as the bonus shares in Company B that were issued to Company A were fully paid. Therefore, in accordance with this provision, the bonus shares are taken to have been acquired when Company A acquired the original shares i.e. before 20 September 1985.

Question 3

Summary

75. The goodwill held by Company B is a CGT asset acquired before 20 September 1985.

Detailed reasoning

76. For the purposes of applying CGT event K6, it is also necessary to consider whether the goodwill of Company B is property acquired on or after 20 September 1985.

77. Goodwill, or an interest in it, is a CGT asset under paragraph 108-5(2)(b) of the ITAA 1997.

78. Taxation Ruling TR 1999/16 Income Tax: capital gains: goodwill of a business (TR 1999/16) deals with CGT issues relating to the goodwill of a business. TR 1999/16 reflects the decision of the High Court of Australia in FC of T v Murry 98 ATC 4585; (1998) 39 ATR 129 (the Murry case).

Meaning of goodwill

79. Goodwill for the purposes of the definition of CGT asset in section 108-5 of the ITAA 1997 has the meaning it bears under the general law. It is the legal definition of goodwill as explained by the High Court in the Murry case, rather than its accounting and business definitions, which applies.

80. The legal meaning of goodwill according to the majority justices of the High Court in the Murry case has three different aspects namely property, sources and value.

81. Goodwill is the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it. Goodwill is a quality or attribute that derives among other things from using or applying other assets of a business. Goodwill is a composite thing. It is an indivisible item of property that is legally distinct from the sources from which it emanates. It is something that attaches to a business and is inseparable from the conduct of a business. 

When is the goodwill of a business acquired for CGT purposes?

82. Subsection 995-1(1) of the ITAA 1997 provides that you acquire the goodwill in the circumstances and at the time worked out under Division 109 of the ITAA 1997.

83. Section 109-10 of the ITAA 1997 sets out specific rules for the circumstances in which, and the time at which, you acquire a CGT asset otherwise than as a result of a CGT event happening. Item 1 of section 109-10 of the ITAA 1997 provides that if you create a CGT asset and you own it when the CGT asset is created, you acquire the CGT asset at the time the work that resulted in its creation started. If a taxpayer commences business and starts to create the goodwill, the goodwill of the business is acquired when the taxpayer starts work that results in the creation of the goodwill. 

The consequences of the goodwill of a business being one CGT asset

84. In accordance with paragraph 89 of TR 1999/16, the goodwill of a business that commenced before 20 September 1985 remains a pre-CGT asset provided the same business continues to be carried on. As stated at paragraph 17 of TR 1999/16, this principle holds even though:

(a) the sources of the goodwill of a business may vary during the life of the business; or

(b) there are fluctuations in goodwill during the life of the business.

85. As such, any accretion to its goodwill since 20 September 1985 is not a post-CGT asset, provided the same business is being carried on.

 Same business test for CGT goodwill purposes

86. Whether the same business is being carried on is a question of fact and degree that ultimately depends on the circumstances of each particular case. The business does not need to be identical from its acquisition to its disposal. If the essential nature or character of the business is not changed, the business remains the same business for the CGT goodwill provisions. It is not sufficient, however, if just a similar kind of business is carried on. Factors to consider include the nature or character of the business, its location and size, its customer base, the extent of changes in the assets and resources of the business, the activities of the business whether the activities constitute, or are treated by the business owned as constituting separate or distinct activities, enterprises, divisions or undertakings and the way in which the business is structured, carried on, managed and controlled (see paragraphs 62 and 91 to 95 of TR 1999/16).

87. The business owner may expand or contract activities, or change the way in which a business is carried on, without ceasing to carry on the same business, provided the business retains its essential nature or character. Organic growth, expansion or diversification of a business by, for example:

(a) adopting new compatible operations,

(b) servicing different clients, or

(c) offering improved products or services,

does not of itself cause it to be a new business provided the business retains its essential nature or character.

88. In accordance with paragraph 24 of TR 1999/16, the same business is not carried on if:

(a) through a planned or systematic process of change within a reasonable period of time, a business changes its essential nature or character, or

(b) there is a sudden and dramatic change in the business brought about by either the acquisition or the shedding of activities on a considerable scale.

 The CGT status of the goodwill of Company B's business

89. Company B commenced to operate a business supplying its products before 20 September 1985. Therefore, pursuant to item 1 of section 109-10 of the ITAA 1997, Company B is taken to have acquired the goodwill of the business from when it started its business and consequently on face value, this goodwill will be taken to be a pre-CGT asset.

90. Since September 1985, there have been various changes to the nature of the business conducted and therefore it is necessary to consider whether the 'same business' is being carried on such that the goodwill of the business retains its pre-CGT status.

91. As previously noted, TR 1999/16 outlines a number of factors that are considered relevant when assessing whether the business carried on prior to 20 September 1985 is the same as that just prior to the divestment. In the current circumstances an analysis of these factors is as follows:

(a) The nature or character of the business

92. In the current circumstances, the nature of the business conducted by Company B has, from a broad perspective, remained consistent as it core activities have continued to focus on wholesaling, distributing, processing and marketing of its products.

93. Similarly, the general nature of its product range (made up of the six distinguishable product categories) also appears to have remained consistent.

94. The contribution, as a percentage of Company B's total revenue, that each category from its product range provides has also not materially changed.

95. Before 1985, Company B distributed it products through two main sales channels being food service operators and via retail. It also exported certain products internationally however changes in the market conditions have resulted in the export of these products reducing post 1985. Post-1985 a different product is the business' key export product however the revenue generated from the company's exports account for a relatively minor portion of the company's total revenue. The increase in export sales primarily from the sale of this product also does not appear to have changed the nature of the business as it is considered that this product, which was sold domestically before 1985, is closely aligned to its core business, and in any event is a relatively minor component of its operations.

96. The fact that Company B has also maintained business relationship with a number of its biggest suppliers since before 1985 also indicates that the nature of the business has not changed.

(b) customers

97. Although Company B's customer base has increased significantly from that prior to September 1985, its customers have generally remained in the same industries. In this regard, it is also relevant to note that Company B still supplies nine key customers that it serviced prior to September 1985 (including four of its biggest customers).

(c) location and size

98. Company B's headquarters are still situated in the same location from which it has maintained its administration, procurement, information technology, production, warehousing distribution and primary marketing activities.

99. To support its headquarters and maintain market relevance, the company now also has offices located throughout Australia and overseas.

100. Since 1985, Company B's business has experienced significant growth in terms of revenue, client base and other business attributes.

(d) The extent of changes in assets and resources of the business

101. Since 1985, Company B has significantly increased its asset base however the nature of the assets held has remained consistent with property held including property, plant and equipment, motor vehicles, stock and goodwill.

102. Its key tangible assets at present include a processing facility, warehousing infrastructure and transportation. The assets acquired since 1985 have provided the business with the ability to expand its fundamental business processors of processing, storing and transporting its products.

 The activities of the business

103. Since 1985, the core activities of Company B's business have remained unchanged primarily focussing on the wholesaling, distributing, processing and marketing of its products.

104. It has also made no business acquisitions or divestments over this period.

105. From an administrative perspective, there have also been no major changes to the structure of Company B nor any separate recognition of the various business activities in its core management accounts.

(e) Do the activities constitute, or are treated by the business owner as constituting separate or distinct activities, enterprises, divisions or undertakings.

106. There does not appear to be any change in the operation of the business of Company B over the relevant period from the perspective of the business owners.

(f) The way in which the business is structured, carried on, managed and controlled.

107. A number of the key personnel of the business from 1985 are still involved in the management of the business. Final decisions also continue to be made by the directors/board. Some additional management positions have been created since 1985.

Conclusion

108. Based on the information provided, it is evident that business of Company B has developed and expanded since 1985 as it now:

• provides a greater range of products sold as part of its business operations;

• has begun to export certain products;

• has increased its customer base both domestically and internationally;

• has increased the number of staff employed in its business;

• has increased its business asset base; and

• has offices throughout Australia and overseas.

109. It is however considered that these changes represent organic growth and expansion of the business because none of the above activities change the essential nature or character of the business, being a product wholesaler and distributer of its products. Company B continues to carry on the same business as demonstrated by the following features:

• Company B has maintained its primary focus on wholesaling, distributing, processing and marketing its products;

• It has continued to service clients in the same industries and has maintained a number of key customers over the relevant period;

• It sales channels have remained consistent;

• It has maintained business with a number of its biggest suppliers since before 1985;

• The business has been headquartered continuously in the same location;

• The business structure, management and control has remained largely unchanged; and

• The business has not been supplemented through the acquisition of other businesses nor have divestments occurred.

110. Accordingly, despite the developments and expansion of Company B's business over the years from 1985 to the present, the goodwill of the business is taken to have been acquired before 20 September 1985, and therefore is a pre-CGT asset.

 Question 4

Summary

111. CGT event K6 will not happen upon disposal of the D class shares in Company A by the Taxpayer provided:

(a) the market value of the shares in Company B is more than % of the net value of Company A; and

(b) the market value of the goodwill in Company B is more than % of the net value of Company A.

Detailed reasoning

112. Subsection 104-230(1) of the ITAA 1997 states that CGT event K6 will happen if:

(a) you own shares in a company that you acquired before 20 September 1985; and

(b) CGT event A1, C2, E1, E2, E3, E5, E6, E7, E8, J1 or K3 happens in relation to the shares or interest; and

(c)  there is no roll-over for the other CGT event; and

(d) the applicable requirement in subsection (2) is satisfied.

113. Subsection 104-230(2) of the ITAA 1997 states that just before the other event happened:

(a) the market value of property of the company or trust (that is not its trading stock) that was acquired on or after 20 September 1985; or

(b) the market value of interests the company or trust owned through interposed companies or trusts in property (except trading stock) that was acquired on or after 20 September 1985;

must be at least % of the net value of the company or trust.

114. The time of CGT event K6 is when the other event happens.

115. In this case, the D class shares in Company A were acquired by the Taxpayer prior to 20 September 1985. CGT event A1 will happen when each share in Company A is disposed of and there will be no roll-over relevant to CGT event A1. The requirements in paragraphs 104-230(1)(a) to 104-230(1)(c) of the ITAA 1997 are consequently met.

116. It is therefore necessary to consider the requirements in subsection 104-230(2) of the ITAA 1997 and specifically whether, just before CGT event A1 happens:

(a) the market value of property of the company (that is not its trading stock) that was acquired on or after 20 September 1985; or

(b) the market value of interests the company owns through interposed companies or trusts in property (except trading stock) that was acquired on or after 20 September 1985;

is at least % of the net value of the company.

Paragraph 104-230(2)(a) of the ITAA 1997- The market value of property of Company A (that is not its trading stock) that was acquired on or after 20 September 1985

117. Based on the information provided, it is evident that in the current circumstances, the property of Company A that was acquired on or after 20 September 1985 is made-up of:

• Shares in Company C;

• Interest in the warehouse property;

• Plant and equipment; and

• Receivables.

118. The property acquired by Company A before 20 September 1985 only includes the shares that its holds in Company B.

119. Therefore, provided the market value of the shares in Company B (being the only pre-CGT asset) is more than % of the net value of Company A, it is considered that the % test in paragraph 104-230(2)(a) of the ITAA 1997 will not be breached.

Paragraph 104-230(2)(b) of the ITAA 1997- the market value of interests Company A owns through interposed companies or trusts in property (except trading stock) that was acquired on or after 20 September 1985

120. The property taken into account under paragraph 104-230(2)(b) of the ITAA 1997 is post-CGT property that is owned by lower tier companies in which the company referred to in paragraph 104-230(2)(a) has a direct or indirect interest. If the company referred to in paragraph 104-230(2)(a) has a less than 100% interest in a lower tier company, only that percentage interest in the underlying post-CGT property is counted. It does not matter, for that purpose, whether the shares in the lower tier company giving rise to the interest were acquired pre-CGT or post-CGT. However, the property taken into account does not include post-CGT shares owned by one lower tier company in another.

121. In the current circumstances, Company A holds interests in Company B and Company C.

122. The shares in Company C were acquired by Company A after 20 September 1985 and the full value of property held by Company C is considered to be post-20 September 1985 property for the purposes of this test.

123. In respect of the property held by Company B, the property that was acquired on or after 20 September 1985 includes the following:

• Cash

• Plant and equipment

• Receivables

• Other passive assets.

124. The property of Company B that was acquired before 20 September 1985 is only made up of the goodwill of Company B.

125. It is therefore considered that, provided the market value of the goodwill in Company B (being the only pre-CGT asset held by Company A through Company B as an interposed company) is more than % of the net value of Company A, the % test in paragraph 104-230(2)(b) of the ITAA 1997 will not be breached.

The net value of Company A

126. 'Net Value' is defined in section 995-1 of the ITAA 1997 as 'the amount by which the sum of the market values of the assets of the entity exceeds the sum of its liabilities.'

127. In the current circumstances, the proposed Transaction will involve the sale of all the shares in Company A to an independent, third party. It is therefore expected that the purchase price agree to by the parties should constitute a fair market value for these shares and as such should also reflect the amount by which the sum of the market value of the assets of Company A exceeds it liabilities (and thus represents the net value of Company A which is relevant for the purposes of the calculations in subsection 104-230(2) of the ITAA 1997).

CGT event K6 Conclusion

128. As detailed above, the requirements in subsection 104-230(2) of the ITAA 1997 and in turn paragraph 104-230(1)(d) of the ITAA 1997 will not be met if:

(a) the market value of the shares in Company B is more than % of the net value of Company A; and

(b) the market value of the goodwill in Company B is more than % of the net value of Company A

and therefore CGT event K6 will not happen upon disposal of the D class shares in Company A by the Taxpayer under the proposed Transaction.

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