Edited version of private advice

Authorisation Number: 1052119466072

Date of advice: 15 June 2023

Ruling

Subject: CGT - subdivision 126-B roll-over

Question 1

Will Company A be eligible for CGT roll-over relief under Subdivision 126-B of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the disposal of its shares in Company X (XCo Shares) to Company B?

Answer

Yes.

Question 2

If the answer to question 1 is 'YES':

(i)            will any capital gain derived by Company A on the disposal of the XCo Shares to Company B be disregarded, and

(ii)           will Company B inherit the first element of the cost base or reduced cost base of the XCo Shares from Company A?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commences:

During an income year

Relevant facts and circumstances

The entities

Company A is a company incorporated, with its central management and control, outside Australia. Company A is not a resident of Australia for taxation purposes.

Company B is a listed company incorporated, with its central management and control, outside Australia (in a separate jurisdiction to Company A). Company B is not a resident of Australia for taxation purposes.

Company X is an Australian incorporated company and an Australian resident for tax purposes.

Company B owns 100% of the shares in Company A and is not in the business of trading shares.

Company A owns 100% of the issued ordinary XCo Shares and acquired those shares after 20 September 1985, as a consequence of an issue of new shares by Company X.

No person is or will be in a position to affect the rights of Company B in relation to Company A.

No person is, or will be, in a position to affect the rights of Company B or Company A in relation to Company X.

Transfer of the XCo Shares

Subject to the execution of a Share Sale Agreement, Company A intends to transfer all of its XCo Shares to Company B for current fair market value consideration, so that Company B will own 100% of the XCo Shares. Company A's cost base in the XCo Shares is less than the current fair market value consideration to be paid by Company B for the XCo Shares.

Company A will derecognise the investment in Company X and Company B will recognise the equity investment. The consideration will be recognised as a loan (which is on commercial arm's length terms) in the accounts of Company A and Company B.

Both at the time just before the transfer, as well as just after the transfer, the sum of the market value of the assets of Company X that are taxable Australian real property (TARP) will exceed the sum of the market value of its assets that are not TARP.

The stated purpose of the restructure is to improve the administration and management efficiency of the group and to facilitate new investment through the simplification of the group's legal structure, by removing the third jurisdiction where Company A is situated.

Following the restructure, there are no plans to divest the shares in Company A and no sale transaction of the XCo Shares is under serious contemplation.

Assumption

Company A and Company B will choose to obtain a roll-over under Subdivision 126-B of the ITAA 1997 within the timeframe stipulated in section 103-25.

Relevant legislative provisions

ITAA 1997 section 11-5

ITAA 1997 section 103-25

ITAA 1997 subsection 104-10(1)

ITAA 1997 subsection 104-10(2)

ITAA 1997 Subdivision 126-B

ITAA 1997 subsection 126-45(1)

ITAA 1997 subsection 126-45(2)

ITAA 1997 section 126-50

ITAA 1997 subsection 126-50(1)

ITAA 1997 subsection 126-50(2)

ITAA 1997 subsection 126-50(3)

ITAA 1997 subsection 126-50(3A)

ITAA 1997 subsection 126-50(4)

ITAA 1997 subsection 126-50(5)

ITAA 1997 subsection 126-50(6)

ITAA 1997 subsection 126-50(9)

ITAA 1997 section 126-55

ITAA 1997 paragraph 126-55(1)(a)

ITAA 1997 subparagraph 126-55(1)(a)(i)

ITAA 1997 subparagraph 126-55(1)(a)(ii)

ITAA 1997 paragraph 126-55(1)(b)

ITAA 1997 section 126-60

ITAA 1997 subsection 126-60(1)

ITAA 1997 subsection 126-60(2)

ITAA 1997 Division 130

ITAA 1997 Division 134

ITAA 1997 section 420-10

ITAA 1997 section 855-15

ITAA 1997 subsection 855-25(1)

ITAA 1997 section 855-30

ITAA 1997 section 960-195

ITAA 1997 section 975-500

ITAA 1997 section 975-505

ITAA 1997 subsection 995-1(1)

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

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

Question 1

Summary

Company A will be eligible for CGT roll-over relief under Subdivision 126-B in relation to the disposal of its XCo Shares to Company B.

Detailed reasoning

Division 126-B rollover

There may be a roll-over if a certain CGT event (trigger event) happens involving a company (originating company) and another company (recipient company), and the circumstances set out in section 126-50 are met (subsection 126-45(1)).

The eligible trigger events are listed in subsection 126-45(2) and CGT event A1 is listed as a relevant trigger event.

CGT event A1 happens if an entity disposes of a CGT asset (subsection 104-10(1)). An entity disposes of a CGT asset if a change of ownership occurs from the entity to another entity, whether because of some act or event or by operation of law (subsection104-10(2)).

When Company A (the originating company) transfers all of its XCo Shares to Company B (the recipient company), CGT event A1 (a trigger event) will happen. Therefore, subject to satisfying the requirements in section 126-50, a roll-over may be available.

Section 126-50 requirements

Wholly-owned group

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

Wholly-owned group is defined by subsection 995-1(1) as having the meaning given by section 975-500, which provides:

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.

Section 975-505 defines a 100% subsidiary as follows:

(1)    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.

(2)    However, the subsidiary is not a 100% subsidiary of the holding company if a person is in a position to affect rights, in relation to the subsidiary company, of:

(a)     the holding company; or

(b)     a 100% subsidiary of the holding company.

(3)    The subsidiary company is also not a 100% subsidiary of the holding company if at some future time a person will be in a position to affect rights as described in subsection (2).

Subsection 975-150(1) provides that a person is in a position to affect rights of a company in relation to another company if the person has a right, power or option:

(a)    to acquire those rights from one or other of those companies; or

(b)    to do something that would prevent one or other of those companies from exercising its rights for its own benefit, or from receiving any benefit arising from having those rights.

At the time of CGT event A1, Company B beneficially owns 100% of the shares in Company A. No person is or will be in a position to affect the rights of Company B in relation to Company A. Therefore, Company A is a 100% subsidiary of Company B and as such, Company A and Company B 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 from being trading stock of, or a registered emissions unit held by, the recipient company just after the time of the trigger event. A registered emissions unit is a Kyoto unit or an Australian carbon credit unit (section 420-10).

The roll-over assets are the XCo Shares, which are not a Kyoto unit or an Australian carbon credit unit. Company B is not in the business of trading shares. Therefore, the XCo Shares will not be trading stock in the hands of Company B just after the transfer.

Right, convertible interest or option

The conditions in subsections 126-50(3) and 126-50(3A) apply where the roll-over asset is a right or convertible interest referred to in Division 130 or an option of the kind referred to in Division 134. As the XCo Shares are not such assets, these subsections are 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).

Company B is not an entity listed in section 11-5 nor an untaxable Commonwealth entity (as defined in section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999). Therefore, Company B is not an exempt entity for the purposes of subsection 126-50(4).

Taxation Australian property

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

The term 'taxable Australian property' is defined in section 855-15 to include 'a CGT asset that is an indirect Australian real property interest'. Under subsection 855-25(1), a membership interest held by an entity in another entity at a time is an indirect Australian real property interest at the time if the interest passes:

•         the non-portfolio interest test, and

•         the principal asset test.

Therefore, the XCo Shares held by Company A just before CGT event A1 happens and held by Company B just after CGT event A1 happens must pass the non-portfolio interest test and the principal asset test at each of those times.

Section 960-195 provides that the non-portfolio interest test is passed at a time if the sum of the direct participation interests held by the holding entity in the test entity is 10% or more at that time. Just before CGT event A1 happens, Company A will hold 100% of the shares in Company X, and just after CGT event A1 happens, Company B will hold 100% of the shares in Company X. Therefore, the XCo Shares will pass the non-portfolio interest test at both just before and just after the trigger event.

Section 855-30 provides that, to pass the principal asset test, the sum of the market value of the test entity's (Company X's) assets that are TARP must exceed the sum of the market value of its assets that are not TARP.

Just before and just after CGT event A1 happens to the XCo Shares, the sum of the market value of the assets of Company X that are TARP exceeds the sum of the market value of its assets that are not TARP. Therefore, the XCo Shares held by Company A just before CGT event A1 happens and held by Company B just after CGT event A1 happens will satisfy the principal asset test.

Consequently, the XCo Shares will be CGT assets that are indirect Australian real property interests just before and just after CGT event A1 happens and as such, will be taxable Australian property just before and just after the trigger event for the purposes of subsection 126-50(5).

Remaining provisions in subsections 126-50(6)-(9)

The remaining provisions in subsections 126-50(6) to 126-50(9) are not applicable because:

•         Company A and Company B are both foreign (not Australian) residents at the time CGT event A1 happens, and

•         Company A acquired the XCo Shares as a consequence of an issue of new shares by Company X, and therefore no previous roll-over relief has been applied in relation to the XCo Shares.

Section 126-55 requirements

Paragraph 126-55(1)(a) provides there is a roll-over if:

•         the originating company makes a capital gain under the trigger event (subparagraph 126-55(1)(a)(i))

•         the originating company makes no capital loss and is not entitled to a deduction (subparagraph 126-55(1)(a)(i)), or

•         the originating company acquired the roll-over before 20 September 1985 (subparagraph 126-55(1)(a)(ii)).

As Company A's cost base in the XCo Shares is less than the current fair market value consideration to be paid by Company B for the XCo Shares, the disposal of the XCo Shares by Company A would give rise to a capital gain. Therefore, subparagraph 126-55(1)(a)(i) is satisfied.

Paragraph 126-55(1)(b) requires that the originating company and the recipient company both choose to obtain roll-over. The Commissioner is asked to assume that both Company A and Company B will choose to obtain roll-over within the timeframe stipulated by section 103-25.

Conclusion

In conclusion, Company A will be eligible for CGT roll-over relief under Subdivision 126-B in relation to the disposal of its XCo Shares to Company B.

Question 2

Summary

If the answer to question 1 is 'YES':

(i)         any capital gain derived by Company A on the disposal of the XCo Shares to Company B will be disregarded, and

(ii)        the first element of the cost base or reduced cost base of each XCo Share in the hands of Company B will be the cost base or reduced cost base of that share in the hands of Company A.

Detailed reasoning

Section 126-60 lists the consequences of a CGT roll-over under Subdivision 126-B for both the originating and recipient company.

Where Company A disposes of the XCo Shares to Company B, and given that those shares were acquired by Company A after 20 September 1985, the consequences are:

•         any capital gain made by Company A will be disregarded (subsection 126-60(1)), and

•         the first element of the cost base or reduced cost base of each XCo Share in the hands of Company B will be the cost base or reduced cost base of that share in the hands of Company A (subsection 126-60(2)).

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