Edited version of your written advice

Authorisation Number: 1051316194874

Date of advice: 7 December 2017

Ruling

Subject: Subdivision 126-B roll-over

Question

Does Subdivision 126-B of the ITAA 1997 as modified by section 419 of the ITAA 1936 apply to the disposal of shares in Y Co (Disposal A) and Overseas Co A and Overseas Co B (Disposal B) such that any capital gains arising on those disposals are not included in notional assessable income of XYZ Co in accordance with section 385 of the ITAA 1936, for the purposes of working out the attributable income of a CFC that will be included in the assessable income of the taxpayer pursuant to section 456 of the ITAA 1936?

Answer

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Overview of the Group

The corporate group consists of resident and non-resident entities. The ultimate holding entity in the Group is an overseas company (‘XYZ Co’).

An individual shareholder of XYZ Co and its associates are taken to be attributable taxpayers in relation to XYZ Co.

XYZ Co holds directly and indirectly, the following subsidiaries:

● XYZ Co owns 100% of the shares in Overseas Co A.

● Overseas Co A owns 100% of the shares in Overseas Co B.

● Overseas Co B owns 100% of the shares in Y Co, a company incorporated in Australia and the head company of an Australian tax consolidated group.

Proposed reorganisation

Among others, the steps to be undertaken under the proposed reorganisation will include:

● XYZ Co acquiring interests in Y Co;

● XYZ Co acquiring interests in Overseas Co B;

● XYZ Co transferring the interest it acquires in Y Co under the reorganisation to Overseas Co A (‘Disposal A’);

● XYZ Co forming a New Overseas XYZ; and

● XYZ Co transferring its interests in Overseas Co A and Overseas Co B to New Overseas XYZ Co (‘Disposal B’).

Other facts

● XYZ Co is a controlled foreign company.

● XYZ Co, Overseas Co A, Overseas Co B and New Overseas XYZ Co are tax residents of a listed country for tax purposes and are not Part X Australian residents.

● Disposals A and B will give rise to capital gains for XYZ Co that will be Designated Concession Income for the purposes of Part X of the ITAA 1936.

● Immediately prior to Disposal A, Overseas Co A will be a direct wholly owned subsidiary of XYZ Co.

● Immediately prior to Disposal B, New Overseas XYZ Co will be a direct wholly owned subsidiary of XYZ Co.

● All interests transferred in Disposals A and B will not be trading stock or registered emissions units within the meaning of section 995-1 of the ITAA 1997.

● The interests transferred in Disposals A and B will not be rights or convertible interests referred to in Division 130 of the ITAA 1997, or options under Division 134 of the ITAA 1997, or exchangeable interests under section 995-1 of the ITAA 1997.

● Overseas Co A and New Overseas XYZ Co will not be exempt entities for Australian income tax purposes.

● At the time of the relevant transfers, no other persons other than XYZ Co will be in a position to affect rights in relation to Overseas Co A or New Overseas XYZ Co.

● XYZ Co has not, and will not, acquire the shares in Y Co, Overseas Co A and Overseas Co B because of a single CGT event, or a series of CGT events, giving rise to a previous application of Subdivision 126-B and involving an Australian resident originating company.

● XYZ Co, Overseas Co A and New Overseas XYZ Co will choose to obtain the roll-over under Subdivision 126-B of the ITAA 1997 in respect of Disposals A and B in accordance with the timeframes specified in section 103-25 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 (ITAA 1936)

Section 419

Section 320

Section 332

Section 385

Section 456

Income Tax Assessment Act 1997 (ITAA 1997)

Section 11-5

Section 126-45

Section 126-50

Section 126-55

Section 126-60

Section 975-500

Section 975-505

Income Tax Assessment Act (1936 Act) Regulation 2015

Regulation 17

Regulation 19

Reasons for decision

Roll-over relief may be available for the transfer of a CGT asset between two companies under Subdivision 126-B if the following requirements are satisfied:

● a CGT event (‘the trigger event’) that is one of the events listed in subsection 126-45(2) of the ITAA 1997 happens;

● the trigger event involves a company (‘the originating company’) and another company (‘the recipient company’) that are members of the same wholly owned group at the time of the trigger event;

● the roll-over asset must not be trading stock or a registered emissions unit;

● the recipient company must not be an exempt entity;

● at least one of the companies is a foreign resident;

● a foreign resident originating company must not have acquired the roll-over assets from an Australian resident under a previous application of Subdivision 126-B; and

● the trigger event must result in the originating company making a capital gain.

The abovementioned requirements will be considered in further detail in the following paragraphs.

A CGT event (‘the trigger event’) that is one of the events listed in subsection 126-45(2) of the ITAA 1997 happens

Section 126-45 of the ITAA 1997 requires that a CGT event of a type specified in subsection 126-45(2) happens to the originating company. Subsection 126-45(2) provides that only the following CGT events are relevant:

(a) CGT events A1 and B1 (a disposal case ); and

(b) CGT events D1, D2, D3 and F1 (a creation case ).

In the present case, CGT event A1 will happen:

● when XYZ Co transfers the Y Co shares to Overseas Co A in exchange for shares in Overseas Co A (‘Disposal A’); and

● when XYZ Co transfers the Overseas Co A and Overseas Co B shares to New Overseas XYZ Co in exchange for shares in New Overseas XYZ Co (‘Disposal B’).

The trigger event involves a company (‘the originating company’) and another company (‘the recipient company’) are members of the same wholly owned group at the time of the trigger event

Subsection 126-50(1) provides that the originating company and recipient company must be members of the same wholly-owned group at the time of the trigger event.

The term ‘wholly-owned group’ is defined in section 975-500 of the ITAA 1997 as follows:

Two companies are members of the same wholly-owned group if:

(a) one of the companies is a 100% subsidiary of the other company; or

(b) each of the companies is a 100% subsidiary of the same third company.

The term ‘100% subsidiary’ is defined in subsection 975-505 of the ITAA 1997 as follows:

(1) A company (the subsidiary company ) is a 100% subsidiary of another company (the holding company ) if all the shares in the subsidiary company are beneficially owned by:

(a) the holding company; or

(b) one or more 100% subsidiaries of the holding company; or

(c) the holding company and one or more 100% subsidiaries of the holding company.

In the present case, the originating company for the Disposal A and Disposal B transactions will be XYZ Co. The recipient companies for the relevant transactions will be Overseas Co A and New Overseas XYZ Co, respectively.

At the time of the trigger event in respect of Disposal A, the recipient company Overseas Co A will be a 100% subsidiary of XYZ Co within the meaning of subsection 975-505(1) as all of the shares in Overseas Co A will be beneficially owned by XYZ Co.

Likewise, at the time of the trigger event in respect of Disposal B, the recipient company New Overseas XYZ Co will be a 100% subsidiary of XYZ Co within the meaning of subsection 975-505(1) as all of the shares in New Overseas XYZ Co will be beneficially owned by XYZ Co.

In this regard, XYZ Co, Overseas Co A and New Overseas XYZ Co will be members of the same wholly-owned group within the meaning of section 975-500 and, therefore, the condition in subsection 126-50(1) will be met.

The roll-over asset must not be trading stock or a registered emissions unit

Subsection 126-50(2) of the ITAA 1997 provides that the CGT assets involved (the ‘roll-over asset’) must not be:

a) trading stock of the recipient company just after the time of the trigger event; or

b) a registered emissions unit held by the recipient company just after the time of the trigger event.

The roll-over assets subject of the disposal occurring in Disposal A are shares in Y Co, whilst the shares in Overseas Co A and Overseas Co B shares are the roll-over assets subject of the disposal occurring in Disposal B. As none of these shares are the trading stock or registered emissions units held by Overseas Co A and New Overseas XYZ Co after the time of the trigger event, the condition in subsection 126-50(2) will be satisfied.

As the roll-over assets are not rights or convertible interests referred to in Division 130 of the ITAA 1997, or options referred to in Division 134 of the ITAA 1997, or exchangeable interests within the meaning of section 130-100, neither subsection 126-50(3) nor subsection 126-50(3A) apply.

The recipient company must not be an exempt entity

Subsection 126-50(4) of the ITAA 1997 provides that:

The ordinary income and statutory income of the recipient company must not be exempt from income tax because it is an exempt entity for the income year of the trigger event.

The meaning of “exempt entity” is defined in section 995-1 of the ITAA 1996 as follows:

a) an entity all of whose ordinary income and statutory income is exempt from income tax because of this Act or because of another Commonwealth law, no matter what kind of ordinary income or statutory income the entity might have; or

b) an untaxable Commonwealth entity.

Section 11-5 of the ITAA 1997 provides a list of entities of the kind referred to in paragraph (a). An ‘untaxable Commonwealth entity’ refers to an untaxable Commonwealth entity as defined by section 195-1 of A New Tax System (Goods and Services Tax) Act 1999.

It is stated as a fact in this Ruling that Overseas Co A and New Overseas XYZ Co will not be exempt entities for Australian income tax purposes.

At least one of the companies is a foreign resident

Ordinarily, subsection 126-50(5) requires that:

● at the time of the trigger event either the originating company or the recipient company must be a foreign resident; and

● the roll-over asset must be taxable Australian property either just before the trigger event or just before and just after the trigger event for a disposal case.

However, section 419 of the ITAA 1936 will modify the application of the requirements in subsection 126-50(5) for the purposes of applying the Act in calculating the attributable income of an eligible CFC.

Subsection 419(1) provides that Subdivision 126-B of the ITAA 1997 has effect as if the table contained in subsection 126-50(5) of the Act were replaced with the table contained in section 419. The residency status of the originating CFC and the recipient company (i.e. whether the company is a resident of a listed or unlisted country) will be determinative of the nature of the additional requirements contained in the table in respect of the roll-over assets.

Section 320 of the ITAA 1936 provides that in Part X of the ITAA 1936, “listed country” means:

a foreign country, or a part of a foreign country, that is declared by the regulations to be a listed country for the purposes of this Part.

Companies are residents of listed countries for the purposes of Part X if the requirements contained in subsection 332(2) of the ITAA 1936 are satisfied, as follows:

(2) For the purposes of this Part, a company is a resident of a particular listed country at a particular time if, and only if, both of the following conditions are satisfied at that time:

(a) the company is not a Part X Australian resident;

(b) the company is treated as a resident of the listed country for the purposes of the tax law of the listed country.

In the present case, both the originating CFC, XYZ Co, and the recipient companies, Overseas Co A and New Overseas XYZ Co, in respect of Disposals A and B respectively, are not Part X Australian residents and are residents of a listed country for tax purposes.

The relevant item in the present case will be Item 1 as the originating entity XYZ Co is a resident of a listed country at the time of the trigger event and the recipient companies are also residents of a listed country at that time. Item 1 provides that it does not matter what the roll-over asset is. Accordingly, there are no applicable requirements with regard to the roll-over assets, the Y Co shares in respect of Disposal A and the Overseas Co A and Overseas Co B shares in respect of Disposal B.

Foreign resident originating company must not have acquired the roll-over assets from an Australian resident under a previous application of Subdivision 126-B

Subsection 126-50(7) provides that where the originating company is a foreign resident, it must not have acquired the roll-over asset because of:

● a single CGT event giving rise to a roll-over under a previous application of Subdivision 126-B involving an Australian resident originating company other than the company that is the recipient company for the current application of Subdivision 126-B: paragraph 126-50(7)(a); or

● a series (whether or not it is the longest possible services) of consecutive CGT events giving rise to roll-overs under previous applications of Subdivision 126-B, the earliest involving an Australian resident originating company other than the company that is the recipient company for the current application of Subdivision 126-B: paragraph 126-50(7)(b).

In the present case, no CGT events have happened to the Y Co shares and the Overseas Co A and Overseas Co B shares, giving rise to a roll-over under a previous application of Subdivision 126-B involving an Australian resident originating company.

The trigger event must result in the originating company making a capital gain

Section 126-55 of the ITAA 1997 provides that there is a roll-over if:

(a) either:

(i) the trigger event would have resulted in the originating company making a capital gain or making no capital loss and not being entitled to a deduction; or

(ii) the originating company acquired the roll-over asset before 20 September 1985; and

(b) the originating company and the recipient company both choose to obtain it.

It is taken to be a fact for the purposes of this ruling that a capital gain will be made as a result of the disposal of the Y Co shares occurring in Disposal A and as a result of the disposal of the Overseas Co A and Overseas Co B shares occurring in Disposal B. Accordingly, the requirement in subparagraph 126-55(1)(a)(i) will be satisfied.

As XYZ Co, Overseas Co A and New Overseas XYZ Co will choose to obtain the roll-over under Subdivision 126-B of the ITAA 1997 in respect of Disposal A and Disposal B in accordance with the timeframes specified in section 103-25 of the ITAA 1997, the requirement in paragraph 126-55(1)(b) will also be satisfied.

Consequences of roll-over

As the requirements in Subdivision 126-B are satisfied, XYZ Co will be able to disregard the capital gains that arise from the proposed disposals of the Y Co shares and the Overseas Co A and Overseas Co B shares pursuant to subsection 126-60(1) of the ITAA 1997.

The result is that XYZ Co, which is taken to be a CFC for the purposes of this ruling, will not have notional assessable income arising from the proposed disposals of the relevant shares for the purposes of section 385 of the ITAA 1936. Accordingly, the proposed disposals will not give rise to the attributable income of a CFC that will be included in the assessable income of the taxpayer, who is taken to be an attributable taxpayer in relation to XYZ Co for the purposes of this ruling, pursuant to section 456 of the ITAA 1936.

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