Edited version of private advice

Authorisation Number: 1051564603275

Date of advice: 15 August 2019

Ruling

Subject: Rollover relief on the disposal of shares - flip up arrangement

Question

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 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are shareholders in the Company (the Shareholders).

The Shareholders are Australian residents for tax purposes.

All shares in the Company are held on capital account.

All shares currently on issue are ordinary shares.

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

The Company is seeking to expand into the Country A and, to this end, wishes to 'flip up' to a parent company (Parent Co).

A number of actions will be undertaken to set up the arrangement including:

1)    The Company's board will make a resolution related to the arrangement, recommend to Shareholders that they approve the flip up transaction and, subject to Shareholders' approval, to execute such documents as necessary to carry out the flip up transaction.

2)    Shareholders will resolve to approve the flip up transaction

3)    The parties will execute the relevant agreements and forms

4)    Parent Co will make the written choice to apply section 615-65 within two months of the proposed flip up transaction

5)    Each Shareholder will prepare their returns so as to make the choice to apply rollover relief under Division 615 of the ITAA 1997.

Parent Co has no shares on issue at this stage but on issue will be equivalent to ordinary shares.

The Shareholders of the Company will swap their shares in the Company on a 1:1 basis for shares Parent Co. Following the arrangement, Parent Co will own all of the shares in the Company and the Shareholders will own all of the shares in Parent Co.

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.

Section 995-1(1) of the ITAA 1997 states that a 'member', in relation to an entity, has the meaning given by section 960-130. Section 960-130 states that where an entity is a company, a stockholder is a member of the company.

In this case, the Shareholders are all member of the Company, the requirement in paragraph 615-5(1)(a) is satisfied.

Paragraph 615-5(1)(b) requires more than one entity to own all the shares in the company referred to in Paragraph 615-5(1)(a). Section 995-1 defines share in a company as a share in the capital of the company, and includes stock. There are a number of members in the Company, which collectively own 100% of the ordinary shares. Therefore, the requirement in paragraph 615-5(1)(b) is satisfied.

Paragraph 615-5(1)(c) of the ITAA 1997 requires that, under a scheme for reorganising 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).

Paragraph 615-5(1)(c) of the ITAA 1997 requires that, under a scheme for reorganising 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. The Shareholders will receive shares in the Parent Co, and nothing else.

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 2 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 the shares in the Company by the Shareholders.

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