Edited version of your written advice

Authorisation Number: 1051236733199

Date of advice: 13 June 2017

Ruling

Subject: CGT – Division 615 rollover relief

Question 1

Subject to making the appropriate elections by the relevant dates, will rollover relief be available under Division 615 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the disposal of your shares in the Company?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2017

The scheme commences on:

1 July 2017

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian resident for tax purposes.

You are not subject to the Taxation of Financial Arrangement rules in Division 230 of the ITAA 1997.

The Company currently has more than two shareholders (Shareholders).

You hold X% of the shares in the Company, and you hold them on capital account.

All shares currently on issue are ordinary shares.

The Company also has options to purchase ordinary shares on issue (Options). All of the Options in the Company are held by one of the Shareholders (Option Holder).

The Company is seeking to expand into a foreign country and, to this end, wishes to 'flip up’ to a parent company (Parent Co).

In order to effect the flip-up, it is proposed that the shareholders of the Company swap their shares in the Company on a 1:1 basis for shares in the Parent Co. Following the arrangement, the Parent Co will own all of the shares in the Company and Shareholders will own all of the shares in the Parent Co.

The shares in the Parent Co will be equivalent to ordinary shares.

A draft Agreement (the Agreement) has been prepared to effect the transaction. Under the Agreement:

● Each of the Shareholders will, concurrently with the execution of the Agreement, transfer all of their rights and interests in their Company shares to the Parent Co.

● In consideration of the transfer, each of the Shareholders will receive an equivalent number of shares of the Parent Co (1:1) with the result that each shareholder will hold the same percentage of Parent Co shares that they previously held in Company shares.

● The Shareholders are required to make various representations and warranties.

● The Parent Co also makes various representations and warranties.

After the flip-up transaction is completed, and pursuant to a separate agreement with the holder of the Options, it is proposed that the Options in the Company will be cancelled and options on substantially the same terms will be issued to the relevant entity. The Option Holder will be the only shareholder to receive anything under this separate agreement, being the new options.

Assumptions

Each of the Shareholders will continue to own the shares in the Parent Co from the time they are issued until at least until completion time.

The Parent Co will choose for section 615-65 of the ITAA 1997 to apply within two months of the completion time.

You will elect to apply the rollover contained within Division 615 by the date you lodge your 2016-17 tax return, and this will be evidenced by the way you lodge your return.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 615

Reasons for decision

Roll-over under Division 615 of the ITAA 1997 enables a member of a company or a trust to disregard a capital gain or capital loss from a share or a unit that is either disposed of, or redeemed or cancelled, as part of a reorganisation of the affairs of the entity, where the member becomes the owner of new shares in another company in exchange.

Subdivision 615-5 of the ITAA 1997 states that you can choose to obtain the rollover if:

● you are a member of a company (the original entity)

● you and at least one other entity (the exchanging members) own all of the shares in it

● under the scheme for reorganising its affairs the exchanging members dispose of all their shares to an interposed company in exchange for shares in the interposed company (and nothing else); and

● the requirements of Subdivision 615-B are satisfied.

In this case the Shareholders are all members of the Company (the original entity) within the meaning of Division 615 of the ITAA 1997. There are more than two Shareholders (the exchanging members) who own 100% of the shares in the Company.

Paragraph 615-5(1)(c) of the ITAA 1997 requires that, under a scheme for re-organising its affairs, the exchanging members dispose of all their shares in the original company to another company (the interposed company) in exchange for shares in the interposed company (and nothing else).

The proposed arrangement involves the Shareholders transferring their shares in the Company to the Parent Co, in exchange for shares in the Parent Co (an interposed company) on a 1:1 basis. Although there will be a separate agreement dealing with the Options, under the Agreement, the Shareholders will receive shares in the Parent Co, and nothing else. Anything received under a subsequent agreement by the Option Holder will be in consideration for the disposal of the Options, not the shares in the Company.

Further requirements are imposed by Subdivision 615-B of the ITAA 1997. The relevant requirements in this case are:

● the interposed company must own all the original interests immediately after the 'completion time’ (the time all the exchanging members have had their shares disposed of under the scheme) (section 615-15 of the ITAA 1997)

● immediately after completion time, each exchanging member must own:

● a whole number of shares in the interposed company; and

● a percentage of the shares in the interposed entity that were issued to all of the exchanging members that is equal to the percentage of the shares in the original entity that were owned by the member and disposed of under the scheme (subsection 615-20(1) of the ITAA 1997)

● the following ratios must be equal:

● the market value of each exchanging member’s shares in the interposed company to the market value of the shares in the interposed company issued to all exchanging members (worked out immediately after the completion time); and

● 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 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). (subsection 615-20(2) of the ITAA 1997)

● you are an Australian resident at the time your original interests were disposed of (subsection 615-20(3) of the ITAA 1997)

● the shares issued in the interposed entity must not be redeemable shares (subsection 615-25(1) of the ITAA 1997)

● each exchanging member who is issued shares in the interposed company must own the shares from the time they are issued until at least completion time (subsection 615-25(2) of the ITAA 1997),

● immediately after completion time the exchanging members must own all of the shares in the interposed company (subsection 615-25(3) of the ITAA 1997); and

● the interposed company must make the choice that section 615-65 of the ITAA 1997 applies within two months of completion time (section 615-30 of the ITAA 1997).

Taking the relevant assumptions into account, the requirements of Subdivision 615-B of the ITAA 1997 will be met because:

● under the Agreement the Parent Co will become the owner of 100% of the shares in the Company

● only whole numbers of shares are being dealt with under the Agreement; and each Shareholder will hold the same percentage in the Parent Co that the previously held in the Company

● we consider that the relevant market ratios will be met

● you are an Australian resident

● there are no redeemable shares being issued in the Parent Co; and

● based on the assumption that each of the Shareholders will continue to own the shares in the Parent Co from the time they are issued until at least until completion time, the exchanging members will own all of the issued shares in the Parent Co on completion time.

Accordingly, rollover relief will be available under Division 615 of the ITAA 1997 in relation to the disposal of your shares in the Company.

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