Edited version of your written advice

Authorisation Number: 1051502103050

Date of advice: 8 April 2019

Ruling

Subject: Restructure – CGT rollover relief – Part IVA

Question

Will the interposition of a Holding Company (NewCo) between Company A and its shareholders satisfy the conditions of Division 615 of the Income Tax Assessment Act 1997 (ITAA 1997) such that any capital gain that would otherwise arise to the rulees is disregarded under subsection 124-10(2) of the ITAA 1997?

Answer

Yes

Question

Will the interposition of NewCo between Company A and its shareholders satisfy the conditions of Division 615 of the ITAA 1997 such that the Company A tax consolidated group will be taken not to have ceased and will continue in existence under section 703-70 of the ITAA 1997?

Answer

Yes

Question

Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to include an amount in the assessable income of the rulees on CGT event A1 happening as a result of the proposed restructure to interpose NewCo between Company A and its shareholders?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commences on:

1 July 2018

Relevant facts and circumstances

Group Structure

Company A is an Australian resident company that is a private company for income tax purposes.

The Company A group currently comprises Company A and its four wholly owned subsidiaries, which are non-trading trustee companies.

The Company A group is consolidated for income tax purposes.

The Company A tax consolidated group has entered into a tax sharing agreement (TSA) and a tax funding agreement (TFA).

Following the Global Financial Crisis (GFC), Company A restructured its business operations. It continues to pursue its strategic objectives which assume growth over the coming years. This growth may be achieved either organically or via acquisitions.

All Company A shareholders are Australian residents for income tax purposes.

Proposed Restructure Steps

The steps involved in the proposed restructure are as follows:

(i) Company A directors and shareholders will approve a new constitution and shareholder agreement for NewCo. These documents will mirror the existing terms and conditions currently in place for Company A.

(ii) NewCo will be incorporated as a proprietary limited company with one $1 ordinary share which will be held by an entity B that is not a shareholder of Company A.

(iii) The current shareholders will transfer all of their shares in Company A to NewCo under a share sale agreement (SSA).

(iv) Under the SSA, NewCo will issue ordinary shares to the shareholders, in the same proportion as their shareholding in Company A (ignoring the share held by entity B). That is, a one-for-one scrip for scrip transaction.

(v) The shares issued by NewCo to the Company A shareholders will be held from the time of issue and will not be transferred or otherwise dealt with until after the completion of the restructure.

(vi) Immediately after completion, each shareholder will:

- own a whole number of shares in NewCo,

- have the same percentage of shareholding in NewCo as they had in Company A immediately prior to the restructure (ignoring the one share held by entity B).

(vii) Immediately upon completion of the share transfer, NewCo will commence the process to cancel the initial one ordinary share held by entity B by way of selective buyback.

(viii) A new shareholder agreement, which will supersede the existing Company A shareholder agreement, will be executed with NewCo as a party to the shareholder agreement.

(ix) A deed of accession will be executed in relation to the TSA/TFA recognising that NewCo has joined the tax consolidated group and will replace Company A as the head company.

(x) Within 28 days of the completion date, NewCo will lodge NAT 71275 ‘Notification of the continuation of a consolidated group with a new interposed head entity’ with the Australian Taxation Office as notification that it is the new head entity of the Company A income tax consolidated group.

Purpose of restructure

The proposed restructure represents a significant transition in the legal structure of the Company A Group. The restructure steps are intended to ‘modernise’ Company A’s corporate structure in a manner consistent with other businesses within the same industry. Specifically, the introduction of a holding company should enable Company A to restructure a number of aspects of its business which will enable it to:

● Enhance its ability to fund future growth.

● Novate its valuable assets away from Company A to a holding company which would be expected to have a much lower operational risk profile than Company A.

● Transfer the employment of all Company A Group employees to a new ‘services’ entity (ServiceCo) to be established. ServiceCo will be wholly owned by NewCo.

● Transfer its leases as well as its fixed assets to a ‘services’ entity.

● Enable Company A to be singularly focused – including the ability to have a specialised board and governance structure.

Commercial benefits of the restructure

The introduction of a new holding company will modernise’ Company A’s corporate structure in a manner consistent with other entities within the same industry. Specifically, it will provide the following commercial benefits to Company A and its business:

● It will allow for the movement of Company A’s valuable assets away from Company A (with a moderate level of risk), to a holding company which would be expected to have a very low risk profile.

● Allow for the relocation of all of Company A’s employees to a ‘services’ entity which would be a 100% subsidiary company of NewCo and act as the employer entity for the group.

● Allow for the transfer of Company A’s commercial office lease as well as its fixed assets (both owned and leased) to a services entity.

● Flexibility to establish a differentiated Board within the Company A Group depending on specialised skill and experience.

● The interposition of NewCo will create an advantageous funding structure.

Assumptions

For the purposes of the questions raised in this Application, the Commissioner is asked to make the following factual assumptions:

● All Shareholders hold their shares in Company A on capital account.

● The market value of the Shareholders’ shares are greater than their respective cost bases. Accordingly, a disposal of shares in Company A for an arms-length consideration will to give rise to a capital gain in the hands of each Shareholder.

● Shortly after the conclusion of the restructure of the Company A Group, Company A will:

● Transfer ownership its interests in the fund manager trust to NewCo,

● Company A will incorporate a 100% subsidiary company (ServiceCo) which will:

○ be the employing entity for the Company A Group.

○ take over the commercial lease agreements in relation Company A’s tenancy.

○ take over the lease agreements in relation to Company A’s leased assets.

○ acquire and hold Company A’s owned fixed assets.

○ enter into any new commercial leases for office tenancy as and when required.

○ acquire any new leased or owned fixed assets for the Company A group.

● Company A, NewCo and ServiceCo will enter into a shared services agreement under which ServiceCo will provide shared services for a commercial charge.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 124-10

Income Tax Assessment Act 1997 Division 615

Income Tax Assessment Act 1997 Section 615-5

Income Tax Assessment Act 1997 Section 615-15

Income Tax Assessment Act 1997 Section 615-20

Income Tax Assessment Act 1997 Section 615-25

Income Tax Assessment Act 1997 Section 615-30

Income Tax Assessment Act 1997 Section 703-5

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177F

Reasons for decision

Question 1

Summary

The interposition of NewCo between Company A and its shareholders will satisfy the conditions of Division 615 such that any capital gain that would otherwise arise to the shareholders will be disregarded.

Detailed reasoning

Capital Gain - CGT event A1

Section 104-10 of the ITAA 1997 provides that CGT event A1 will happen on the disposal of a CGT asset. If the capital proceeds received are greater than the cost base of the CGT asset, a capital gain will arise. Alternatively, if the capital proceeds are less than the asset’s reduced cost base, a capital loss will occur.

The Company A shares are CGT assets of the Company A shareholders. The disposal of the Company A shares to NewCo will result in CGT event A1 happening. The shareholders will make a capital gain if the capital proceeds are more than the cost base of the shares.

Roll-over relief – Division 615

Division 615 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.

Division 615 contains a number of conditions for eligibility to choose roll-over. The main conditions that are relevant to the Company A restructure are:

● at least two entities must own all the shares or units in the 'original entity' (Company A) (paragraph 615-5(1)(b))

● there must be a scheme for reorganising the original entity's affairs, and consideration for the disposal of the shares or units in the original entity must consist only of receiving shares in another company (the 'interposed company') and nothing else (paragraph 615-5(1)(c))

● the interposed company must own all the shares or units in the original entity immediately after all the exchanging members have disposed of their shares or units in the original entity (the 'completion time') (section 615-15)

● immediately after the completion time, each exchanging member must own a whole number of shares in the interposed company (paragraph 615-20(1)(a))

● immediately after the completion time, each exchanging member must own a percentage of the shares in the interposed company that were issued to all the exchanging members of the original entity that is equal to the percentage of the shares or unit in the original entity that the exchanging member owned (paragraph 615-20(1)(b))

● immediately after the completion time, the exchanging members must own all the shares in the interposed company, or entities other than those members must own no more than 5 shares in the interposed company and the market value of those shares is such that it is reasonable to treat the exchanging members as owning all the shares (subsection 615-25(3))

● the shares issued in the interposed company must not be redeemable shares (subsection 615-25(1)), and

● the market value ratio test in subsection 615-20(2) is met.

The above conditions are all satisfied because:

● immediately prior to the restructure there are more than two shareholders of Company A,

● under the scheme, there is to be a reorganisation, and under that reorganisation, Company A shareholders will dispose of all their shares in Company A in exchange for shares in NewCo and nothing else,

● all Company A shareholders will dispose of their shares in Company A to NewCo, and NewCo will own all the shares in Company A just after the completion time,

● immediately after the completion time, each Company A shareholder will own a whole number of shares in NewCo,

● under the scheme, NewCo will acquire the shares from Company A shareholders on a one for one basis, therefore there will be no change in the percentage shareholding of each shareholder,

● immediately after the completion time, the exchanging members will own all but one $1 share representing less than 0.001% of the total market value of all shares,

● the shares issued in NewCo are not redeemable, and

● under the scheme, Company A shareholders will acquire NewCo shares on a one for one basis, therefore the market value ratio test in subsection 615-20(2) is met.

Additionally, under section 615-30 of the ITAA 1997 if the original entity was a head company of a tax consolidated group, the interposed entity must choose to become the head company of the tax consolidated group. You have advised that NewCo will elect under subsection 615-30(2) that the Company A tax consolidated group will continue to exist after the restructure, and notify the Commissioner within 28 days in the required manner (refer to Question 2).

Therefore, under subsection 615-5(2), Company A shareholders are taken to have chosen to obtain roll-over relief on CGT event A1 happening at the time of the restructure. As a result, any capital gain from CGT event A1 happening will be disregarded in accordance with subsection 124-10(2).

Question 2

Summary

Company A tax consolidated group will continue to exist with NewCo replacing Company A as the head company of the group.

Detailed reasoning

Under subsection 615-30(2), the interposed company must choose that the consolidated group continues at and after the time of the restructure. Such a choice must be made within 28 days after the restructure.

Where the interposed company chooses under subsection 615-30(2) that the consolidated group will continue in existence after the restructure, section 703-70 provides that the consolidated group is taken not to have ceased to exist under subsection 703-5(2) because the original head company is no longer the head company of the group.

You have advised that NewCo will advise the Commissioner within 28 days of the restructure taking place, therefore the requirements of subsection 615-30(2) will be met, and the consolidated group is taken not to have ceased to exist at the time of the restructure, and NewCo will be the new head company of the consolidated group.

Question 3

Part IVA of the ITAA 1936 (Part IVA) is a general anti-avoidance provision. Part IVA gives the Commissioner the power to cancel a ‘tax benefit’ that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules (PS LA 2005/24) deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise the power in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met:

1. there must be a scheme within the meaning of section 177A of the ITAA 1936

2. a tax benefit arises that was obtained or would be obtained in connection with the scheme but for Part IVA of the ITAA 1936 and

3. having regard to the matters in subsection 177D(2) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies.

The scheme

Subsection 177A(1) provides that:

" scheme” means:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable by legal proceedings; and

(b) any scheme, plan, proposal, action, course of action or course of conduct;

The scheme is the arrangement described in the facts (‘Proposed Restructure Steps’), being:

● the incorporation of NewCo,

● current Company A shareholders will dispose of their shares in Company A to NewCo on a one for one basis, and NewCo will then own all the shares in Company A, and

● immediately following the transfer, NewCo will elect to be the head company of the consolidated group.

Tax benefit

Subsection 177C(1) of the ITAA 1936 defines four kinds of tax benefit relating broadly to an amount not being included in the assessable income of the taxpayer of a year of income, a deduction being allowable to the taxpayer in relation to a year of income, a capital loss being incurred by the taxpayer during a year of income and a foreign tax credit being allowable to the taxpayer.

The potential benefit of the restructure from a tax perspective would be the exclusion of the capital gain from the assessable income of the shareholders as a result the application of the replacement asset rollover under section 124-10 of the ITAA 1997.

The applicant has provided clear commercial reasons for undertaking the scheme (refer ‘Commercial benefits of the restructure’ above), and there is no evidence to suggest that the scheme has been entered into for the purpose of creating the circumstances necessary to enable the rollover to be obtained. Therefore, any tax benefit arising from the scheme will be excluded from the operation of Part IVA by paragraph 177C(2)(a) of the ITAA 1936.

Subsection 177D(2) of the ITAA 1936

As there is no tax benefit to which Part IVA may potentially apply it is not necessary to consider the eight factors contained in subsection 177D(2) of the ITAA 1936.

Therefore, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to the restructure.

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).