Edited version of private advice

Authorisation Number: 1051781225177

Date of advice: 17 November 2020

Ruling

Subject: Capital gains tax roll-over relief under subdivision 122A of the Income Tax Assessment Act 1997

Question

Is the Taxpayer eligible to choose to obtain a roll-over under subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) on the proposed transfer of shares in Company A to NewCo Pty Ltd, and thus disregard any capital gain realised on the disposal of those shares in accordance with subsection 122-40(1)?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer owns 100% of the ordinary shares in Company A.

The Taxpayer's spouse owns 100% of C Class shares in Company A.

There are no other shareholders or shares classes on issue.

The Taxpayer holds their Company A Shares on capital account and not as trading stock. They are used to generate assessable income and are not a personal use asset or a collectable.

The Taxpayer intends to incorporate a new private company (NewCo Pty Ltd) in which The Taxpayer will be the sole founding shareholder.

The Taxpayer will then dispose of their Company A Shares to NewCo Pty Ltd in return for additional non-redeemable ordinary shares in NewCo Pty Ltd.

After the additional shares are issued, The Taxpayer will own all of the issued shares in NewCo Pty Ltd.

NewCo Pty Ltd will hold the Company A Shares on capital account and not as trading stock.

The Taxpayer is, and NewCo Pty Ltd once incorporated will be, a resident of Australia for Australian income tax purposes.

Once incorporated NewCo Pty Ltd will not be an 'exempt entity', as defined in subsection 995 1(1) of the ITAA 1997

The Taxpayer does not have any loans or other liabilities in respect of the Company A Shares. Accordingly, NewCo Pty Ltd will not be making an undertaking to discharge a liability in respect of the Company A Shares on behalf of The Taxpayer in respect of the disposal of The Taxpayer's Company A Shares to NewCo Pty Ltd.

There are no further steps planned or in contemplation in relation to this arrangement.

Assumption(s)

The market value of the shares The Taxpayer receives from NewCo Pty Ltd for Company A Shares will be substantially the same as the market value of the Company A Shares disposed of by The Taxpayer to NewCo Pty Ltd.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 subsection 40-30(2)

Income Tax Assessment Act 1997 section 70-10

Income Tax Assessment Act 1997 section 70-12

Income Tax Assessment Act 1997 section 108-10

Income Tax Assessment Act 1997 subsection 108-10(2)

Income Tax Assessment Act 1997 section 108-20

Income Tax Assessment Act 1997 subsection 108-20(2)

Income Tax Assessment Act 1997 paragraph 108-20(2)(a)

Income Tax Assessment Act 1997 Subdivision 122-A

Income Tax Assessment Act 1997 section 122-15

Income Tax Assessment Act 1997 section 122-20

Income Tax Assessment Act 1997 subsection 122-20(1)

Income Tax Assessment Act 1997 paragraph 122-20(1)(a)

Income Tax Assessment Act 1997 subsection 122-20(2)

Income Tax Assessment Act 1997 subsection 122-20(3)

Income Tax Assessment Act 1997 paragraph 122-20(3)(a)

Income Tax Assessment Act 1997 subsection 122-20(4)

Income Tax Assessment Act 1997 section 122-25

Income Tax Assessment Act 1997 subsection 122-25(1)

Income Tax Assessment Act 1997 subsection 122-25(2)

Income Tax Assessment Act 1997 subsection 122-25(2) item 1(a) of the table

Income Tax Assessment Act 1997 subsection 122-25(2) item 1(b) of the table

Income Tax Assessment Act 1997 subsection 122-25(2) item 1(c) of the table

Income Tax Assessment Act 1997 subsection 122-25(2) item 1(d) of the table

Income Tax Assessment Act 1997 subsection 122-25(2) item 1(e) of the table

Income Tax Assessment Act 1997 subsection 122-25(3)

Income Tax Assessment Act 1997 subsection 122-25(4)

Income Tax Assessment Act 1997 subsection 122-25(5)

Income Tax Assessment Act 1997 subsection 122-25(6)

Income Tax Assessment Act 1997 subsection 122-25(6)(a)

Income Tax Assessment Act 1997 subsection 122-25(7)

Income Tax Assessment Act 1997 section 122-35

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

Income Tax Assessment Act 1936 section 6(1)

Income Tax Assessment Act 1936 section 124ZO

Income Tax Assessment Act 1936 section 124ZQ

Reasons for decision

Unless otherwise stated all references are to the Income Tax Assessment Act 1997 (ITAA 1997)

Question

Is The Taxpayer eligible to choose to obtain a roll-over under Subdivision 122-A of the ITAA 1997, on the proposed transfer of Company A Shares to NewCo Pty Ltd and thus disregard any capital gain realised on the disposal of those shares in accordance with subsection 122-40(1)?

Summary

Yes, the proposed transfer of Company A Shares to NewCo Pty Ltd will satisfy the requirements of Subdivision 122-A, and thus The Taxpayer may choose to obtain a roll-over under Subdivision 122-A, such that the capital gain realised on that disposal will be disregarded in accordance with subsection 122-40(1).

Detailed reasoning

Section 122-15 states:

If you are an individual or a trustee, you can choose to obtain a roll-over if one of the *CGT events (the trigger event) specified in this table happens involving you and a company in the circumstances set out in sections 122-20 to 122-35.

The Taxpayer is an individual and intends to dispose of their shares in Company A Pty Ltd to NewCo Pty Ltd.

The disposal of shares in a company is an A1 event as listed in the table and if the conditions in sections 122-20 to 122-35 are satisfied, The Taxpayer will be able to choose to obtain a roll-over.

Section 122-20 - What you receive for the trigger event?

Subsection 122-20(1) provides:

The consideration you receive for the trigger event happening must be only:

(a) *shares in the company; or

(b) for a *disposal of a *CGT asset, or all the assets of a business, to the company (a disposal case) - shares in the company and the company undertaking to discharge one or more liabilities in respect of the asset or assets of the *business (as appropriate).

Note: There are rules for working out what are the liabilities in respect of an asset: see section 122-37.

In return for their shares in Company A Pty Ltd, The Taxpayer will receive ordinary shares in NewCo Pty Ltd, so paragraph 122--20(1)(a) will be satisfied.

Subsection 122-20(2) provides:

The *shares cannot be *redeemable shares.

The term 'redeemable shares' is defined in subsection 995-1(1) as:

redeemable shares means:

(a)          *shares that are liable to be redeemed; or

(b)          shares that, at the option of the company that issued them, are liable to be redeemed.

The shares being issued by NewCo Pty Ltd to The Taxpayer will be ordinary shares in NewCo Pty Ltd and not be 'redeemable shares' as defined in subsection 995-1.

Subsection 122-20(3) states

The *market value of the *shares you receive for the trigger event happening must be substantially the same as:

(a) for a disposal case - the market value of the asset or assets you disposed of, less any liabilities the company undertakes to discharge in respect of the asset or assets (as appropriate); or

(b) for another trigger event (a creation case) - the market value of the CGT asset created in the company (the created asset).

The Taxpayer will dispose of their Company A Shares to NewCo Pty Ltd, which is a disposal case under paragraph 122-20(3)(a).

In respect of paragraph 122-20(3)(a), subsection 122-30(4) states:

In working out if the requirement in paragraph (3)(a) is satisfied, if the *market value of the *shares is different to what it would otherwise be only because of the possibility of liabilities attaching to the asset or assets, disregard the difference.

As there are no liabilities attached to the Company A Shares, subsection 122-20(4) has no application.

In respect of the market value of the shares The Taxpayer receives from NewCo Pty Ltd for their Company A Shares, the market value of the shares in NewCo Pty Ltd will be substantially the same[1] as the market value of the Company A Shares.

As such subsection 122-20(3) will be satisfied.

All the relevant subsections of section 122-20 will thus be satisfied in respect of The Taxpayer's disposal of their Company A Shares to NewCo Pty Ltd[2].

Section 122-25 Other requirements to be satisfied

Subsection 122-25(1) provides

You must own all the *shares in the company just after the time of the trigger event.

Note: You must own the shares in the same capacity as you owned or created the assets that the company now owns.

The Taxpayer, as founding shareholder of NewCo Pty Ltd will own all the shares in NewCo Pty Ltd prior to the disposal of their Company A Shares to NewCo Pty Ltd.

NewCo Pty Ltd will issue new shares to The Taxpayer in exchange for the Company A Shares that they will dispose to NewCo Pty Ltd.

As such, The Taxpayer will own all the shares in NewCo Pty Ltd just after they dispose of the Company A Shares to NewCo Pty Ltd.

The Taxpayer will also own the shares in NewCo Pty Ltd in the same capacity, i.e. as an individual, as they owned the Company A Shares.

Thus, subsection 122-25(1) will be satisfied.

Subsection 122-25(2) provides

This Subdivision does not apply to the *disposal or creation of any of the assets specified in this table:

The Taxpayer is disposing of their Company A Shares to NewCo Pty Ltd. As such, Item 1 of the table in subsection 122-25(2) is the relevant item to be examined in respect of this disposal.

In respect of Item 1(a) of the table, a collectable is defined in subsection 995-1(1) to have the meaning in section 108-10, and subsection 108-10(2) states a collectable is:

(a) *artwork, jewellery, an antique, or a coin or medallion; or

(b) a rare folio, manuscript or book; or

(c) a postage stamp or first day cover;

that is used or kept mainly for your (or your *associate's) personal use or enjoyment.

A personal use asset is defined in subsection 995-1(1) to have same meaning as section 108-20 and paragraph 108-20(2)(a) states:

a *CGT asset (except a *collectable) that is used or kept mainly for your (or your *associate's) personal use or enjoyment

As the Company A Shares were held by The Taxpayer on capital account, to produce assessable income they are not a personal use asset or a collectable.

An award for valour, per Item 1(b) of the table, is not applicable to shares in a company.

In respect of item 1(c) a precluded asset is defined in subsection 122-25(3) as:

A precluded asset is:

(a) a *depreciating asset; or

(b) *trading stock; or

(c) an interest in the copyright in a *film referred to in section 118-30; or

(d) a *registered emissions unit.

A depreciating asset is defined in subsection 995-1(1) to have the meaning in section 40-30. This definition excludes intangible assets unless it is specifically mentioned in subsection 40-30(2) and shares in a company are not included in that list.

Trading stock is defined is subsection 995-1(1) to have the meaning contained in section 70-10 as modified by section 70-12 and sections 124ZO and 124ZQ of the Income Tax Assessment Act 1936 (ITAA 1936). In effect trading stock needs to be something held for sale or exchange in the ordinary course of business and, as The Taxpayer held the Company A Shares as a capital asset, they were not held for sale or exchange.

In respect of item 1(d), the Company A Shares will not become trading stock of NewCo Pty Ltd after the disposal to NewCo Pty Ltd.

In respect of item 1(e), the Company A Shares are not a registered emissions unit as defined in subsection 995-1(1).

As such the Company A Shares are not an asset listed in the table in subsection 122-25(2) to which subdivision 122-A does not apply.

Subsection 122-25(4) provides:

If:

(a) the *CGT asset or any of the assets of the *business is a right, option, *convertible interest or *exchangeable interest; and

(b) the company *acquires another CGT asset by exercising the right or option or by converting the convertible interest or in exchange for the disposal or redemption of the exchangeable interest;

the other asset cannot become *trading stock of the company just after the company acquired it.

The CGT assets are the Company A Shares already owned by The Taxpayer. As such this subsection does not apply.

Subsection 122-25(5) states:

The *ordinary income and *statutory income of the company must not be exempt from income tax because it is an *exempt entity for the income year of the trigger event.

As NewCo Pty Ltd will not be an exempt entity as defined in section 995-1, this subsection does not apply.

Subsection 122-25(6) provides:

If you are an individual at the time of the trigger event, either:

(a)  you and the company must both be Australian residents at that time; or

(b)  both of the following requirements must be satisfied:

(i)      each asset must be *taxable Australian property at that time;

(ii)     the shares in the company mentioned in subsection 122-20(1) must be taxable Australian property just after that time.

The Taxpayer is, and once incorporated NewCo Pty Ltd will be, a resident of Australia for the purposes of the definition in subsection 6(1) of the ITAA 1936. As such, paragraph 122-25(6)(a) applies and this subsection will be satisfied.

Subsection 122-25(7)

If you are a trustee of a trust at the time of the trigger event, either:

(a)  at that time, the trust must be a *resident trust for CGT purposes and the company must be an Australian resident; or

(b)  both of the following requirements must be satisfied:

(i)    each *CGT asset must be a CGT asset of the trust that is *taxable Australian property at that time; and

(j)    the shares in the company mentioned in subsection 122-20(1) must be taxable Australian property just after that time.

This subsection only applies to a trustee of a trust so does not apply to The Taxpayer's disposal of their Company A Shares to NewCo Pty Ltd.

All the relevant subsection of section 122-25 will be satisfied in respect of The Taxpayer' disposal of their Company A Shares to NewCo Pty Ltd.

Section 122-35 - What if the company undertakes to discharge a liability (disposal case)

NewCo Pty Ltd is not discharging a liability of The Taxpayer as part of the disposal of Company A Shares to NewCo Pty Ltd and therefore this section has no application.

As the requirements of sections 122-15, 122-20 and 122-25 are satisfied, The Taxpayer may choose to obtain a roll-over on the transfer of the Company A Shares to NewCo Pty Ltd in exchange for shares in NewCo Pty Ltd, and thus disregard the capital gain realised on the disposal of those shares in accordance with subsection 122-40(1).

[1] As per the assumption to this ruling.

[2] Note: as per ATO Interpretative Decision ATO ID 2004/94 Income Tax Capital gains tax: Subdivision 122-A rollover: no consideration received, if the Taxpayer decides to dispose of their Company A Shares to NewCo Pty Ltd for no consideration, then section 122-20 will not need to be applied in respect of the disposal.

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