Edited version of your written advice

Authorisation Number: 1013099169906

Disclaimer

You cannot rely on this edited version in your tax affairs. You can only rely on the advice that we have given to you or to someone acting on your behalf.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions.

Date of advice: 30 September 2016

Ruling

Subject: Capital Gains Tax Rollover

Question 1

Did former section 160ZZN of the Income Tax Assessment Act 1936 ('ITAA 1936') apply to the issue of shares to the taxpayer and their former spouse upon the transfer of assets to a wholly owned company?

Answer

Yes

Question 2

Did former section 160ZZM of the ITAA 1936 apply to the transfer of the former spouse's shares in the wholly owned company to the taxpayer upon financial settlement of the divorce proceedings?

Answer

Yes

This ruling applies for the following period<s>:

Year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

Background

In 19WW, the taxpayer registered her/his business as sole proprietor.

In 19XX, the taxpayer's former spouse was added as an additional registered owner of the taxpayer's business. A partnership between the taxpayer and their former spouse was then established to operate the taxpayer's business. Each partner held a 50% interest in the partnership.

Transfer of business to a wholly owned company

In 19YY, a company was incorporated with two ordinary shares with par value $X each for the purposes of a rollover of the business assets from the taxpayer's partnership.

In 19ZZ, all the pre-CGT business assets of the taxpayer's partnership were transferred to the company. In consideration for the disposal of the pre-CGT partnership assets to the company, the partners (the taxpayer and their former spouse) received ordinary and non-redeemable shares in the company. On the same day, the taxpayer's partnership was wound up.

The taxpayer asserted that they made an election in writing pursuant to subsection 160ZZN(2)(d) of the ITAA 1936 for the CGT rollover relief to apply to the transfer of the pre-CGT partnership assets to the company. However, the taxpayer and the company are unable to provide a copy of the lodged section 160ZZN notice nor their income tax returns for the 19ZZ income year.

The taxpayer also asserted that they and their former spouse sought legal and accounting advice to assist with the proposed restructure. The taxpayer asserted that she/he recalled having discussions with their former accountants and advisers at the time of incorporation of their company, and the associated transfer of the taxpayer's business. The discussions included the recently enacted capital gains tax ('CGT') provisions, and the need for elections to be made to preserve the pre-CGT status of their interests.

Marriage Breakdown

In 19AA, the taxpayer and their former spouse were separated and their divorce was finalised in 19BB.

In the divorce agreement dated in 19BB and approved by a court under section 87 of the Family Law Act 1975, the taxpayer and their former spouse agreed to vary the share capital of the company from X shares with a par value of $X to X shares with a par value of X each. Following the variation of capital, the taxpayer and their former spouse would each hold X ordinary shares in the company with a par value of X cent per share.

It is agreed that at the time of entering into the agreements, the shares in the company had an agreed value of $X, and that their former spouse would transfer them X ordinary shares in the company to the taxpayer for $X in the tranches outlined in your letter.

On settlement of the divorce process, the taxpayer transferred only $X cash to their former spouse for their shares in the company, based on the company's net after tax value of $X and that no Capital Gains Tax ('CGT') was paid by their former spouse on the transfer of their shares.

Business Restructure

In early 20DD, as part of a broader business restructure, the company transferred all the stores to a related company.

Immediately following the transfer, the company retained only the business name, licence and associated goodwill. In early 20DD, the company entered into a licence agreement with the related company, whereby the related company was to pay the company an annual charge calculated as a percentage of the total retail sales income for the year (being 0.25% in the first year), for the use of the business name.

The consideration paid by the related company in return for the stores is unknown, and documentation in respect of the transfer of the stores has not been able to be located.

Disposal of the company

The taxpayer intends to dispose of their shares in the year ended 30 June 20EE, and requires certainty that their shares are taken to have been acquired prior to 20 September 1985, and thus, any gain on disposal of their shares in the company will be free from Capital Gains Tax.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 160ZZN(2)

Income Tax Assessment Act 1936 Subsection 160ZZN(2)(a)

Income Tax Assessment Act 1936 Subsection 160ZZN(2)(b)

Income Tax Assessment Act 1936 Subsection 160ZZN(2)(c)

Income Tax Assessment Act 1936 Subsection 160ZZN(2)(d)

Income Tax Assessment Act 1936 Subsection 160ZZN(6)

Income Tax Assessment Act 1936 Subsection 160ZZN(7)(a)

Income Tax Assessment Act 1936 Subsection 160A(a)

Income Tax Assessment Act 1936 Subsection 160A(d)

Income Tax Assessment Act 1936 Subsection 160M(1)

Income Tax Assessment Act 1936 Subsection 160M(1A)

Income Tax Assessment Act 1936 Subsection 160M(2)

Income Tax Assessment Act 1936 Subsection 160ZZM(1)

Income Tax Assessment Act 1936 Subsection 160ZZM(1)(b)

Income Tax Assessment Act 1936 Subsection 160ZZM(1)(c)

Income Tax Assessment Act 1997 Subsection 104-10

Income Tax Assessment Act 1997 Subsection 108-5

Income Tax Assessment Act 1997 Subdivision 126-A

Income Tax Assessment Act 1997 Subsection 126-5(1)

Income Tax Assessment Act 1997 Subsection 126-5(6)

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the taxpayer. While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. All references are to the Income Tax Assessment Act 1936 unless otherwise stated.

Issue 1 - Income Tax

Question 1

Summary

As the requirements in former section 160ZZN(2) were satisfied, the shares in the wholly owned company are considered to have been acquired by the taxpayer and their former spouse before 20 September 1985, pursuant to former section 160ZZN(7)(a).

Detailed reasoning

Former section 160ZZN provided rollover relief where an asset was transferred by a non-corporate taxpayer to a wholly-owned company. To obtain the rollover relief, certain conditions need to be satisfied at the time the assets were transferred to the company. These requirements for the rollover relief are found in former subsection 160ZZN(2), as follows:

• a taxpayer (other than a company or a taxpayer in the capacity of a trustee) who was a resident of Australia disposed of an asset to a company who was also a resident of Australia: paragraph 160ZZN(2)(a);

• the consideration in respect of the disposal consisted only of non-redeemable shares in the company: paragraph 160ZZN(2)(b);

• immediately after the disposal the taxpayer was the beneficial owner of all the shares in the company: paragraph 160ZZN(2)(c);

• the taxpayer elected by notice in writing and given to the Commissioner on or before the date of lodgement of the return of the year of income in which the disposal took place: paragraph 160ZZN(2)(d).

During the period between 20 September 1985 and 28 January 1988, a partnership was only entitled by virtue of former subsection 160ZZN(6) (repealed by the Taxation Laws Amendment Act 1991) to the rollover relief provided by former subsection 160ZZN if it met the following conditions:

(a) at least one of the partners is a natural person; and

(b) immediately after the disposal the persons who were partners in the partnership beneficially owned the shares in the company in the same proportions as their respective partnership interests immediately before the disposal.

Application to your circumstances

Based on the information provided, the assets in question were the taxpayer and their former spouse's interests in the taxpayer's partnership assets under former subsection 160A(d). The relevant rollover event was the disposal of the interest in the partnership assets by the partners (the taxpayer and their former spouse) to a wholly owned company, under former subsections 160M(1) to 160M(2).

It is determined that the conditions in former subsection 160ZZN(2) were satisfied for the incorporation rollover to apply, because:

• Each of the partners (the taxpayer and their former spouse) and the company were Australian residents at the time of the trigger event (disposal of partnership assets);

• The partners (the taxpayer and their former spouse) received non-redeemable shares (ordinary shares) in the company in consideration for the transfer of the partnership assets;

• Immediately after the disposal, the partners (the taxpayer and their former spouse) owned all the shares in the company;

• Most importantly, both of the partners (the taxpayer and their former spouse) who were natural persons beneficially owned the shares in the company in the same proportions as their respective partnership interests immediately before the disposal (i.e. 50% each). It satisfied former section 160ZZN(6), which provides that former section 160ZZN(2) applied to the taxpayer and their former spouse being a partnership, since the rollover event happened between 20 September 1985 and 28 January 1988.

You asserted that the partners (the taxpayer and their former spouse) made a valid election under subsection 160ZZN(2)(d) by written notice to the Commissioner on or before 30 June 1986. However, you are unable to locate any copy of written confirmation of the rollover election nor the income tax returns for the 19ZZ income year. The ATO records have since been destroyed.

Given the rollover election and the transaction in question occurred more than 30 years ago, it is reasonable to misplace or destroy such records. Hence, it is determined that the requirements of former subsection 160ZZN(2)(d) have been satisfied. Accordingly, the taxpayer and their former spouse were deemed to have acquired their shares in the company before 20 September 1985, under former subsection 160ZZN(7)(a).

Question 2

Summary

Former section 160ZZM applied to the transfer of the former spouse's shares in the company Pty Ltd to the taxpayer upon financial settlement of the divorce proceedings.

Detailed reasoning

Subdivision 126-A of the ITAA 1997 (or former section 160ZZM) is the CGT provision which expressly applies upon the breakdown of marriage or similar relationships. It is an automatic rollover provision and, therefore, will operate in every case in which the conditions precedent to its operation are met - no choice by the taxpayer is necessary to trigger that operation.

Subdivision 126-A of the ITAA 1997 is applicable to assessments for the 1999 and later income years. For assessments prior to the 1999 income year, former section 160ZZM applies.

As a same asset rollover provision, subdivision 126-A of the ITAA 1997 (or former subsection 160ZZM) provides rollover relief where there is a breakdown of marriage and there is a transfer between spouses of an asset under:

• an order of a court under the Family Law Act 1975 or under a corresponding law of a foreign country; or

• a maintenance agreement approved by a court under section 87 of the Family Law Act 1975 or a corresponding agreement approved by, or otherwise sanctioned by, a court under a corresponding law of a foreign country; or

• an order of a court under a law of a State or Territory or of a foreign country relating to the breakdown of de facto marriages.

Then, under subsection 126-5(6) of the ITAA 1997 (or former subsection 160ZZM(1)(c)), any asset which was acquired by their former spouse before 20 September 1985 will retain its capital gains tax exempt status on transfer to the receiving spouse.

Application to your circumstances

As determined previously in Question 1, an incorporation rollover under former section 160ZZN occurred on 1 January 1986, which resulted in the issue of 2 new ordinary shares in the company in return for the transfer of partnership assets to the company. As the partnership assets were acquired before 20 September 1985, the shares in the company were deemed to be acquired by the taxpayer and their former spouse before 20 September 1985, under former section 160ZZN(7)(a).

You asserted that, as a result of the divorce, the former spouse disposed their shares in the company to the taxpayer between a specified period, pursuant to their divorce agreement dated on a relevant date and approved by a court under section 87 of the Family Law Act 1975.

Although the marriage breakdown between the taxpayer and their former spouse happened in 19BB, the assets (being the former spouse's shares in the company) were only transferred to the taxpayer between a specified period. As such, both former section 160ZZM and subdivision 126-A of the ITAA 1997 should be considered in the context of a marriage breakdown.

The relevant CGT asset was the former spouse's shares in the company under section 108-5 of the ITAA 1997 and former section 160A. The relevant CGT event was the disposal of shares in the company by their former spouse under section 104-10 of the ITAA 1997 and former subsections 160M(1) to 160M(2).

As the maintenance agreements between the taxpayer and their former spouse satisfied both former subsection 160ZZM(1)(b) and subsection 126-5(1)(b) of the ITAA 1997, the former spouse's shares (that were transferred to the taxpayer) automatically retain the pre-CGT status in the hands of the taxpayer, upon the divorce between the taxpayer and their former spouse.

Subsection 126-5(6) of the ITAA 1997 applied to exempt the former spouse (the transferor) from the operation of CGT and retain their shares' pre-CGT status in the hands of the taxpayer (the transferee), for the transfers occurring between a specified period.

For the transfers occurring prior to 30 June 1998, former subsection 160ZZM applied. In other words, the taxpayer was deemed to have acquired their former spouse's shares in the company before 20 September 1985 under the former subsection 160ZZM(1)(c).

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).