Edited version of private advice

Authorisation Number: 1052281758849

Date of advice: 30 July 2024

Ruling

Subject: Disposal of assets to a wholly-owned company

Question

Can Individual A and Individual B choose to obtain a roll-over under Subdivision 122-B of the Income Tax Assessment Act 1997 if they sell their interests in a property to a company in return for the issue of ordinary shares in the company?

Answer

Yes.

This ruling applies for the following period:

1 July 20xx - 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

Individual A and Individual B (Partners) acquired a block of land after 19 September 1985 (Property).

The Property is used for leasing purpose.

The Partners are carrying on another enterprise unrelated to the leasing activity.

For asset protection purposes the Partners wish to dispose of their interests in the Property to a newly created company (Company) in return for fully-paid ordinary shares in the Company.

The Company will be wholly owned by the Partners in equal shares and will not be an exempt entity.

There is no liability in respect of the Partners' interest in the Property.

The Partners and the Company are Australian residents.

The Partners will choose to obtain a roll-over under Subdivision 122-B of the Income Tax Assessment Act 1997.

Relevant legislative provisions

Subdivision 122-B Income Tax Assessment Act 1997

Section 122-125 Income Tax Assessment Act 1997

Section 122-130 Income Tax Assessment Act 1997

Section 122-135 Income Tax Assessment Act 1997

Section 122-150 Income Tax Assessment Act 1997

Section 122-155 Income Tax Assessment Act 1997

Section 122-200 Income Tax Assessment Act 1997

Does Part IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for decision

Subdivision 122-B provides a rollover where partners in a partnership transfer assets to a wholly owned company.

'Partnership' is defined in subsection 995-1(1) as

partnership means:

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

The Partners are joint owners of the Property held for leasing purpose. They are, therefore, 'an associate of persons .... in receipt of ordinary income or statutory income jointly' and are Partners of a partnership.

Pursuant to section 108-7 each Partner is taken to own an equal interest of 50% each in the Property as if they were tenants in common.

Section 108-7 provides that:

Individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common.

The Property is a CGT asset as defined in section 108-5.

Sections 122-125 to 122-235 sets out when partners in a partnership can obtain a roll-over when transferring a CGT asset, or all the assets of a business, to a company, or create an asset in the company.

Relevant to the purpose of this ruling, the conditions in Subdivision 122-B that must be satisfied for the roll-over to be available to partners in a partnership that transfer a single CGT asset to a company are set out below:

1.         All the partners in a partnership can choose to obtain a roll-over if one of the CGT events specified in the table in section 122-125 (the trigger event) happens involving the partners and a company. The CGT events listed includes CGT event A1 on the disposal of a CGT asset of a partnership, or all the assets of a business carried on by the partnership to a wholly owned company.

The Property is an asset used for the purpose of the partnership. All the Partners in this case dispose of their interests in the Property to the Company, which will be wholly owned by the Partners, and will choose to obtain a roll-over.

This condition is therefore, satisfied.

2.         The consideration the partners receive must be only shares in the company or shares in the company together with the company undertaking to discharge one or more liabilities in respect of their interests (subsection 122-130(1)).

This condition is satisfied as the Partners will receive only shares in the Company and there are no liabilities in respect of their interests in the Property.

3.         The shares cannot be redeemable shares (subsection 122-130(2)).

This condition is satisfied as the shares to be issued by the Company are not redeemable shares.

4.         The market value of the shares each partner receives must be substantially the same as the market value of interests in the assets the partner disposed of, less any liabilities the company undertakes to discharge in respect of the interests in the asset (paragraph 122-130(3)(a)).

As the Company has no other assets, the market value of the shares each Partner will receive is substantially the same as the market value of their individual interest in the Property and there is no liability the Company is required to discharge. This condition is satisfied.

5.         The partners must own all the shares in the company just after the time of the trigger event (subsection 122-135(1)).

This condition will be met.

6.         Each partner must own the shares the partner received in the same capacity that the partner owned the partner's interests in the assets that the company now owns (subsection 122-135(2)).

Each Partner will own the shares in their individual names and in the same capacity as they own the Property. This condition is therefore, satisfied.

7.         The asset transferred or created must not be a personal use asset, a decoration, a precluded asset, or an asset that will be become trading stock of the company (subsection 122-135(3)).

This condition is satisfied as the Property is not a personal use asset, precluded asset, a decorated awarded for bravery and will not become trading stock of the Company.

8.         If the asset in question is a right, option, or convertible note, the asset acquired by the company on the exercise or conversion of the right, must not become trading stock of the company just after acquisition (subsection 122-135(4)).

This condition is not relevant.

9.         The company cannot be an exempt entity (subsection 122-135(5)).

This condition will be met as the Company will not be an exempt entity.

10.     The partners and the company must be an Australian resident at the time of the trigger event. (subsection 122-135(6)).

This condition will be met as the Partners and the Company are Australian resident.

Conclusion

The Partners satisfy all the relevant conditions to obtain a roll-over under Subdivision 122-B on the transferring of their interests in the Property to the Company.

Consequently, a capital gain or capital loss each Partner makes from the transfer is disregarded in accordance with section 122-150.

The cost base of the shares each Partner will receive from the Company is determined in accordance with subsection 122-155(1).

The cost base of the Property in the hand of the Company is determined in accordance with subsection 122-200(2).

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