Edited version of your written advice

Authorisation Number: 1013056848708

Date of advice: 29 July 2016

Ruling

Subject: Eligibility for roll-over under Division 615 of the Income Tax Assessment Act 1997 (ITAA 1997)

Question 1

Will Shareholder 2 be eligible to choose to obtain roll-over under subsection 615-5(1) of the ITAA 1997 in relation to the exchange of shares in Original Co for shares in Interposed Co?

Answer

Yes.

This ruling applies for the following periods:

Year ending 31 December 2016

Year ending 31 December 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The scheme that is the subject of this ruling is as follows:

1. Shareholder 1 and Shareholder 2 are each an Australian resident for income tax purposes.

The Proposed Restructure (Restructure)

2. A new X tax resident company (Interposed Co) will be interposed between Original Co and its shareholders, Shareholder 1 and Shareholder 2 (the Shareholders).

3. Interposed Co will elect to be a X REIT for X tax purposes. As a X REIT, Interposed Co will be taxed on a flow through basis in respect of qualifying rental income and gains.

4. Interposed Co will not be subject to the X corporate tax rate on such income and gains. Rather, X dividend withholding tax under the Australia/X tax treaty will apply to distributions of such income and gains to the Shareholders (being Australian residents).

5. A number of requirements need to be satisfied in order for an entity to qualify as a X REIT. The following points are made in this respect:

X REIT requirement for Interposed Co	Comment
It must be a company that is a X resident.	Interposed Co will be established as a X resident company.
It must not be a closely held company.	Interposed Co will not be closely held.
It must be listed on a recognised stock exchange.	Interposed Co will be listed on the Securities Exchange.
It must only have one class of ordinary share capital.	The interposing of Interposed Co between the Shareholders and Original Co will enable one class of ordinary shares to be issued.
It must satisfy income and asset tests.	It is expected that this will be satisfied. Ongoing monitoring will be required.
It must distribute at least 90% of its rental profits within 12 months of year end.	It is expected that at least 90% of its rental profits will be distributed within 12 months.

Restructure steps

6. The Restructure will be implemented through the following steps:

Step 1

• The Shareholders will subscribe for new different class shares in Original Co.

• The new shares will be issued at the same value per share.

• The value of the shares will be based on the accounting net asset value of Original Co (essentially market value).

Step 2

• Interposed Co will be established with initially 100 shares on issue, with A held by Shareholder 1 and B held by Shareholder 2.

• The interposition of Interposed Co will be achieved by the Shareholders exchanging their different class shares in Original Co for ordinary shares in Interposed Co on a 1:1 basis.

Under subsection 615-30(1) of the ITAA 1997, Interposed Co will choose that section 615-65 of the ITAA 1997 applies.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 615-5(1)

Income Tax Assessment Act 1997 section 615-15

Income Tax Assessment Act 1997 subsection 615-20(1)

Income Tax Assessment Act 1997 subsection 615-20(2)

Income Tax Assessment Act 1997 subsection 615-20(3)

Income Tax Assessment Act 1997 section 615-25

Income Tax Assessment Act 1997 section 615-30

Reasons for decision

Question 1

Will Shareholder 2 be eligible to choose to obtain roll-over under subsection 615-5(1) of the ITAA 1997 in relation to the exchange of shares in Original Co for shares in Interposed Co?

Detailed reasoning

Broadly, Division 615 of the ITAA 1997 applies where at least two entities own all the shares in a company or units in a trust, and under a scheme for reorganising the affairs of the company or trust, those entities dispose of their shares or units with the result that the entities become the owner of the corresponding percentage of new shares in another company (the interposed company).

The key requirements for determining eligibility for roll-over under Division 615 of the ITAA 1997 can be found in subsection 615-5(1) of the ITAA 1997. Subsection 615-5(1) of the ITAA 1997 provides the following:

(1) You can choose to obtain a roll-over if:

(a) you are a *member of a company or a unit trust (the original entity); and

(b) you and at least one other entity (the exchanging members) own all the *shares or units in it; and

(c) under a *scheme for reorganising its affairs, the exchanging members *dispose of all their shares in it to a company (the interposed company) in exchange for shares in the interposed company (and nothing else); and

(d) the requirements in Subdivision 615-B are satisfied.

Membership of Original Co (paragraphs 615-5(1)(a) and 615-5(1)(b) of the ITAA 1997)

Item 1 of the table in subsection 960-130(1) of the ITAA 1997 defines a 'member' of a company as 'a member of the company or a stockholder in the company'. Shareholder 1 is a member of Original Co because it holds different class shares in Original Co. Therefore, paragraph 615-5(1)(a) of the ITAA 1997 is satisfied.

Paragraph 615-5(1)(b) of the ITAA 1997 will be satisfied as Shareholder 1 and Shareholder 2 (being at least two entities) own all the shares in Original Co.

Scheme for reorganising Original Co's affairs (paragraph 615-5(1)(c) of the ITAA 1997)

Subsection 995-1(1) of the ITAA 1997 defines 'scheme' as any arrangement or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. Accordingly, a scheme for reorganising the affairs of a company or unit trust in the context of Division 615 includes a share for share exchange.

The Restructure involves two steps as follows:

• Step 1 involves the Shareholders subscribing for new shares in Original Co such that, after the new shares are issued, Shareholder 1 will hold A% and the Shareholder 2 will hold B% of each class of shares, and

• Step 2 involves Interposed Co being interposed between the Shareholders and Original Co.

Paragraph 615-5(1)(c) of the ITAA 1997 refers to a 'scheme for reorganising its affairs'. In the context of the present case, 'its' is a reference to Original Co as it is the focus of the reorganisation. There may be an argument that the scheme for the purposes of Division 615 of the ITAA 1997 should be limited to only the steps that directly affect Original Co. However, a scheme for reorganising an entity's affairs may include a series of steps with some being preparatory but equally important in reorganising the entity's affairs. The exchange might be merely one part of that scheme.

In the present case, Step 1 involves the Shareholders subscribing for new shares in Original Co in order to align the ownership percentages of each class of share so as to ensure the successful completion of the Restructure by having the same ownership percentages in Interposed Co. Step 1 is an essential part of the scheme as it sets up the implementation of Step 2.

Therefore, the scheme for the purposes of paragraph 615-5(1)(c) of the ITAA 1997 includes both Step 1 and Step 2 of the Restructure.

Do the Shareholders receive something else?

Paragraph 615-5(1)(c) of the ITAA 1997 states:

(c) under a *scheme for reorganising its affairs, the exchanging members *dispose of all their shares or units in it to a company (the interposed company) in exchange for shares in the interposed company (and nothing else); and …

Prior to the implementation of the Restructure, the Shareholders will hold shares in Original Co according to a A% and B% split between Shareholder 1 and Shareholder 2 (respectively). The purpose of Step 1 of the Restructure is to ensure that both Shareholder 1 and Shareholder 2 each maintain the A% and B% split of shares across the different classes shares.

The new different class shares will be issued at the same value per share. Shareholder 1 will subscribe for a number of shares and Shareholder 2 will subscribe for a number of shares. As such the economic percentage interest in Original Co held by the Shareholders will be the same before the Restructure and after Step 1 of the Restructure.

While new shares will be issued to the Shareholders in Step 1 of the Restructure, the new shares will not affect the requirements of paragraph 615-5(1)(c) of the ITAA 1997 as the Shareholders will still exchange their shares in Original Co (being the shares as they exist after Step 1) for shares in Interposed Co and receive nothing else for the exchange.

Therefore, paragraph 615-5(1)(c) of the ITAA 1997 will be satisfied.

Subdivision 615-B requirements (paragraph 615-5(1)(d) of the ITAA 1997)

Subdivision 615-B of the ITAA 1997 sets out other requirements which must be satisfied in order for Shareholder 1 to be eligible to choose to obtain the roll-over under Division 615 of the ITAA 1997. Each relevant provision within Subdivision 615-B of the ITAA 1997 is considered below.

Interposed company must own all the original interests

Section 615-15 of the ITAA 1997 states:

The interposed company must own all the *shares or units in the original entity immediately after the time (the completion time) all the exchanging members have had their shares or units in the original entity disposed of, redeemed or cancelled under the *scheme.

As part of Step 2 of the Restructure, Interposed Co will acquire, and begin to hold, 100% of the shares in Original Co immediately after the time that the Shareholders have disposed of their shares in Original Co under the Restructure. This will satisfy section 615-15 of the ITAA 1997.

A whole number of shares in the same proportion

Subsection 615-20(1) of the ITAA 1997 states:

Immediately after the completion time, each exchanging member must own:

(a) a whole number of *shares in the interposed company; and

(b) a percentage of the *shares in the interposed company that were issued to all the exchanging members that is equal to the percentage of the shares in the original entity that were:

(i) owned by the member; and

(ii) disposed of, redeemed or cancelled under the *scheme.

This means that each Shareholder's percentage of shares in Interposed Co must equal the percentage of shares they owned in Original Co.

In this regard, Taxation Ruling TR 97/18 Income tax: capital gains: roll-over relief following reorganisation of the affairs of a unit trust or company - sections 160ZZPA, 160ZZPB, 160ZZPC and 160ZZPD (TR 97/18) considers aspects of a CGT roll-over under a predecessor provision in the Income Tax Assessment Act 1936 (ITAA 1936) with the same policy intent as Division 615 of the ITAA 1997. Paragraph 81 of TR 97/18 states:

The time at which the proportion of each exchanging taxpayer's units to the total units in the unit trust for the purposes of this comparison is determined, is immediately before the earliest exchanging taxpayer's disposal time, being the only practical and reliable time. At any earlier time, there may be persons holding units that affect the relevant proportions who will not be disposing of those units under the scheme. Any time after the earliest exchanging taxpayer's disposal time and before the completion time would produce proportions that are distorted by the earlier disposals of exchange units by exchanging taxpayers.

Based on the above, the time at which the proportions are worked out is immediately before the Shareholders dispose of their shares in Original Co (being Step 2 of the Restructure). This means that while the scheme for reorganising Original Co's affairs includes the whole Restructure, the change in ownership percentages across the different classes of shares that takes place in Step 1 of the Restructure is irrelevant for the purposes of applying subsection 615-20(1) of the ITAA 1997.

When the exchange of shares occurs, each Shareholder in Original Co will be issued with a whole number of shares in Interposed Co in proportion to the percentage of shares held by the Shareholder in Original Co immediately before the exchange of shares. This will satisfy subsection 615-20(1) of the ITAA 1997.

Market value ratios

Subsection 615-20(2) of the ITAA 1997 states:

The following ratios must be equal

(a) the ratio of:

(i) the market value of each exchanging member's shares in the interposed company; to

(ii) the market value of the shares in the interposed company issued to all exchanging members (worked out immediately after the completion time);

(b) the ratio of:

(i) the market value of that member's shares or units in the original entity that were disposed of, redeemed or cancelled under the scheme; to

(ii) the market value of all the shares or units in the original entity that were disposed of, redeemed or cancelled under the scheme (worked out immediately before the first disposal, redemption or cancellation).

The ratio of the market value of each Shareholder's shares in Interposed Co to the market value of the shares issued to all Shareholders (worked out immediately after the completion time) must equal the ratio of the market value of that Shareholder's shares in Original Co that were disposed of to the market value of all the shares in Original Co that were disposed of (worked out immediately before the disposal).

As each Shareholder will hold the same proportion of shares in Original Co immediately before the first disposal of shares as in Interposed Co immediately after the completion time, subsection 615-20(2) of the ITAA 1997 will be satisfied.

Residency of Shareholder 2

Subsection 615-20(3) of the ITAA 1997 states:

Either:

(a) you are an Australian resident at the time your *shares or units in the original entity are disposed of, redeemed or cancelled under the *scheme; or

(b) …

Shareholder 2 is an Australian resident and will continue to be an Australian resident when the Restructure is implemented. Subsection 615-20(3) of the ITAA 1997 will be satisfied.

Requirements relating to the interposed company

Section 615-25 of the ITAA 1997 contains additional requirements that must be satisfied in order for the Shareholders to be eligible to choose to obtain the roll-over.

Section 615-25 of the ITAA 1997 states:

(1) The *shares issued in the interposed entity must not be *redeemable shares.

(2) Each exchanging member who is issued *shares in the interposed company must own the shares from the time they are issued to at least the completion time.

(3) Immediately after the completion time:

(a) the exchanging members must own all the *shares in the interposed company; …

Subsection 615-25(1) of the ITAA 1997 will be satisfied because the shares that will be issued in Interposed Co will be ordinary shares, not 'redeemable shares'. Subsection 995-1(1) of the ITAA 1997 defines 'redeemable shares' to mean:

(a) *shares that are liable to be redeemed; or

(b) shares that, at the option of the company that issued them, are liable to be redeemed.

There is no indication that the ordinary shares in Interposed Co will satisfy either of these criteria.

Subsection 615-15 of the ITAA 1997 defines the 'completion time' as the time all the exchanging members (the Shareholders) have had their shares in the original entity (Original Co) disposed of under the scheme. The Shareholders will have disposed of their Original Co shares and received Interposed Co shares as consideration upon completion of Step 2 of the Restructure. Subsection 615-25(2) of the ITAA 1997 will be satisfied because the Shareholders (who will be issued with shares in Interposed Co) will own those shares from the time they are issued to at least the completion time.

Subsection 615-15(3) of the ITAA 1997 will be satisfied because immediately after the completion time, the exchanging members (the Shareholders) will own all the shares in the interposed company (Interposed Co).

Section 615-30 of the ITAA 1997 requires the interposed company to make a particular choice. Section 615-30 of the ITAA 1997 states:

(1) Unless subsection (2) applies, the interposed company must choose that section 615-65 applies.

(2) The interposed company must choose that a *consolidated group continues in existence at and after the completion time with the interposed company as its *head company, if:

(a) Immediately before the completion time, the consolidated group consisted of the original entity as head company and one or more other members (the other group members); and

(b) immediately after the completion time, the interposed company is the head company of a *consolidatable group consisting only of itself and the other group members.

As subsection 615-30(2) of the ITAA 1997 will not apply to the present case (as it is not a member of an income tax consolidated group), Interposed Co will make the choice under subsection 615-30(1) of the ITAA 1997 that section 615-65 of the ITAA 1997 applies.

As all of the requirements in Subdivision 615-B of the ITAA 1997 will be satisfied as detailed above, paragraph 615-5(1)(d) of the ITAA 1997 will also be satisfied.

Conclusion

Therefore, Shareholder 2 will be eligible to choose to obtain the roll-over under subsection 615-5(1) of the ITAA 1997 in relation to the exchange of shares in Original Co for shares in Interposed Co.

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