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Edited version of your written advice
Authorisation Number: 1012864355762
Date of advice: 28 August 2015
Ruling
Subject: Division 45 of the ITAA 1997
Will the requirements of subsection 45-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997) be met for the Sale Entities when all of the membership interests in Sale Entity X are acquired by the Purchaser?
Answer
No
This ruling applies for the following period:
Income Year ended XX XX XXXX
The scheme commences on:
XX XX XXXX
Relevant facts and circumstances
Background
Proposed transaction
1. XY Company (XY) is listed on an international Stock Exchange and has a diverse global portfolio of businesses operating in many industries and markets around the world.
2. During the income year ended XX XX XXXX, XY has agreed to sell a part of its global business to an unrelated third party Purchaser (Proposed Global Transaction).
3. The Australian businesses which form part of the Proposed Global Transaction are currently held by the XY multiple entry consolidated (MEC) group. The business being sold is carried on by Sale Entities which are subsidiary members of the XY MEC Group.
4. The Proposed Global Transaction involves the sale of 100% of the shares in Sale Entity X by YY Pty Ltd (YY to Purchaser or a wholly-owned (direct or indirect) subsidiary of the Purchaser, which will in turn result in a 100% indirect sale of the shares in Sale Entities Y and Z (Proposed Australian Transaction).
Ownership structure
5. XY Partnership is a limited Partnership organised under the Partnerships Act 1958 (Vic) ultimately 100% owned by XY.
6. XY Partnership is an Australian resident for income tax purposes and the provisional head company (PHC) of the XY Partnership MEC Group.
7. Sale Entity Y and Sale Entity Z are subsidiary members of the XY MEC Group and are wholly owned subsidiaries of Sale Entity X. Sale Entity X is a subsidiary member of the XY MEC Group and is wholly owned by YY, which is itself indirectly wholly-owned by XY.
8. The Sale Entities joined the XY MEC Group in 20XX and have been subsidiary members since this time.
The Purchase Agreement
9. YY as the current legal owner of 100% of the shares in Sale Entity X entered into a Purchase Agreement with the Purchaser for the sale of 100% of the shares in Sale Entity X on arm's length terms on XX XX XX.
10. YY and the Purchaser are dealing at arm's length for the purpose of paragraph 703-33(1)(c) of the ITAA 1997.
11. Under the terms of the Purchase Agreement, the Purchaser will:
• become the beneficial owner of 100% of the shares in Sale Entity X on the date of closing (Closing Date); and
• be entitled to be registered as the owner of 100% of the shares in Sale Entity X on the Closing Date.
12. Under the terms of the Purchase Agreement, YY will:
• cease to be the beneficial owner of 100% of the shares in Sale Entity X on the Closing Date; and
• cease to be entitled to be registered as the owner of 100% of the shares in Sale Entity X on the Closing Date.
13. The Purchase Agreement is the relevant contract for the purpose of section 703-33 of the ITAA 1997 in relation to the 'transfer time'. The Purchase Agreement is the contract that is expected to bring the sale transaction to completion.
14. The actual dollar amount of the purchase price has not yet been determined.
15. The net assets figure has not yet been confirmed but the sale is expected to be a debt free sale.
The business of the Sale Entities
16. The Sale Entities provide fleet services to Australian businesses.
17. The Sale Entities each currently own certain depreciating assets that are used in their leasing business (Leased Assets). These assets are primarily leased to entities and persons that are not members of the XY MEC Group however some of the assets are leased to related XY entities in Australia.
18. The majority of the leased assets are leased to members outside the group and a small percentage of assets are leased to XY entities in Australia.
19. As head company of the XY MEC Group, XY has claimed deductions under Division 40 of the ITAA 1997 for the decline in value of the Leased Assets.
20. At the time that the Proposed Australian Transaction completes, it is anticipated that the majority of the Leased Assets will have a tax written down value that is greater than market value.
Assumptions
21. The Commissioner has been requested to make the following assumptions for the purpose of this Ruling:
• The Purchaser and YY will do everything required under the Purchase Agreement to transfer the ownership of the Sale Entity X shares to the Purchaser on the Closing Date.
• The Purchaser may or may not be a member of an Australian income tax consolidated group at the Closing Date.
• The Purchaser Group is not and will not be a tax exempt or tax preferred body at the Closing Date.
• The main business exemption in Division 45 of the ITAA 1997 has not been considered for its application.
• YY and the Purchaser will not be associates of one another at any time up to and including the Closing Date (i.e. the Purchaser is an unrelated third party) for the purpose of paragraph 703-33(1)(d) of the ITAA 1997.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 45
Income Tax Assessment Act 1997 Section 703-33
Income Tax Assessment Act 1997 Division 705
Income Tax Assessment Act 1997 Division 711
Reasons for decision
Question 1
Will the requirements of subsection 45-15(1) of the Income Tax Assessment Act 1997 (ITAA1997) be met for the Sale Entities when all of the membership interests in Sale Entity X are acquired by the Purchaser?
Summary
The requirements of subsection 45-15(1) of the ITAA 1997 will not be met for the Sale Entities when all of the membership interests in Sale Entity X are acquired by the Purchaser.
Detailed reasoning
All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated.
1. The requirements of subsection 45-15(1) will not be met for the Sale Entities as the requirements of paragraphs 45-15(1)(a), 45-15(1)(b) and 45-15(1)(c) will not be satisfied when all of the membership interests in Sale Entity X are acquired by the Purchaser.
2. The single entity rule in section 701-1 has the effect that11:
• or the purposes of paragraph 45-15(1)(a), XY, rather than the Sale Entities, deducted or could deduct an amount for the decline in value of the relevant Leased Assets; and
• for the purposes of paragraphs 45-15(1)(b) and 45-15(1)(c), XY, rather than the Sale Entities, 'held' the Leased Assets at the relevant time.
The requirements of Division 45
3. Subsection 45-15(1) sets out the requirements for Division 45 to apply to the Proposed Australian Transaction:
(1) A company (the former subsidiary) is treated as if it had disposed of plant, received its market value for that disposal and immediately reacquired it for the same amount if:
(a) the former subsidiary has deducted or can deduct an amount for the decline in value of the plant; and
(b) the former subsidiary was a 100% subsidiary of another company in a wholly-owned group at a time when it *held the plant; and
(c) for most of the time when the former subsidiary held the plant, the plant was leased to another entity; and
(d) the main business of the former subsidiary was to lease assets; and
(e) all or part of the lease period occurred on or after 22 February 1999; and
(f) on or after that day, the direct or indirect beneficial ownership of more than 50% of the shares in the former subsidiary is acquired by an entity or entities none of which is a member of the wholly-owned group; and
(g) the plant's written down value at the time of that acquisition is less than its market value at that time.
4. When applying subsection 45-15(1) to the Proposed Australian Transaction, each Sale Entity will be a 'former subsidiary' and the 'plant' will be the relevant Leased Assets owned by each Sale Entity.
5. Section 45-15 will only deem each Sale Entity to have disposed of the Leased Assets, received market value for that disposal and immediately reacquired it for the same amount if paragraphs (a) to (f) of subsection 45-15(1) are satisfied.
Paragraph 45-15(1)(a)
6. Paragraph 45-15(1)(a) will not be satisfied in relation to any of the Sale Entities because none of the Sale Entities have, or will have, deducted any amounts for the decline in value of the Leased Assets in any income year, nor will they be entitled to such deductions up to the Closing Date.
7. Under the single entity rule in section 701-1 (as modified by section 719-2 for MEC groups), the Sale Entities have always been, and will be up to the Closing Date, considered part of XY. On the Closing Date, the Sale Entities will then be considered part of the Purchaser Group (under the single entity rule) or as stand-alone entities.
8. As a consequence, XY (as PHC of the XY MEC Group) is the entity which deducted amounts for the decline in value of the Leased Assets, and not the Sale Entities.
9. The single entity rule, discussed above, applies for head company core purposes and entity core purposes (section 701-1 as modified by section 719-2 for MEC groups).
10. As set out in subsection 701-1(2), the head company core purposes are:
-working out the amount of the head company's liability (if any) for income tax
calculated by reference to any income year in which any of the period occurs or any later income year; and
-working out the amount of the head company's loss (if any) of a particular sort for any such income year.
11. As set out in subsection 701-1(3), the entity core purposes are:
-working out the amount of the entity's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and
-working out the amount of the entity's loss (if any) of a particular sort for any such income year.
12. The implications of the single entity rule are that, during the time that the Sale Entities are subsidiary members of the XY MEC Group, their assets are deemed to be held directly by XY for the purposes of working out the income tax liability of XY and the Sale Entities22.
13. This means that XY is the 'holder' of the Leased Assets for Division 40 purposes and is entitled to deductions for the decline in value of the Leased Assets under section 40-25.
14. The Sale Entities, as part of XY, are effectively ignored for these purposes and are not entitled to those deductions.
15. Similarly, if the Sale Entities become members of the Purchaser Group, the head company of the group will become the 'holder' of the Leased Assets for Division 40 purposes and will be entitled to deductions under section 40-25 (on the basis that the asset is held by the Purchaser Group for a taxable purpose).
16. In this case the Sale Entities, as part of the head company of the Purchaser Group, will be effectively ignored and will not be entitled to those deductions.
17. It follows that the Sale Entities never actually deducted amounts for the decline in value of the Leased Assets and will not be entitled to such deductions up to the Closing Date as the requirements of paragraph 45-15(1)(a) are not satisfied for any of the Sale Entities.
Paragraph 45-15(1)(b)
18. Notwithstanding that the Sale Entities are 100% subsidiaries of a wholly-owned group, paragraph 45-15(1)(b) will not be satisfied in relation to any of the Sale Entities because they have never 'held' the Leased Assets.
19. 'Held' is a defined term in section 995-1 which provides that the 'holder' of a depreciating asset is ascertained under section 40-40.
20. Section 40-25 allows deductions for the decline in value of a depreciating asset that a taxpayer 'held' for any time during an income year.
21. Under the single entity rule, the 'holder' of the Leased Assets has always been XY as the PHC of the XY MEC Group.
22. As 'holder', XY was entitled to deductions under section 40-25 at the time when the Sale Entities were members of a wholly-owned group.
23. It follows that at no time will the Sale Entities have 'held' the Leased Assets under Division 40 and accordingly paragraph 45-15(1)(b) cannot be satisfied.
Paragraph 45-15(1)(c)
24. Consistent with paragraph 45-15(1)(b), paragraph 45-15(1)(c) also requires the relevant Sale Entity to have 'held' the Leased Assets.
25. Paragraph 45-15(1)(c) will not be satisfied for the same reasons as set out above for paragraph 45-15(1)(b).
Conclusion
26. As paragraphs 45-15(1)(a) - (c) will not be satisfied in relation to any of the Sale Entities, the requirements of subsection 45-15(1) will not be met.
1 See paragraph 31 of TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997
2 This includes working out the leaving value of an entity's assets. Subsection 711-25(1) provides that for the purposes of step 1 in the table in subsection 711-20(1), the step 1 amount is worked out by adding up the *head company's *terminating values of all the assets that the head company holds at the leaving time because the leaving entity is taken by subsection 701-1(1) (the single entity rule) to be a part of the head company.
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