Edited version of private advice

Authorisation Number: 1052249656762

Date of advice: 8 May 2024

Ruling

Subject: CGT - discount capital gains

Question 1

Will the first element of A Trust's and B Trust's (together the Shareholders) cost base in New Co Pty Ltd (New Co) shares under subsection 110-25(2) of the Income Tax Assessment Act 1997 (ITAA 1997) be equal to the amount payable under the Promissory Notes?

Answer

Yes.

Question 2

Will the Shareholders' sale of shares in Hold Co Pty Ltd (Hold Co) to New Co give rise to CGT event A1 under section 104-10 of the ITAA 1997?

Answer

Yes.

Question 3

Will the Shareholders' sale of shares in Hold Co to New Co give rise to a discount capital gain under Division 115 of the ITAA 1997?

Answer

Yes.

Question 4

On the formation of an income tax consolidated group (ITCG) by New Co, will the cost base of the underlying assets held by Hold Co and its wholly-owned subsidiaries be set in accordance with Division 705 of the ITAA 1997?

Answer

Yes.

Question 5

Will the cost of membership interests in the joining entity (being Hold Co) for the purposes of section 705-65 of the ITAA 1997 be equal to the market value of Hold Co shares?

Answer

Yes.

Question 6

Will the transfer of the assets from Hold Co and its wholly-owned subsidiaries to New Co be ignored under the single entity rule (SER) in section 701-1 of the ITAA 1997?

Answer

Yes.

Question 7

Will the forgiveness of the intercompany debts between Hold Co and its wholly owned-subsidiaries, New Co and Prop Co be ignored under the SER in section 701-1 of the ITAA 1997?

Answer

Yes.

Question 8

Will New Co's sale of shares in Hold Co give rise to CGT event A1 under section 104-10 of the ITAA 1997?

Answer

Yes.

Question 9

Upon the sale of shares in Hold Co by New Co, will the cost base of shares in Hold Co be set in accordance with Division 711 of the ITAA 1997?

Answer

Yes.

Question 10

Will the market value substitution rule (MVSR) under section 116-30 of the ITAA 1997 apply to the sale of New Co's shares in Hold Co to the Shareholders?

Answer

Yes.

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Relevant facts and circumstances

Hold Co

1.    Hold Co is the holding company of 3 wholly-owned companies that conducts a business.

2.    The wholly-owned subsidiaries were acquired by Hold Co in 20XX as part of the administration of the death of the founder of the business conducted by Hold Co.

3.    Hold Co and its wholly-owned subsidiaries are not consolidated for income tax purposes.

4.    Hold Co has related party loan receivables from its wholly-owned subsidiaries. These loans have arisen over multiple years and were sourced from dividends paid to Hold Co by some of the subsidiaries that were loaned back to those businesses. Hold Co has no material assets other than these receivables and shares in the subsidiaries.

5.    As at the date of this ruling, the total of the cost bases of CGT assets that Hold Co owns that have been acquired less than 12 months prior is not more than half of the total of the cost bases of the CGT assets of Hold Co.

Shareholders of Hold Co

6.    The shareholders of Hold Co are the A Trust and B Trust. A Trust and B Trust are controlled by A and B who are the children of the founder of the business conducted by Hold Co.

7.    Interposed Entity Elections (IEE) are in place for some of Hold Co's subsidiaries.

Proposed Restructure

8.    The Shareholders are actively pursuing a trade sale or other means of exit from the business (the Subsequent Transaction). However, the existence of IEEs in Hold Co's subsidiaries makes a sale that includes those entities as part of the Subsequent Transaction unfeasible as no buyer will complete the acquisition of an entity which has an IEE in place.

9.    Accordingly, a restructure of Hold Co (the Proposed Restructure) will need to be undertaken in order to facilitate an exit event, specifically in order to present a target structure which meets the preferences of buyers acquiring a privately owned business. That is, in the event of a trade sale or IPO, a buyer/the market would prefer that a pre-sale restructure has been undertaken such that all business assets are transferred into a newly incorporated company to mitigate historical risks in the entity being acquired (be that legal, tax, employment or environmental risks, among others).

10.  The Proposed Restructure will not occur until such time as it is confirmed that the Subsequent Transaction will proceed (i.e. the execution of the relevant legal documentation in relation to the Subsequent Transaction). That is, the Proposed Restructure is expected to be a condition precedent in any such transaction document.

11.  The Proposed Restructure involves:

•         Step 1: Two new Australian private companies, New Co and Prop Co are incorporated. Prop Co will be a 100% owned subsidiary of New Co. Prop Co will acquire the land and building type assets from Hold Co and keep these separate from the operational assets that New Co will acquire from Hold Co. The Shareholders will each be issued with one ordinary share in New Co for nominal consideration (i.e. $1 per share).

•         Step 2: The Shareholders will subscribe for additional shares in New Co in equal proportions and in total equal to the market value of Hold Co. The consideration for the additional New Co shares will be a Promissory Note from each of the Shareholders. The amount payable under the Promissory Notes is in total equal to the market value of Hold Co.

•         Step 3: The Shareholders and the preferred bidder execute a Share Sale Deed under which all the shares in New Co will be sold to the preferred bidder. Completion will occur some time after Step 7 below.

•         Step 4: New Co acquires the shares in Hold Co from the Shareholders in exchange for shares in itself, effectively interposing itself between the Shareholders and Hold Co. The consideration for the acquisition of shares in Hold Co will be New Co endorsing the Promissory Notes (from Step 2) back to the Shareholders, effectively resulting in the cancellation of the Promissory Notes.

•         Step 5: New Co and its 100% owned subsidiaries elect to consolidate for Australian income tax and GST purposes, with New Co becoming the head company of the ITCG.

•         Step 6: Hold Co and its wholly-owned subsidiaries transfer their assets to New Co and Prop Co (as the case requires) in accordance with the terms of a Business Sale Deed. As a result, New Co will hold all operating assets and liabilities required to operate the business.

The assets and liabilities will be transferred to New Co and Prop Co for nominal (i.e. very small amount of money) consideration. Following the transfer, to the extent this results in the creation of any amounts receivable, this will be forgiven by New Co. All existing intercompany balances between the Hold Co entities will also be forgiven.

This will result in Hold Co and its subsidiaries holding no assets or liabilities on their respective balance sheets other than an income tax liability and associated cash to settle that liability for the stub period tax returns.

•         Step 7: The Shareholders acquire the shares in Hold Co from New Co.

On the basis that Hold Co and the subsidiaries will have no assets or liabilities other than an income tax liability and associated cash to settle that liability (as per Step 6), it is expected that the market value of each entity (as well as the shares in Hold Co) will be nil and consideration for this transaction will be nominal or nil.

Following the Proposed Restructure and Subsequent Transaction, the Shareholders will then formally deregister or liquidate Hold Co and its subsidiaries.

Assumptions

1.    For the purposes of Question 3 of this ruling, at the time of the CGT event (being the sale of Hold Co shares at Step 4 of the Proposed Restructure), the total of the cost bases of the CGT assets that Hold Co owns that have been acquired less than 12 months prior is not more than half of the total of the cost bases of all the CGT assets.

2.    For the purposes of Question 9 and 10 of this ruling and in relation to Step 7 of the Proposed Restructure:

•         there will be no amounts at Steps 2 and 3 of the exit Allocable Cost Amount (ACA) for Hold Co and its wholly-owned subsidiaries at the time of their exit from the New Co ITCG;

•         the exiting entities will only have a residual asset and liability which represents the income tax provision for the stub period and the corresponding cash to settle those liabilities in full; and

•         New Co and the Shareholders will not deal with each other at arm's length.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 103-15

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 subsection 108-5(2)

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 subsection 110-25(2)

Income Tax Assessment Act 1997 paragraph 110-25(2)(a)

Income Tax Assessment Act 1997 paragraph 110-25(2)(b)

Income Tax Assessment Act 1997 section 112-20

Income Tax Assessment Act 1997 paragraph 112-20(1)(a)

Income Tax Assessment Act 1997 paragraph 112-20(1)(b)

Income Tax Assessment Act 1997 paragraph 112-20(1)(c)

Income Tax Assessment Act 1997 subsection 112-20(2)

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Subdivision 115-A

Income Tax Assessment Act 1997 section 115-10

Income Tax Assessment Act 1997 section 115-15

Income Tax Assessment Act 1997 section 115-20

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 subsection 115-25(1)

Income Tax Assessment Act 1997 subsection 115-25(3)

Income Tax Assessment Act 1997 section 115-45

Income Tax Assessment Act 1997 subsection 115-45(2)

Income Tax Assessment Act 1997 subsection 115-45(3)

Income Tax Assessment Act 1997 subsection 115-45(4)

Income Tax Assessment Act 1997 subsection 115-45(5)

Income Tax Assessment Act 1997 section 116-30

Income Tax Assessment Act 1997 subsection 116-30(1)

Income Tax Assessment Act 1997 subsection 116-30(2)

Income Tax Assessment Act 1997 Division 705

Income Tax Assessment Act 1997 section 701-1

Income Tax Assessment Act 1997 subsection 701-1(2)

Income Tax Assessment Act 1997 subsection 701-1(3)

Income Tax Assessment Act 1997 section 705-60

Income Tax Assessment Act 1997 section 705-65

Income Tax Assessment Act 1997 subsection 705-65(1)

Income Tax Assessment Act 1997 Division 711

Income Tax Assessment Act 1997 section 711-15

Income Tax Assessment Act 1997 section 711-20

Income Tax Assessment Act 1997 section 711-55

Reasons for decision

All subsequent legislative references are to the ITAA 1997.

Question 1

Summary

Yes. The additional New Co shares will be issued to the Shareholders in consideration for the issue of the Promissory Notes to New Co at Step 2 of the Proposed Restructure. When the amount payable under each Promissory Note is set-off upon the endorsement of each Promissory Note (at Step 4 of the Proposed Restructure), this set-off constitutes money paid by the Shareholders in respect of the acquisition of the additional New Co shares. The amount payable under the Promissory Notes will therefore constitute the first element of the cost base of each Shareholder's New Co shares under subsection 110-25(2).

Detailed reasoning

Under Step 2 of the Proposed Restructure, the Shareholders will subscribe for additional shares in New Co in equal proportions. The subscription value will be an amount equal to the market value of Hold Co and will be satisfied by way of the issue of a Promissory Note from each Shareholder (as Issuer) to New Co (as Noteholder).

Section 110-25 contains the general rules about cost base of a CGT asset.

Under subsection 110-25(2):

The first element is the total of:

(a)  the money you paid, or are required to pay, in respect of acquiring it; and

(b)  the market value of any other property you gave, or are required to give, in respect of acquiring it (worked out at the time of the acquisition).

By virtue of section 103-15, being 'required' to pay money or give property includes a requirement to pay or give immediately or at a future date. The issuing of a promissory note gives rise to an obligation on the issuer of the note to pay the agreed amount to the holder of the note.

Each Promissory Note issued to New Co has a market value equivalent to 50% of the market value of Hold Co shares.

The Noteholder is able to assign the Promissory Note to any person, including the Issuer. Where the issuer is the assignee, the amount payable is deemed to be paid in full by the Issuer.

Taxation Determination TD 2005/52 Income tax: capital gains: can money paid for the purposes of the first element of the cost base in subsection 110-25(2) of the Income Tax Assessment Act 1997 and the reduced cost base under section 110-55 of the Income Tax Assessment Act 1997 include the amount of a liability extinguished under the doctrine of set-off? (TD 2005/52) states that if an amount is owed in respect of the acquisition of a CGT asset, the set-off of all or part of that liability constitutes money paid in respect of the acquisition of the asset for the purposes of the first element of the cost base and the reduced cost base.

According to TD 2005/52, a set-off occurs if there are presently due mutual liabilities of sums certain owing between the same parties which they agree to set-off in equal amounts against each other. A set-off will occur at Step 4 of the Proposed Restructure when New Co acquires Hold Co shares and endorses the Promissory Note back to the Shareholders; there will be a set-off of equal amounts of liabilities for New Co and the Shareholders.

Therefore, the liabilities payable under the Promissory Notes which are set-off when the Promissory Notes are endorsed, constitutes money paid by the Shareholders in respect of the acquisition of the additional New Co shares for the purposes of the first element of the cost base of those New Co shares in subsection 110-25(2).

The MVSR in section 112-20 does not apply since:

•         the Shareholders will incur expenditure to acquire New Co shares by way of the set-off of the liabilities due which is considered to be money paid in respect of the acquisition of an asset;

•         the Promissory Notes can be valued; and

•         the Shareholders will pay an amount for New Co shares equal to the market value of New Co (being the shares in Hold Co) when the Promissory Notes are endorsed at Step 4 of the Proposed Restructure.

Question 2

Summary

Yes. The sale of the shares in Hold Co by the Shareholders to New Co (at Step 4 of the Proposed Restructure) will constitute a disposal of a CGT asset and give rise to CGT event A1 under section 104-10 on the basis that a change of ownership in the shares will occur from the Shareholders to New Co.

Detailed Summary

Under section 104-10, CGT event A1 arises when you dispose of a 'CGT asset'.

Shares are included as an example of a CGT asset under Note 1 to subsection 108-5(2).

Under subsection 104-10(2) you dispose of a CGT asset if a change of ownership occurs from you to another entity. Under subsection 104-10(3) the time of CGT event A1 is when you enter into a contract for the disposal or, if there is no contract, when the change of ownership occurs.

Therefore, the sale of the shares in Hold Co will constitute a disposal of a CGT asset and give rise to CGT event A1 on the basis that a change of ownership in the shares will occur from the Shareholders to New Co.

CGT event A1 will occur when the Shareholders enter into a contract to sell the shares in Hold Co with New Co or, if there is no contract, when the change of ownership occurs.

Question 3

Summary

Yes. To the extent that the sale of the shares in Hold Co by the Shareholders (at Step 4 of the Proposed Restructure) gives rise to a capital gain, the capital gain will qualify as a discount capital gain on the basis that it meets the requirements in sections 115-10, 115-15, 115-20 and 115-25.

Detailed reasoning

Under Subdivision 115-A, there are a number of conditions that must be satisfied for a gain to be a discount capital gain.

Firstly, the capital gain must be made by certain entities specified in section 115-10. This list includes an individual, complying superannuation entity, a trust and life insurance company.

Secondly, under section 115-15, the capital gain must result from a CGT event happening after 11.45 am (by legal time in the Australian Capital Territory) on 21 September 1999.

Thirdly, under section 115-20, the capital gain must have been worked out using a cost base without reference to indexation at any time.

Lastly, under subsection 115-25(1), the capital gain must also result from a CGT event (other than the ones excluded under subsection 115-25(3)) happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event.

Any capital gain made by the Shareholders on the disposal of Hold Co shares at Step 4 of the Proposed Restructure would be eligible as a discount capital gain on the basis that:

•         the Shareholders are discretionary trusts;

•         CGT event A1 would arise on the disposal of Hold Co shares by the Shareholders to New Co and this would happen after 21 September 1999;

•         the Shareholders will not have an indexed cost base; and

•         the Shareholders acquired their shares in Hold Co more than 12 months before the CGT event.

Section 115-45 - Capital gain from equity in an entity with newly acquired assets

However, section 115-45 must also be considered. Section 115-45 is an integrity provision that denies the discount capital gain on the disposal of shares in a company that owns assets that are 'newly acquired' (have not been held for more than 12 months) and the discount would not have been available on the majority of the assets underlying the shares had those assets been sold rather than the shares by the owner of the shares.

A capital gain will not be discount capital gain if the 3 conditions in subsections 115-45(3), (4) and (5) are all met (subsection 115-45(2)).

Subsection 115-45(4)

The condition under subsection 115-45(4) is that the total of the cost bases of CGT assets that the company owned at the time of the CGT event (i.e. the disposal of the shares that are the subject of the discount capital gain) and had acquired less than 12 months before then is more than half of the total of the cost bases of the CGT assets the company owned at the time of the event.

Hold Co's assets comprise of shares in its subsidiaries and related party loan receivables. A significant amount of Hold Co's assets have been acquired more than 12 months before the CGT event. As at the date of this ruling, the total of the cost bases of CGT assets that Hold Co owns that have been acquired less than 12 months prior is not more than half of the total of the cost bases of the CGT assets of Hold Co.

On the assumption that the total of the cost bases of CGT assets that Hold Co owns at the time of the CGT event (at Step 4 of the Proposed Restructure when Hold Co shares are sold and CGT event A1 happens) and acquired less than 12 months prior will not be more than half of the total of the cost bases of the CGT assets of Hold Co, subsection 115-45(4) will not be satisfied. As a result subsection 115-45(2) will not apply and any capital gains realised by the Shareholders on the sale of their shares in Hold Co will be a discount capital gain.

Question 4

Summary

Yes.

Detailed reasoning

Division 705 provides the process through which the cost base of assets held by entities that become subsidiary members of an ITCG are determined. On the basis that New Co will elect to form an ITCG at Step 5 of the Proposed Restructure, Hold Co and its wholly-owned subsidiaries will become subsidiary members of the New Co ITCG and Division 705 will apply to set the cost base of the assets of Hold Co and its wholly-owned subsidiaries.

Question 5

Summary

Yes.

Detailed reasoning

Cost base of Hold Co shares

As discussed in answer to Question 1, pursuant to subsection 110-25(2), the first element of the cost base of an asset includes the money you paid, or are required to pay, in respect of acquiring the asset.

As discussed, a set-off will occur at Step 4 of the Proposed Restructure when New Co acquires Hold Co shares and endorses the Promissory Notes back to the Shareholders as consideration for the acquisition of Hold Co shares; there will be a set-off of equal amounts of liabilities for New Co and the Shareholders.

Therefore, the liabilities payable under the Promissory Notes, which are set-off when the Promissory Notes are endorsed, constitutes money paid by New Co in respect of the acquisition of Hold Co shares and the first element of the cost base of Hold Co shares under subsection 110-25(2).

Step 1 of the ACA of Hold Co

Section 705-65 provides how to work out Step 1 of the ACA under section 705-60, which is about the cost of membership interests in the joining entity held by members of the joined group.

Item 1 of the table in subsection 705-65(1) provides that if the market value of the membership interest is equal to or greater than its cost base, the amount to include at Step 1 of the ACA is its cost base.

Since the cost base of Hold Co shares will equal the total of the amounts payable under the Promissory Notes which also equals the market value of the Hold Co shares at the time of their transfer to New Co, the cost of membership interests at Step 1 of the ACA for Hold Co will also be equal to the market value of Hold Co shares.

Question 6

Summary

Yes. The SER under section 701-1 will apply to treat Hold Co and its wholly-owned subsidiaries as parts of New Co, rather than separate entities, during the time they are subsidiary members of the consolidated group. As a result, the transfer of assets from Hold Co and its wholly-owned subsidiaries to New Co (at Step 6 of the Proposed Restructure) will be disregarded for income tax purposes.

Detailed reasoning

Section 701-1 details the operation of the SER which has the effect that an entity that is a subsidiary member of a consolidated group is taken to be part of the head company for 'head company purposes' and 'entity core purposes' for the time the entity is a subsidiary member of the consolidated group.

Under subsections 701-1(2) and 701-1(3), head company and entity core purposes includes working out the income tax liability of the head company and subsidiary member for the period the subsidiary is a member of the consolidated group.

At Step 5 of the Proposed Restructure, New Co will elect to form a consolidated group upon its acquisition of Hold Co shares. On the basis that New Co and Hold Co will all be members of the New Co ITCG, the transfer of assets from Hold Co and its wholly-owned subsidiaries to New Co while the entities are members of the New Co ITCG will be a transaction that is ignored for income tax purposes under the SER.

Question 7

Summary

Yes. The forgiveness of the intercompany debts between New Co, Prop Co, Hold Co and its wholly-owned subsidiaries will be ignored under the SER on the basis the entities involved are all members of the consolidated group at the time of the forgiveness.

Detailed reasoning

Under Step 5 of the Proposed Restructure, New Co will elect to form a consolidated group upon its acquisition of the shares in Hold Co. Subsequent to this, at Step 6 of the Proposed Restructure, Hold Co and its wholly-owned subsidiaries will transfer the business assets to New Co and Prop Co.

Following this transfer, to the extent that this results in the creation of any amount receivable, this will be forgiven. The existing intercompany balances between the Hold Co will also be forgiven.

On the basis that New Co, Prop Co, Hold Co and its wholly-owned subsidiaries will all be members of a consolidated group when the intercompany debts between them are forgiven, the forgiveness of the debts will be ignored under the SER.

Question 8

Summary

Yes. The sale of the shares in Hold Co by New Co to the Shareholders (at Step 7 of the Proposed Restructure) will constitute a disposal of a CGT asset and give rise to CGT event A1 under section 104-10 on the basis that a change of ownership in the shares will occur from New Co to the Shareholders.

Detailed Summary

Under section 104-10, CGT event A1 arises when you dispose of a 'CGT asset'.

Shares are included as an example of a CGT asset under Note 1 to subsection 108-5(2).

Under subsection 104-10(2) you dispose of a CGT asset if a change of ownership occurs from you to another entity. Under subsection 104-10(3) the time of CGT event A1 is when you enter into a contract for the disposal or, if there is no contract, when the change of ownership occurs.

Therefore, the sale of the shares in Hold Co will constitute a disposal of a CGT asset and give rise to CGT event A1 on the basis that a change of ownership in the shares will occur from New Co to the Shareholders.

CGT event A1 will occur when New Co enters into a contract to sell the shares in Hold Co with the Shareholders or, if there is no contract, when the change of ownership occurs.

Question 9

Summary

Yes. When the Shareholders acquire the shares in Hold Co from New Co (at Step 7 of the Proposed Restructure), this will result in an exit of Hold Co and its wholly-owned subsidiaries from the New Co ITCG. The cost base of the shares in Hold Co will be set in accordance with Division 711.

Detailed reasoning

Division 711 sets the cost base of the membership interests of an entity that ceases to be a member of an ITCG.

Since Hold Co will be a member of an ITCG when the shares in it are sold by New Co to the Shareholders (Step 5 of the Proposed Restructure), Division 711 is relevant.

Where there is just one entity leaving or ceasing to be a member of the ITCG, the cost base is worked out under the process set out in section 711-15 which is, broadly, by firstly working out the old groups' ACA for the leaving entity in accordance with section 711-20 and then allocating that to each of the membership interests.

The old groups' ACA for the leaving entity is worked out using the 5 step process detailed in section 711-20.

Where there are multiple entities ceasing to be members of the ITCG, section 711-55 will apply to work out the cost bases of the leaving entities under a 'bottom up' approach that involves determining the cost base of a lower-tier subsidiary first with reference to section 711-15 and then using the amount obtained to work out the cost base of the entity that owns the membership interest in that lower-tier subsidiary again with reference to section 711-15.

On the basis that:

•         the balance sheets of each of the exiting entities will only contain nominal assets (i.e. cash) and liabilities related to the income tax provision, and

•         the assumption that there are no amounts at step 2 and 3 of the exit ACA of the exiting entities,

this should result in a cost base of New Co's interest in Hold Co broadly equalling nil.

Question 10

Summary

Yes. The MVSR will apply to the capital proceeds received by New Co for the sale of Hold Co shares at Step 7 of the Proposed Restructure. The application of the MVSR will result in the capital proceeds for New Co's disposal of Hold Co shares being taken to be nil.

Detailed reasoning

No capital proceeds

Under subsection 116-30(1), if you received no capital proceeds from a CGT event, you are taken to have received the market value of the CGT asset (worked out as at the time of the CGT event).

There are capital proceeds

Under subsection 116-30(2), you are taken to have received the market value of a CGT asset if there are capital proceeds from a CGT event and:

•         some or all of those proceeds cannot be valued, or

•         the capital proceeds are more or less than the market value of the asset and either you and the entity that acquired the asset did not deal with each other at arm's length in connection with the event, or the CGT event is CGT event C2.

While it is not certain whether New Co will receive any capital proceeds from the Shareholders for the sale of Hold Co, it is expected that any consideration received would be nominal (i.e. a very small amount) since Hold Co and its wholly-owned subsidiaries will hold minimal assets and liabilities.

The MVSR in section 116-30 will apply on the basis that:

•         the capital proceeds received by New Co will either be nominal or nil;

•         the market value of Hold Co will be 'nil' at the time of their disposal to the Shareholders; and

•         it is assumed that New Co and the Shareholders will not deal with each other at arm's length in relation to Step 7 of the Proposed Restructure.

The MVSR will apply with the following consequences:

If no capital proceeds are received, the MVSR under subsection 116-30(1) will apply and New Co will be taken to have received the market value of Hold Co shares worked out at the time of the CGT event which is expected to be nil.

On this basis, the capital proceeds received by New Co will be taken to be nil (as well as actually being nil)

If nominal capital proceeds are received, the MVSR under subsection 116-30(2) will apply since the nominal proceeds will be more than the nil market value of the Hold Co shares and the parties to this transaction are not dealing with each other on an arm's length basis. New Co will be taken to have received the market value of the Hold Co shares, worked out at the time of the CGT event, which is equal to nil.

On this basis, the capital proceeds received by New Co will be taken to be nil.

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