Edited version of your written advice

Authorisation Number: 1013072686853

Date of advice: 1 September 2016

Ruling

Subject: Income Tax Treatment of disposing shares in a subsidiary member of a consolidated group

Question 1

Will CGT event A1 in section 104-10 of the Income Tax Assessment 1997 (ITAA 1997) happen to Company A (as head company of the A Group) in respect of the Company B shares when Company A, B Holdings and Company L sign the Share Sale Agreement?

Answer

Yes

Question 2

Will the 'transfer time' for the purposes of subparagraph 703-33(1)(a)(ii) of the ITAA 1997, and therefore also the 'leaving time' for the purposes of subsection 711-5(1) of the ITAA 1997, be at the time of the day when Company L receives the executed share transfer form and pays the Completion Payment?

Answer

Yes

Question 3

Will the execution of the Transaction Agreements be entered into, while Company B is a subsidiary member of the A Group for the purposes of section 703-30 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 September 20XX

Year ending 30 September 20YY

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

Background

Company A is the head company of the A Group for the purposes of section 703-15 of Income Tax Assessment Act 1997.

Company B is 100% owned by B Holdings, a subsidiary member of the A Group and a wholly-owned subsidiary of Company A.

Company L is not an associate of Company B or Company A (within the definition of section 318 of the Income Tax Assessment Act 1936).

The proposed scheme

Company A, B Holdings and Company L will enter into a Share Sale Agreement (SSA) such that Company L will acquire 80% of the ordinary shares in Company B (Sale Shares).

According to the SSA, title and risk in the Sale Shares will pass to Company L on Completion Date.

At Completion, share certificates and any other documents will be executed and delivered to Company L to establish Company L's title to the Sale Shares and Completion Payment will be made by Company L to B Holdings. Prior to that, various Transaction Agreements will be executed by the parties.

At Completion, the asset tax cost less liability values will align with the cost of the membership interests in Company B.

The parties will be dealing with each at arm's length in relation to the SSA.

Relevant legislative provisions

Section 104-10 of the Income Tax Assessment Act 1997

Section 701-1 of the Income Tax Assessment Act 1997

Section 703-30 of the Income Tax Assessment Act 1997

Section 703-33 of the Income Tax Assessment Act 1997

Section 711-5 of the Income Tax Assessment Act 1997

Subsection 711-5(1) of the Income Tax Assessment Act 1997

Section 995-1 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Will CGT event A1 in section 104-10 of the Income Tax Assessment 1997 (ITAA 1997) happen to Company A (as head company of the A Group) in respect of the Company B shares when Company A, B Holdings and Company L sign the SSA?

Summary

Yes. The language used in the SSA evidences the parties' intention to be bound by it from the date it is signed. Thus, by virtue of the single entity rule in section 701-1 and section 104-10 of the ITAA 1997, CGT event A1 will happen to A Group when the SSA is signed by the parties.

Detailed Reasoning

For the purposes of Question 1, all legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified.

Section 104-10 provides that CGT event A1 happen if you dispose of a CGT asset. A CGT asset is defined in section 108-5 as 'any kind of property' or 'a legal or equitable right that is not property'. A share is personal property as stated in 1070A of the Corporations Act 2001 and therefore, the disposal of Company B's shares being CGT assets by B Holdings pursuant to the SSA will trigger CGT event A1.

Subsection 104-10(3) in turn provides that CGT event A1 happens when you enter into the contract for the disposal or, if there is no contract, when the change of ownership occurs. As stated in ATOID 2004/668, the time when a contract is entered into is the time when it comes into existence for general law purposes.

If a contract is subject to a condition, an issue arises whether the condition is a condition precedent to its formation or whether it is a condition precedent to performance of the contract. In the first case, the contract does not come into existence until the condition is met. In the second case, the condition does not prevent the creation of the contract - non-fulfilment of the condition merely entitles a party to terminate the contract.

What emerges from the language of the SSA is that the parties intend to be bound by the contract as of the date of signing. Accordingly, by virtue of the single entity rule in section 701-1 and section 104-10, CGT event A1 will happen to Company A (as head company of the A Group) when the SSA is signed by the parties.

Question 2

Will the 'transfer time' for the purposes of subparagraph 703-33(1)(a)(ii) of the ITAA 1997, and therefore also the 'leaving time' for the purposes of subsection 711-5(1)of the ITAA 1997, be at the time of the day when Company L receives the executed share transfer form and pays the Completion Payment?

Summary

Yes. The SSA makes clear that title and risk in the Sale Share passes to the Buyer on Completion. According to the Completion Run Sheet, the parties will have done everything under the contract to transfer ownership to Company L by a specific hour of the Completion date. Company L will receive the executed share transfer form and pay the Completion Payment. Thus, the 'transfer time' for the purposes of subparagraph 703-33(1)(a)(ii) of the ITAA 1997 and the 'leaving time' for the purposes of subsection 711-5(1) of the ITAA 1997 will be at that specific hour of Completion date.

Detailed Reasoning

For the purposes of Question 2, all legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified.

When is the 'transfer time'?

Section 703-33 sets out the circumstances in which the seller is taken to have stopped being the beneficial owner of the share at the 'transfer time' and the buyer is taken to have become the beneficial owner of the share at the 'transfer time' for the purposes of subsection 703-30(1).

703-33 Transfer time for sale of shares in company

(1)This section applies if:

(a) under a contract:

(i) a person (the seller) stops being entitled to be registered as the holder of a share in a company at a time (the transfer time); and

(ii) another person (the buyer) becomes entitled to be registered as the holder of the share in the company at the transfer time; and

(b) as a result of the contract, the seller stops being the beneficial owner of the share, and the buyer becomes the beneficial owner of the share; and

(c) the seller and the buyer dealt with each other at arm's length in relation to the contract; and

(d) the seller and the buyer were not associates of one another at any time during the period:

(i) starting when the contract was entered into; and

(ii) ending at the transfer time.

(2) For the purposes of subsection 703-30(1):

(i) the seller is taken to have stopped being the beneficial owner of the share at the transfer time; and

(ii) the buyer is taken to have become the beneficial owner of the share at the transfer time.

Is paragraph 703-33(1)(a) satisfied?

The 'transfer time' here will be the time when Company L receives the executed share transfer form and any other necessary documents to allow it to register as the new shareholder and in return pays B Holdings the Completion Payment. This is expected to happen by a specific hour of the Completion Date. Thus, paragraph 703-33(1)(a) is satisfied.

Is paragraph 703-33(1)(b) satisfied?

As a result of the SSA, B Holdings stops being the beneficial owner of the Sale Shares, and Company L becomes the beneficial owner of the Sale Shares. Thus, paragraph 703-33(1)(b) is satisfied.

Is paragraph 703-33(1)(c) satisfied?

The parties will be dealing with each other at arm's length in relation to the SSA. Thus, paragraph 703-33(1)(c) is satisfied.

Is paragraph 703-33(1)(d) satisfied?

The parties are not associates of one another during the relevant period. Thus, paragraph 703-33(1)(d) is satisfied.

Accordingly, section 703-33 applies such that at 'transfer time', B Holdings will be taken to have stopped being the beneficial owner of the Sale Shares, and Company L will be taken to have become the beneficial owner of the Sale Shares.

Section 711-5 provides that the 'leaving time' is when an entity ceases to be a 'subsidiary member of a consolidated group'.

711-5 Application and object of this Division

(1) This Division has effect:

(a) For the head company core purposes set out in subsection 701-1(2); and

(b) For the entity core purposes set out in subsection 701-1(3);

if an entity (the leaving entity) ceases to be a *subsidiary member of a *consolidated group (the old group) at a particular time (the leaving time).

The term 'subsidiary member of a consolidated group' is defined in section 995-1 to have the meaning given by section 703-15. Section 703-15 provides that the entity must be a 'wholly-owned subsidiary' of the head company of the group or other members of the group.

The term 'wholly-owned subsidiary' of an entity is defined in section 995-1 to have the meaning given by section 703-30.Section 703-30 in turn provides that a subsidiary is a 'wholly-owned subsidiary' of another entity if all the membership interests in the subsidiary entity are beneficially owned by the holding entity and/or one or more wholly-owned subsidiaries of the holding entity.

The term 'membership interest' is defined in section 960-135 to mean interests or rights in an entity by virtue of being a member of the entity. Therefore, by definition, this would include the Sale Shares.

In other words, 'leaving time' will happen in this case when not all of the membership interests in Company B are beneficially owned by B Holdings as that will be the time when Company B ceases to be a subsidiary member of the A group for the purposes of section 711-5.

In this case, at 'transfer time', B Holdings will be taken to have stopped being the beneficial owner of the Sale Shares in Company B by virtue of the operation of section 703-33 and therefore, that will also be the 'leaving time'.

Note that Tax Determination TD 2006/74 states:

8. The time at which beneficial ownership of all the membership interests commences to exist, or, where section 703-33 applies, the time at which the buyer becomes entitled to be registered as the holder of the shares, will depend on the facts and circumstances of each case. Relevant factors may include whether settlement has occurred, whether the seller and the buyer have done everything required under the contract to transfer ownership to the buyer and whether any relevant provisions in the company's constitution have been satisfied.

9. In determining the time at which an event occurs it is not always necessary to identify the hour of occurrence. As stated in Halsbury's Laws of England ,'in computing a period of time ...no regard is, as a general rule, paid to fractions of a day ....'; however, [t]he general rule ...does not apply where the object of a statute would be defeated unless the precise hour of occurrence were noted ... for then the particular hour when the events occurred may become material.' Therefore, in determining whether the relevant time for the purposes of subsection 703-30(1) may be identified as a day or should be identified as an hour of a day, it is necessary to consider the facts and circumstances of the particular case and whether the objects of Part 3-90 are met.

10. In this regard, the time that an entity first qualifies as a subsidiary member under paragraph 703-15(2)(b) may have a number of consequences for the purposes of Part 3-90. For example, it may be relevant for the purposes of setting the tax cost of that subsidiary member's assets under Division 705. Therefore, the time at which an entity is taken to become a subsidiary member needs to be determined in the light of the objects and operation of Part 3-90.

11. There may be occasions which warrant the conclusion that beneficial ownership or the entitlement to be registered as the holder of the shares is to transfer to the buyer only at a particular hour on a particular day and not simply on that day. This would be the case, for example, where transactions such as the transfer of assets or the payment of dividends occur on that day but before the time at which settlement occurs, which would otherwise result in the cost of the entity's assets not being aligned with the cost of the membership interests. In such a case, the consolidatable group which is formed will not come into existence until the particular hour of the day at which beneficial ownership transfers or the entitlement to be registered arises for the buyer

This is an occasion which warrants the conclusion that the 'transfer time' and 'leaving time' should be noted at a specific hour of the Completion Date as Company B's asset tax cost less its liabilities will align with the cost of the membership interests in Company B.

Question 3

Will the execution of the Transaction Agreements be entered into while Company B is a subsidiary member of the A Group for the purposes of section 703-30 of the ITAA 1997?

Summary

Yes. The Transaction Agreements will be executed at a time when Company B is still a subsidiary member of the A Group.

Detailed Reasoning

For the purposes of Question 3, all legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified.

An entity is a subsidiary member of a consolidated group if it is a wholly-owned subsidiary of the head company or other members of the group in accordance with section 703-15.

The term 'wholly-owned subsidiary' is defined in section 995-1 to have a meaning given by section 703-30:

703-30 When is one entity a wholly-owned subsidiary of another

(1) One entity (the subsidiary entity) is a wholly-owned subsidiary of another entity (the holding entity) if all the membership interests in the subsidiary entity are beneficially owned by:

(a) the holding entity; or

(b) one or more wholly wholly-owned subsidiaries of the holding entity; or

(c) the holding entity and one or more wholly-owned subsidiaries of the holding entity.

(2) An entity (other than the subsidiary entity) is a wholly-owned subsidiary of the holding entity if, and only if:

(a) (a) it is a wholly-owned subsidiary of the holding entity; or

(b) (b) it is a wholly-owned subsidiary of a wholly-owned subsidiary of the holding entity; because of any other application or applications of this section.

At 'transfer time', B Holdings will be taken to have stopped being the beneficial owner of the Sale Shares. Therefore, at 'transfer time', Company B will not be a wholly-owned subsidiary of B Holdings.

At the time of executing the Transaction Agreements which will happen prior to the 'transfer time', all of the membership interests in Company B will still be beneficially owned by B Holdings. Therefore, Company B will still be a wholly- owned subsidiary of B Holdings at the time of executing the Transaction Agreements for the purposes of section 703-30. Consequently, Company B will be a subsidiary member of the A group at that time.

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