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Edited version of your written advice
Authorisation Number: 1013102561378
Date of advice: 5 October 2016
Ruling
Subject: CGT event K6 share transfer
Question 1
Will CGT event K6 under section 104-230 of the Income Tax Assessment Act 1997 (ITAA 1997) happen on the transfer of the ordinary share in Company X (held by Company Y) to NewCo or to A and B in their own right (the Proposed Share Transfer)?
Answer
No
This ruling applies for the following periods:
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
Year ending 30 June 2020
The scheme commences on:
1 July 2016
Relevant facts and circumstances
The Business was established before 1985 by A and B.
The Business was transferred to Company X (the taxpayer) which was incorporated before
20 September 1985. The shareholders of Company X are A, B and Company Y (which was also incorporated before 20 September 1985).
The shareholders of Company Y are A, B and B as trustee for C and D.
Since before 20 September 1985 the Business has grown and continued to expand.
In 20XX a valuation was conducted on the Business by a registered valuer. The valuation provided the following information:
• The net value of Company X (being the amount by which the sum of the market value of the assets of Company X exceeds the sum of its liabilities).
• The market value of all of the property, excluding trading stock and goodwill (if any) which exists in the business operated by Company X.
• The market value of the goodwill (if any) which exists in the Business.
• The market value of the fully paid ordinary share in Company X held by Company Y.
The valuation provided that the market value of the property of Company X that was acquired on or after 20 September 1985 represents Y% to Z% of the net value of Company X.
Proposed Share Transfer
Company Y is considering a proposal to transfer its ordinary share in Company X to either another proprietary company of which A and B are the sole shareholders (NewCo), or to A and B in their own right (Proposed Share Transfer).
Market value consideration will be paid by NewCo or A and B (as applicable) for the transfer of the ordinary share.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-230
Income Tax Assessment Act 1997 subsection 104-230(1)
Income Tax Assessment Act 1997 paragraph 104-230(1)(a)
Income Tax Assessment Act 1997 paragraph 104-230(1)(b)
Income Tax Assessment Act 1997 paragraph 104-230(1)(c)
Income Tax Assessment Act 1997 paragraph 104-230(1)(d)
Income Tax Assessment Act 1997 subsection 104-230(2)
Income Tax Assessment Act 1997 paragraph 104-230(2)(a)
Income Tax Assessment Act 1997 paragraph 104-230(2)(b)
Reasons for decision
Question 1
Summary
The transfer of the ordinary share held by Company Y will not trigger a CGT event K6 because the requirement at paragraph 104-230(1)(d) of the Income Tax Assessment Act 1997 will not be satisfied.
Detailed reasoning
Subsection 104-230(1) 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.
Subsection 104-230(2) 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 75% of the net value of the company or trust.
Taxation Ruling TR 2004/18, at paragraph 68, explains:
68. The 75% test is satisfied only if one or both of the following tests are met:
• the market value of property referred to in paragraph 104-230(2)(a) equals or exceeds 75% of the net value of the company;
• the market value of property referred to in paragraph 104-230(2)(b) equals or exceeds 75% of the net value of the company.
In respect of paragraphs 104-230(1)(a) to (c), it is noted that:
• a transfer of the ordinary share held by Company Y in accordance with the Proposed Share Transfer will trigger a CGT event A1 in relation to the ordinary share;
• the ordinary share was acquired by Company Y before 20 September 1985; and
• there are no roll-over reliefs in respect of the transfer of the ordinary share.
In relation to the application of paragraph 104-230(1)(d) and subsection 104-230(2), the valuation report provided as part of the application for the private ruling notes that the market value of property referred to in paragraph 104-230(2)(a) does not equal or exceed 75% of the net value of Company X.
As the 75% test is not satisfied, the transfer of the ordinary share under the proposed Share Transfer will not trigger the application of CGT event K6.
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