Edited version of private advice

Authorisation Number: 1051678283647

Date of advice: 18 May 2020

Ruling

Subject: Subdivision 126-B of theIncome Tax Assessment Act 1997 (ITAA 1997)

Question 1

Is ABC regarded as a company under subsection 995-1(1) of the ITAA 1997 for the purposes of Subdivision 126-B of the ITAA 1997?

Answer

Yes.

Question 2

If the answer to Question 1 is "Yes", will ABC qualify for rollover under Subdivision 126-B of the ITAA 1997 for the transfer of shares in DEF and GHI to JKL?

Answer

Yes.

This ruling applies for the following period

1 July 2019 to 30 June 2021

The scheme commences on

1 July 2019

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 126-B

Income Tax Assessment Act 1997 section 855-15

Income Tax Assessment Act 1997 section 855-25

Income Tax Assessment Act 1997 Subdivision 975-W

Income Tax Assessment Act 1997 subsection 995-5(1)

Relevant facts and circumstances

ABC

1. ABC is a public institution owned, established and supervised by the Government.
2. ABC was established under the law of the Country.
3. ABC was established with 'an independent legal identity and enjoy full capacity to act'.
4. ABC can only be dissolved or liquidated by virtue of a law.
5. All assets and monies of ABC will flow back to the Government upon its dissolution or liquidation.
6. The only entity that has a beneficial interest in the ownership of ABC is the Government.
7. All returns on investments made by ABC are either reinvested or returned to the Government for use by the Government as public monies.
8. All monies provided to ABC and income derived from investments held by ABC are ultimately owned by the Government.
9. ABC is not a resident of Australia for Australian tax purposes.
10. ABC is not an association of persons carrying on a business as partners.
11. ABC is not a limited partnership.
12. ABC is not a non-entity joint venture.

ABC's Board of Directors

13. The management of ABC is undertaken by a Board of Directors.
14. Where a position of a member of the Board of Directors becomes vacant, a substitute member is appointed to continue the tenure of the predecessor.
15. ABC is authorised to carry out all acts which the Board of Directors may deem necessary or suitable for achieving its objectives.
16. In particular, ABC has full power to act and carry out a number of actions, including:

(i)          Exercise all voting rights with respect to any investments.

(ii)         Settle, compromise or submit to arbitration any claims, debts or indemnities due from or owing to ABC and initiate, defend or participate in suits or legal proceedings to protect the interest of ABC.

(iii)       Enter into agreements and sell or exchange any property and grant options for the purchase or exchange thereof.

(iv)       Grant loans and facilities from the fund or participate with banks and other financial establishments.

(v)        Exercise transfer, exchange or participation rights pertaining to any property held.

(vi)       Manage, operate, repair, improve, develop, preserve, mortgage or lease for any period any real property or any oil, mineral or gas properties, royalties, interest or rights held by ABC directly or through any corporation or other entity alone or jointly with others.

(vii)      Acquire, by any legal means, such as purchase, barter or transfer to ABC or to any company, corporation, establishment, organisation, union or other entity owned or controlled, directly or indirectly, by ABC, on the whole or any part of the business, good will rights or other assets of any company, corporation, establishment, organisation, union or other entity.

17. Further management responsibility is delegated to the Managing Director.
18. Directors of ABC are excluded from having a direct or indirect interest in any contracts, projects and transactions entered into or executed by ABC.

DEF and GHI

19. DEF and GHI are both corporate entities that are not residents of Australia for Australian tax purposes.
20. All of the shares in DEF and GHI are wholly-owned by ABC.
21. ABC holds the shares in DEF and GHI on capital account.
22. In respect of its Australian investments, DEF directly holds interests in a number of Australian real estate assets.
23. The shares in DEF and GHI will constitute taxable Australian property (TAP) as defined under section 855-15 of the ITAA 1997 just before and just after the time of the transfer of shares.
24. The shares held in DEF and GHI will not be trading stock as defined under section 70-10 of the ITAA 1997 of JKL just after the time of the transfer of shares.
25. The shares in DEF and GHI will not be registered emissions units per section 420-10 of the ITAA 1997 of JKL just after the time of the transfer of shares.
26. The shares in DEF and GHI do not constitute a right or convertible interest of a kind referred to in Division 130 of the ITAA 1997.
27. The shares in DEF and GHI do not constitute an option of the kind referred to in Division 134 of the ITAA 1997.

The Transaction

28. ABC has recently established a wholly-owned subsidiary entity, JKL, which is not a resident of Australia.
29. JKL is not an exempt entity, within the definition of that term in subsection 995-1(1)of the ITAA 1997, for the income year of the Transaction and therefore the ordinary and statutory income of JKL is not exempt from income tax.
30. ABC is proposing to transfer all of the shares in DEF and GHI to JKL s.
31. The sale of shares in DEF and GHI by ABC to JKL will be undertaken at market value.
32. It is expected that the transfer of shares in DEF and GHI by ABC will result in ABC making a capital gain.
33. ABC has not previously obtained roll-over relief pursuant to Subdivision 126-B of the ITAA 1997 in relation to the acquisition of the shares in DEF and GHI.
34. ABC and JKL will be foreign residents just before, and just after the share sale agreement for the transfer of the DEF and GHI shares is executed.
35. Both ABC and JKL will choose to obtain the Subdivision 126-B roll-over relief under paragraph 126-55(1)(b).

Reasons for decision

All legislative references are to the ITAA 1997 unless specified otherwise.

Question 1

Is ABC regarded as a company under subsection 995-1(1) of the ITAA 1997 for the purposes of Subdivision 126-B of the ITAA 1997?

Summary

Yes. ABC is a company as defined in subsection 995-1(1) and will therefore be considered a company for the purposes of applying the provisions in Subdivision 126-B.

Detailed reasoning

The provisions of Subdivision 126-B provide CGT roll-over to a company (the originating company) that transfers a CGT asset to, or creates a CGT asset in, another company (the recipient company) that is a member of the same 'wholly-owned group' (subsection 126-50(1)).

Section 975-500 details the requirements for a wholly-owned group:

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.

Subsection 975-505(1) provides that a company is a '100% subsidiary' of another company if all the shares in the subsidiary company are beneficially owned by the holding company, or one or more 100% subsidiaries of the holding company, or both.

As such, a critical consideration in the application of Subdivision 126-B is whether the originating and recipient entities are companies.

Subsection 995-1(1) defines the term 'company' as:

(a)  a body corporate; or

(b)  any other unincorporated association or body of persons;

but does not include a partnership or a non-entity joint venture.

Body corporate

The term 'body corporate' is not defined in the Income Tax Assessment Act 1936 or the ITAA 1997.

Miscellaneous Tax Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number (MT 2006/1) considers the definition of 'body corporate':

Body corporate

30. 'Body corporate' is not a defined term. The term takes its meaning from the general law. 'Body corporate' is a general term to describe an artificial entity having a separate legal existence. A body corporate has the ability to continue in existence indefinitely and to keep its identity regardless of changes to its membership. It also has the power to act, hold property, enter into legal contracts, sue and be sued in its own name, just as a natural person can.

31. A body corporate may be created:

· by common law, for example a chartered corporation;

· by statute, for example a Corporations Act company; or

· by registration pursuant to a statute, for example building societies, credit unions, trade unions and incorporated associations.

Section 9 of the Corporations Act 2001 (Cth) (Corporations Act) defines 'body corporate' as:

(a) includes a body corporate that is being wound up or has been dissolved; and

(b) in this Chapter (except section 66A) and section 206E includes an unincorporated registrable body.

The Macquarie Dictionary 3^rd edition, 1997 Macquarie University, NSW, (Macquarie Dictionary) defines a 'body corporate' as:

'an association or group of persons legally incorporated in a corporation'

The Macquarie Dictionary also defines the term 'corporation' as:

An association of individuals, created by law or under authority of law, having a continuous existence irrespective from that of its members, and powers and liabilities distinct from those of its members.

Furthermore, the Corporations Act defines the term 'corporation':

"corporation" has the meaning given by section 57A.

Section 57A of the Corporations Act states:

(1) Subject to this section, in this Act, corporation includes:

(a) a company; and

(b) any body corporate (whether incorporated in this jurisdiction or elsewhere); and

(c) an unincorporated body that under the law of its place of origin, may sue or be sued, or may hold property in the name of its secretary or of an office holder of the body duly appointed for that purpose.

(2) Neither of the following is a corporation:

(a) an exempt public authority;

(b) a corporation sole.

Accordingly, a 'body corporate', and therefore a 'company' for the purposes of the definition in subsection 995-1(1) includes a corporation which is a body incorporated by statute that:

(i)       has a separate legal existence conferred by the appropriate legal authority,

(ii)      has the ability to continue indefinitely,

(iii)    has the ability to keep its identity regardless of changes to its membership,

(iv)    has the power to act, hold property and enter into legal contracts in its own name, and may sue or be sued.

Is ABC a body corporate?

Based upon an analysis of the facts, ABC will meet the definition of 'body corporate' within the definition of a 'company' pursuant to subsection 995-1(1).

Is ABC a partnership or non-entity joint venture?

In order for ABC to be considered to be a company, it must also be shown not to be a partnership or non-entity joint venture.

Subsection 995-1(1) defines a 'partnership' as:

(a)  an association of persons (other than a company or a limited partnership) carrying on a business as partners or in receipt of ordinary income or statutory income jointly; or

(b)  a limited partnership.

A 'limited partnership' is defined by subsection 995-1(1) to be:

(a) an association of persons (other than a company) carrying on business as partners or in receipt of *ordinary income or *statutory income jointly, where the liability of at least one of those persons is limited; or

(b) an association of persons (other than one referred to in paragraph (a)) with legal personality separate from those persons that was formed solely for the purpose of becoming a *VCLP, an *ESVCLP, an *AFOF or a *VCMP and to carry on activities that are carried on by a body of that kind.

Subsection 995-1(1) defines 'non-entity joint venture' as:

an arrangement that the Commissioner is satisfied is a contractual arrangement:

(a) under which 2 or more parties undertake an economic activity that is subject to the joint control of the parties; and

(b) that is entered into to obtain individual benefits for the parties, in the form of a share of the output of the arrangement rather than joint or collective profits for all the parties.

Based on an analysis of the facts, ABC is a company as it meets the definition of 'body corporate' and is not excluded from being a company by virtue of being a partnership or non-entity joint venture.

Conclusion

ABC fulfils the requirements of the definition of company contained in subsection 995-1(1) of the ITAA 1997 as it is a body corporate that is neither a partnership nor non-entity joint venture.

Question 2

If the answer to Question 1 is "Yes", will ABC qualify for rollover under Subdivision 126-B of the ITAA 1997 for the transfer of shares in DEF and GHI to JKL?

Summary

ABC will qualify for the roll-over under Subdivision 126-B of the ITAA 1997 for the transfer of shares in DEF and GHI to JKL.

Detailed reasoning

The provisions of Subdivision 126-B provide CGT roll-over to a company (the originating company) that transfers a CGT asset to, or creates a CGT asset in, another company (the recipient company) that is a member of the same 'wholly-owned group' (subsection 126-50(1)).

Trigger Event

Subsections 126-45(1) and (2) of Subdivision 126-B state:

126-45(1)

There may be a roll-over if a *CGT event (the trigger event) happens involving a company (the originating company) and another company (the recipient company) in the circumstances set out in section 126-50.

126-45(2)

Only these *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).

Subsections 126-45(1) and 126-45(2) require that a CGT event of a specified type happened to the originating company. CGT event A1 is one of the listed CGT events in paragraph 126-45(2)(a) for the roll-over.

When ABC transfers its interest in DEF and GHI to JKL, CGT event A1 (the trigger event) will happen.

Section 126-50 requirements for roll-over

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

Section 975-500 (as referred to by subsection 995-1(1)) provides the definition of 'wholly-owned group' as:

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.

Subsection 975-505(1) then defines a 100% subsidiary as:

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.

JKL is a company incorporated outside Australia and Question 1 has determined that ABC is a company. ABC owns all of the shares in JKL.

As such, JKL is a 100% subsidiary of ABC and they are members of the same wholly-owned group.

Not trading stock or a registered emissions unit

Subsection 126-50(2) prohibits the roll-over asset being trading stock of the recipient company just after the time of the trigger event or a registered emissions unit.

The roll-over assets are the shares in DEF and GHI, which will not be trading stock in the hands of JKL just after the transfer (trigger event), nor are they a unit or an Australian carbon credit unit (registered emissions units per section 420-10). Accordingly, the condition in subsection 126-50(2) is met.

Right or convertible interest

Subsection 126-50(3) contains conditions where the rollover asset is a right or convertible interest referred to in Division 130. As the shares in DEF and GHI are not such assets, the subsection is not applicable.

Option

Subsection 126-50(3A) contains conditions where the rollover asset is an option of the kind referred to in Division 134. As the shares in DEF and GHI are not such assets, the subsection is not applicable.

Recipient not an exempt entity

Subsection 126-50(4) 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.

Subsection 995-1(1) defines 'exempt entity' as:

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.

Note: See section 11-5 for a list of entities of the kind referred to in paragraph (a).

JKL is not an exempt entity, within the definition of that term in subsection 995-1(1). Accordingly, subsection 126-50(4) is met.

Taxable Australian Property (TAP)

Subsection 126-50(5) provides that where both the originating company and the recipient company are foreign residents, the relevant CGT asset must be TAP just before and just after the trigger event.

The shares in DEF and GHI will constitute TAP as defined under section 855-15 of the ITAA 1997 just before and just after the trigger event. Accordingly, subsection 126-50(5) is satisfied.

Remaining provisions

Subsections 126-50(6)-(9) are not relevant to the current transaction.

Therefore, all the requirements for roll-over in section 126-50 have been met.

Capital gain

Subsection 126-55(1)(a) limits the roll-over to the following three circumstances:

the originating company makes a capital gain under the trigger event; or

the originating company makes no capital loss and is not entitled to a deduction; or

the originating company acquired the roll-over asset before 20 September 1985.

ABC is expected to make a capital gain under CGT event A1 as a result of the transfer. Both ABC and JKL will choose to obtain the Subdivision 126-B roll-over relief under paragraph 126-55(1)(b).

Accordingly, ABC can disregard any capital gain that arises from the transfer of its interest in DEF and GHI to JKL.

Consequences of CGT roll-over

Section 126-60 lists the consequences of a CGT roll-over for both the originating and recipient company. Consequences for the recipient company in a disposal case are outlined at subsection 126-60(2) and include:

For a disposal case, if the originating company *acquired the roll-over asset on or after 20 September 1985:

(a) the first element of the asset ' s *cost base (in the hands of the recipient company) is the asset ' s cost base (in the hands of the originating company) when the recipient company acquired it; and

(b) the first element of the asset ' s *reduced cost base (in the hands of the recipient company) is worked out similarly.

Note 1:

There are special indexation rules for roll-overs: see Division 114.

Note 2:

The reduced cost base may be modified for a roll-over happening after a demerger: see section 125-170.

There will be consequences for JKL as a result of the CGT roll-over disposal case, one of which being that JKL as the recipient company will retain the asset's cost base as it was for ABC, the originating company.

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