Edited version of your written advice

Authorisation Number: 1051355898135

Date of advice: 23 April 2018

Subject: Transfer of company shares

Ruling

Question 1

Can the Commissioner confirm that Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) will not affect the underlying interests held by Company A in any pre-CGT assets as a result of the proposed transfers of shares in Company A, upon the basis that there is no change in majority underlying interest in those assets?

Answer

Yes

Question 2

Can the Commissioner confirm that the Continuity of Ownership Test (COT) in section 165-12 of the ITAA 1997 will continue to be passed by Company A following the disposal of the two issued C class shares to companies wholly owned by Taxpayer A and Taxpayer B?

Answer

Yes

This ruling applies for the following period:

1 July 2017 to 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

1. Company A was established to fulfil the testamentary wishes of the late Taxpayer C, who passed away in 2010.

2. Taxpayer C incorporated Company A in a tax haven because it permitted the incorporation of a company limited by guarantee and by shares. It was the preference of Taxpayer C in dealing with their estate to use such a company so as to limit the rights of non-family persons who would become members of the company. Company A is centrally managed and controlled in Australia, carries on business in Australia and is a resident of Australia for tax purposes.

3. The directors of Company A are X, Y, Z, Taxpayer A and Taxpayer B. X, Y and Z are Class B Guarantee members of Company A, their membership carrying voting rights only. The voting rights of Class B Guarantee members at a meeting of members comprise 48% of votes.

4. Taxpayer A and Taxpayer B each own one Class C Share in Company A and Taxpayer B have held these shares since 2010. Class C Shares are the only shares entitled to dividends and are the only shares entitled to a distribution of capital on a winding up of Company A. The voting rights of the holders of Class C shares at a meeting of members comprise 52% of votes.

5. The Memorandum of Association provides that Class C shares may only be issued to members of the family of Taxpayer C and that it was Taxpayer’s C intention that Company A continue for the benefit of Taxpayer A and Taxpayer B and lineal descendants of either of them.

6. There are no other issued shares in Company A.

7. As at 30 June 2016 Company A had carry forward tax losses. These losses were all incurred after the issue of the C Class shares to Taxpayer A and Taxpayer B, and there has been no change in C Class shareholdings since these losses were incurred.

8. Company A holds 50% of the shares in Company E. The other 50% of the shares in Company E are held by Company F. Company E receives substantial assessable income. The large portion of the income of Company A comprises franked dividends received from Company E.

9. 54% of Company A’s underlying interests in Company E are regarded as ‘pre-CGT’ shares for CGT purposes and a substantial portion of the assets of Company E are ‘pre-CGT’ assets.

10. In the 2017 year, substantial fully franked dividends were paid to Taxpayer A and Taxpayer B in equal proportions.

11. Taxpayer A and Taxpayer B each wish to build wealth and investments principally outside of Company A. They do not wish to hold such investments directly, but rather through entities that they respectively control. Both wish to be able to provide financially for their family members (and in particular their spouses) into the future. As their spouses are not lineal descendants of Taxpayer C, the current situation with Company A does not permit this flexibility.

Proposed Steps

12. It is proposed that the following relevant steps will take place:

13. Taxpayer A will dispose of their C Class share in Company A to Company X in consideration for the issue of shares in that company. At all relevant times, Taxpayer A will legally and beneficially own 100% of the shares issued in Company X.

14. Taxpayer B will dispose of their C class share to Company Y in consideration for the issue of shares in that company. At all relevant times, Taxpayer B will legally and beneficially own 100% of the shares in Company Y.

Relevant legislative provisions

Subsection 149-15(1) of the Income Tax Assessments Act 1997

Subsection 149-15(2) of the Income Tax Assessments Act 1997

Subsection 149-15(3) of the Income Tax Assessments Act 1997

Subsection 149-15(4) of the Income Tax Assessments Act 1997

Subsection 149-15(5) of the Income Tax Assessments Act 1997

Subsection 149-30(1) of the Income Tax Assessments Act 1997

Subsection 149-30(3) of the Income Tax Assessments Act 1997

Subsection 149-30(4) of the Income Tax Assessments Act 1997

Section 165-12 of the Income Tax Assessments Act 1997

Section 165-150(2) of the Income Tax Assessments Act 1997

Section 165-155(2) of the Income Tax Assessments Act 1997

Section 165-160(2) of the Income Tax Assessments Act 1997

Section 701-1 of the Income Tax Assessments Act 1997

Subsection 995-1(1) of the Income Tax Assessments Act 1997

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.

Reasons for Decision

These reasons for decision accompany the Notice of private ruling for Company A Group Limited.

All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Can the Commissioner confirm that Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) will not affect the underlying interests held by Company A in any pre-CGT assets as a result of the proposed transfers of shares in Company A, upon the basis that there is no change in majority underlying interest in those assets?

Summary

15. The proposed transfer by Taxpayer A and Taxpayer B of their C Class share in Company A to their private companies will not trigger the operation of Division 149.

Detailed reasoning

16. Division 149 contains the rules which govern when an asset acquired before 20 September 1985 (pre-CGT asset) is treated as having been acquired after that date. Essentially, an asset remains a pre-CGT asset if the majority underlying interests in the asset has not changed since 20 September 1985. Where a change in majority underlying interest occurs, the CGT asset is deemed to be acquired after 19 September 1985, under either Division 20 of the Income Tax Assessment Act 1936 (ITAA 1936) (pre 1998-99 income year) or Division 149.

17. The term ‘majority underlying interests’ is defined in subsection 149-15(1) as more than 50% of:

(a) the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset, and

(b) the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset.

18. The term ‘underlying interest’ is defined in subsection 149-15(2) as:

An underlying interest in a *CGT asset is a beneficial interest that an *ultimate owner has (whether directly or *indirectly) in the asset or in any *ordinary income that may be *derived from the asset.

19. Subsection 149-15(3) defines an ‘ultimate owner’ to include an individual. Subsections

20. 149-15(4) and (5) provide that an ultimate owner has an indirect beneficial interest if he or she would receive for his or her benefit any capital or ordinary income distributed by the entity through interposed entities.

21. The above provisions have the effect that the ownership of underlying interests in CGT assets is traced through to the ultimate owner(s). Relevantly, the ultimate owner(s) is/are the individual(s) who would receive for their own benefit capital if that entity were to distribute its capital and the capital were then successively distributed by each entity interposed between the owner(s) and the individual(s). The provision deals similarly with the interests in income that might be derived from the asset.

22. Where a private company owns a pre-CGT asset, subsection 149-30(1) sets out when the pre-CGT asset will stop being a pre-CGT asset, and states:

The asset stops being a *pre-CGT asset at the earliest time when *majority underlying interests in the asset were not had by *ultimate owners who had *majority underlying interests in the asset immediately before 20 September 1985.

23. Subsections 149-30(3) and 149-30(4) relevantly provide that, if an ultimate owner (new owner) has acquired an interest in an asset because it was transferred to the new owner because of the death of a person (former owner), the 'new owner' is treated as having held the underlying interest of the 'former owner' for the period the 'former owner' held them.

First change in majority underlying interests – the death of Taxpayer C

24. As a result of the death of their parent, Taxpayer C in 2010, ownership of all of the shares they held directly in Company E, being 50% of total Company E shares on issue, were transferred to Company A.

25. By the operation of subsections 149-30(3) and (4), Company A will be taken to have held a 50% interest in Company E shares at all times from when their parent acquired their interests. That is, the percentage of underlying interests held by the deceased is deemed to have been held by the new owner to whom they pass.

26. Since 54% of their parent’s shares were ‘pre-CGT’ assets, these shares will not stop being regarded as pre-CGT assets for the purposes of Division 149 when these shares were transferred to Company A as part of their estate. That is, the transfer of Company E shares to Company A on the death of their parent did not trigger the conversion of pre-CGT assets of Company E assets to post-CGT assets pursuant to the operation of subsections

27. 149-30(3) and (4).

Second change in majority underlying interest – following the proposed restructure

28. Taxpayer A and Taxpayer B presently have exclusive rights to capital and dividends in Company A as the sole owners of the two C Class shares. Following the disposal by each of them of their C Class shares in Company A, Taxpayer A and Taxpayer B will each continue to legally and beneficially own 100% of the shares in their respective private company that purchased their C Class share in Company A.

29. It is the Commissioner’s view, that for the purposes of Division 149, Taxpayer A and Taxpayer B are, both before and after the proposed transfer to respective wholly owned company, the relevant ultimate owners of the CGT assets of Company A and will also have the beneficial interests in any potential income from those assets. Therefore the Commissioner is satisfied that the proposed transfers will not result in a change in the majority underlying interests in the Company E shares held by Company A.

Question 2

Can the Commissioner confirm that the Continuity of Ownership Test (COT) in section 165-12 of the ITAA 1997 will continue to be passed by Company A following the disposal of the two issued C class shares to companies wholly owned by Taxpayer A and Taxpayer B?

Summary

30. The transfer of the two C Class shares held by Taxpayer A and Taxpayer B to their respective wholly owned private company will not result in the failure of the COT in section 165-12.

Detailed reasoning

31. Division 165 contains the rules governing the ability of companies to carry forward tax losses. The provisions apply to the head entities of consolidated groups under the ‘single entity rule’ contained in section 701-1.

32. Section 165-10 states:

A company cannot deduct a *tax loss unless either:

a) it meets the conditions in section 165-12 (which is about the company maintaining the same owners); or

b) it meets the condition in section 165-13 (which is about the company satisfying the same business test).

33. The ownership test period is defined in section 165-12(1) as:

In determining whether section 165-10 prevents a company from deducting a *tax loss, the ownership test period is the period from the start of the *loss year to the end of the income year.

34. Under subsections 165-12(2), (3) and (4), the COT requires that the same persons must at all times during the ownership test period have more than 50% of the company’s voting power in the company, rights to more than 50% of the company’s dividends and rights to more than 50% of the company’s capital distributions.

35. Section 165-12 identifies two mutually exclusive tests for determining whether persons hold more than 50% of the relevant powers or rights - the ‘primary test’ and the ‘alternative’ test.

36. Subsection 165-12(6) states to apply the alternative test where at any time during the ownership test period one or more other companies beneficially own shares in the loss company.

37. It is proposed that 50% of the shares in Company A (the loss company) will be transferred to a company wholly owned and controlled by Taxpayer A and 50% to a company wholly owned and controlled by Taxpayer B. Therefore the alternative test is the relevant test to apply which requires consideration of subsections 165-150(2), 165-155(2) and 165-160(2).

38. Under subsection 165-150(2), if it is the case, or if it is reasonable to assume, that there are persons other than companies or trustees who (between them) control or are able to control, directly or indirectly through one or more interposed entities, the voting power in the company, those persons have more than 50% of the voting power in the company.

39. Under subsection 165-155(2) if there are persons other than companies who between them have the right to receive for their own benefit (whether directly or indirectly) more than 50% of any dividends that the company may pay, those persons have rights to more than 50% of the company’s dividends.

40. Subsection 165-160(2) has similar provisions regarding the right to receive capital distributions directly or indirectly.

41. Under the definition of ‘indirectly’ in subsection 995-1(1), entities are taken to have the right to receive dividends or capital of a company indirectly for their own benefit if they would receive the dividends or capital if the company were to distribute the dividends or capital and the dividends or capital were then successively distributed by each entity interposed between the company and the relevant entity.

42. Following the proposed restructure, the two C Class shares in Company A will each be held by two companies whose shares will be solely owned by Taxpayer A and Taxpayer B respectively (each company owning one share each). As Taxpayer A and Taxpayer B would indirectly have rights to any dividends or capital which might be paid on the C Class shares by Company A held by their respective 100% owned companies, it is the Commissioner’s view that for purposes of the COT in section 165-12 the disposal of the C Class shares will not result in the failure of the COT. Moreover, there are no shares in Company A that has any different voting rights, rights to dividends or rights to capital distributions.

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