Edited version of private advice

Authorisation Number: 1051646557752

Date of advice: 25 March 2020

Ruling

Subject: General value shifting regime

Relevant facts and circumstances

·   XX Pty Ltd (the Company) was incorporated as a private company on XX with the following ordinary shares held by the XX Directors of the Company:

-  A class shares - X issued to X at $X each fully paid (i.e. a total of $X issued for A class shares)

-  B class shares - X issued to X at $X each fully paid (i.e. a total of $X issued for B class shares)

-  (collectively, the Shareholders).

·   The Shareholders are both Australian residents for tax purposes and the shares are all post-CGT assets.

·   There have been no changes to the Shareholders or their interests since incorporation. For completeness, there are no redeemable preference shares (RPS) on issue (section X, Company Constitution).

·   Although the Company Constitution provides for additional classes of shares (X - X ordinary shares and X RPS, section X), only A and B class shares have been issued.

·   The rights and restrictions attached to the A class and B class shares are identical - namely, the same right to receive a notice of general meeting, voting rights, dividends and a distribution of surplus assets if the company is wound up (e.g. Company Constitution clauses X).

·   X resigned as a Director of the company in 20XX.

·   Following this resignation, X (now the Sole Director) would like to simplify the shareholdings by relabelling X B class shares to X A class shares at $X each (fully paid), which will continue to be held by X on conversion (the Share Conversion).

·   X will continue to hold his X A class shares.

·   To achieve this Share Conversion, a members' special resolution will be passed at a members' meeting to amend the Company Constitution at section X to include 'conversion of shares from B class shares into A class shares' (the Special Resolution). The Director (X) will then resolve to relabel X shares, and the company register details will be updated to reflect this. ASIC requirements will need to be met in this regard.

·   Notwithstanding the word "conversion", the Special Resolution will not vary the rights of the B class shares in such a way that causes a deemed variation of class rights under section 246C of the Corporations Act 2001 (Cth).

·   There is no consideration payable under the Share Conversion.

·   There will be no change in the total amount allocated to the share capital of the company, and the proportion of equity owned by each shareholder in the share capital account will be maintained.

·   The market value of the A and B class shares are not currently available, however since there is no change to the rights and obligations of each shareholder, nor the amount of equity held by each shareholder, we have assumed there will be no change in the market value of either interest as a result of the conversion.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-250

Income Tax Assessment Act 1997 Division 725

Income Tax Assessment Act 1997 section 725-145

Reasons for Decision

Summary

The proposed transaction will not give rise to a DVS or IVS and therefore CGT event K8 will not occur to the Shareholders, nor will any other CGT implications arise for the Company or the Shareholders.

Detailed reasoning Question 1

The GVSR contained in Divisions 723, 725 and 727 include rules for created rights, and DVS and IVS.

DVS

Division 725 may apply where there is a DVS under a scheme involving equity interests in an entity.

Section 725-145 considers when there is a DVS. Generally, a DVS happens when there is an increase in the value of the equity or loan interests - or the interests are issued at a discount - and a decrease in the value of other interests in the target entity.

Subsection 725-145(1) states that direct value shift under a scheme involving equity or loan interests in an entity (the target entity) if:

(a)  there is a decrease in the market value of one or more equity or loan interests in the target entity; and

(b)  the decrease is reasonably attributable to one or more things done under the scheme, and occurs at or after the time when that thing, or the first of those things, is done; and

(c)  either or both of subsections (2) and (3) are satisfied.

Subsection 725-145(2) states that one or more equity or loan interests in the target entity must be issued at a discount. The issue must be, or must be reasonably attributable to, the thing, or one or more of the things, referred to in paragraph (1)(b). It must also occur at or after the time referred to in that paragraph.

Subsection 725-145(3) states that there must be an increase in the market value of one or more equity or loan interests in the target entity. The increase must be reasonably attributable to the thing, or to one or more of the things, referred to in paragraph (1)(b). It must also occur at or after the time referred to in that paragraph.

However, a DVS will not have consequences under Division 725 if the sum of the decreases in market value of all the down interests (the ordinary shares) under the same scheme does not exceed $150,000: subsection 725-70(1).

In this regard, subsection 725-70(1) specifically states:

For a down interest of which you are an affected owner, the direct value shift has consequences under this Division only if the sum of the decreases in the market value of all down interests because of direct value shifts under the same scheme as the direct value shift is at least $150,000.

Application to the Share Conversion

In the current circumstances, the Company intends to relabel the B Class Shares at $X each, as A class shares paid up to the same amount under the Share Conversion. Under the scheme, there will not be a change to the market value of the A Class and B class shares as required by Subsection 725-145(1)(a) or (b), since there will be no change to the rights or obligations that currently exist. Identical rights and obligations for both share classes are outlined in the Company Constitution.

Based on the facts, it is considered that the relabelling of B class to A class shares would not cause a DVS which is reasonably attributable to an increase in the market value of the A class Shares.

For completeness, the effect of the de minimis rule in section 725-70 is that only a decrease in the market value of all 'down' interests (and corresponding increase to the market value of all 'up' interests) of $150,000 or more would result in the proposed transaction having DVS tax consequences. Based on facts, it is considered that even if a DVS was identified, the exception in section 725-90 will apply so that there would be no consequences under the DVS rules.

IVS

An indirect value shift as defined in subsection 727-150(3) involves an unequal exchange of economic benefits between two entities, called the losing entity and the gaining entity. Based on the facts, there is no exchange of economic benefits, as no economic interest has changed between the Shareholders. Accordingly, the IVS rules will not apply.

CGT Event K8

Section 104-250 states that "CGT event K8 happens if there is a taxing event generating a gain for a down interest under section 725-245". As outlined above, the Share Conversion will not trigger a DVS, and even if a DVS was triggered, it would have no consequences because of the de minimis threshold in section 725-70. Accordingly, CGT event K8 will not arise for the Shareholders on the Share Conversion.

Detailed reasoning Question 2

The Share Conversion will not give rise to CGT event A1 for X (subsection 104-10(1)), as it does not amount to a disposal of X's B class shares, since she remains the beneficial owner of the shares, albeit they are relabelled as A class shares. There is no consideration offered under the Share conversion.

The Share Conversion will not give rise to CGT event C2 for X (subsection 104-25(1)), as the share conversion should not amount to a redemption or cancellation of the shares for CGT purposes. Specifically, X's B class shares haven't been cancelled, but rather renamed / relabelled.

CGT event H2 happens if an act, transaction or event occurs in relation to a CGT asset that you own and the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base (subsection 104 155(1)). Even if there is no variation of rights attaching to the shares, the 'conversion' to a new class by relabelling (albeit the same rights/obligations) may still be an act, transaction or event with respect to that class. However, H2 should not occur if there is no change in beneficial ownership, since X continues to hold the interest before and after conversion.

In any case, as no proceeds (capital or otherwise) will be received in respect of the Share Conversion, no Shareholder should make a capital gain as a result of the event happening. The acquisition dates of the shares will not be affected if CGT event H2 occurs.

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