Edited version of private advice

Authorisation Number: 1052353540728

Date of advice: 22 January 2025

Ruling

Subject: CGT - rollover

Question 1

Are the Shareholders eligible to choose to obtain roll-over relief under Subdivision 615-A of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the proposed exchange of their shares in the Original Entity for shares in Holding Company?

Answer 1

Yes

Question 2

Will the Shareholders be taken to have acquired their shares in Holding Company at the time they acquired their original shares in the Original Entity?

Answer 2

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

Relevant facts and circumstances

1.            Original Entity is an Australian private company.

2.            Original Entity has X fully paid ordinary shares on issue to X shareholders. No other types of shares exist and there are no schemes that can affect shareholdings e.g. employee share scheme.

3.            A restructure is being planned where by:

(a)          an Australian resident company, Holding Company, will be created

(b)          Holding Company will give each shareholder of Original Entity (Shareholder) one fully paid ordinary share in itself in exchange for each share they hold in Original Entity such that the economic ownership will not change.

4.            The Shareholders will not receive any other consideration under the proposed arrangement.

5.            This will result in the shareholders of Holding Company being the exact same as the current shareholders of Original Entity and Holding Company holding X% of the shares in Original Entity.

6.            Holding Entity will make a choice under section 615-30 of the ITAA 1997 that section 615-65 applies.

7.            Original Entity is not an X or part of an extended licensed entity that includes an X.

Reasons for decision

Question 1

Summary

The Shareholders are eligible to choose to obtain roll-over relief under Subdivision 615-A in relation to the proposed exchange of their shares in the Original Entity for shares in Holding Company

Detailed reasoning

8.            Broadly, Division 615 applies where shareholders, as part of an eligible business restructure, exchange shares in a company (or units in a trust) for shares in another company. The effect of Division 615 is to provide 'roll-over relief' so that the consequences which would normally flow from the disposal and acquisition under the CGT provisions are modified.

9.            Subsection 615-5(1) provides:

You can choose to obtain a roll-over if:

(a)          you are a member of a company or a unit trust (the original entity); and

(b)          you and at least one other entity (the exchanging members) owns all the shares or units in it; and

(c)           under a scheme for reorganising its affairs, the exchanging members dispose of all their shares or units in it to a company (the interposed company) in exchange for shares in the interposed company (and nothing else); and

(d)          the requirements in Subdivision 615-B are satisfied.

10.         In this case, each shareholder is a 'member' of the Original Entity, and together (as the exchanging members) own all the shares in the Original Entity, thereby satisfying the requirements in paragraphs 615-5(1)(a) and 615-5(1)(b).

11.         Under the Proposed Restructure (being a scheme for reorganising the affairs of the Original Entity), the shareholders will transfer (dispose of) all their shares in the Original Entity to Holding Company (the interposed company) in exchange for shares in Holding Company (and nothing else), thereby satisfying the requirements in paragraph 615-5(1)(c).

Subdivision 615-B

12.         Further requirements to obtain the roll-over relief are imposed by Subdivision 615-B. These are:

•                     the interposed company must own all the original interests (section 615-15)

•                     requirements relating to the interests in the original entity (subsection 615-20(1), subsection 615-20(2) and subsection 615-20(3))

•                     a special requirement relating to the interposed company (section 615-25), and

•                     the interposed company must make a particular choice under section 615-30.

Interposed company must own all the original interests

13.         Section 615-15 states that the interposed company must own all the shares or units in the original entity immediately after the time (the completion time) that all the exchanging members have had their shares or units in the original entity disposed of, redeemed or cancelled under the scheme.

14.         Under the Proposed Restructure, Holding Company will own all the shares in the Original Entity immediately after the shareholders dispose of their shares in the Original Entity (the completion time), thereby satisfying the requirement in section 615-15.

Requirements relating to the interests in the original entity

15.         Subsection 615-20(1) requires that, just after the completion time, each exchanging member must own:

•                     a whole number of shares in the interposed company; and

•                     a percentage of the shares in the interposed company that were issued to all the exchanging members that is equal to the percentage of the shares or units in the original entity (that were owned by the member and disposed of, redeemed or cancelled under the scheme).

16.         In this case, immediately after the completion time, each of the shareholders will own a whole number of shares in Holding Company and a percentage of shares in Holding Company that is equal to the percentage of the shares in the Original Entity that they originally owned and disposed of under the Proposed Restructure, thereby satisfying the requirements in subsection 615-20(1).

17.         Subsection 615-20(2) requires that the following ratios must be equal:

(a)          the ratio of the market value of each exchanging member's shares in the interposed company to the market value of the shares in the interposed company issued to all the exchanging members (worked out immediately after the completion time); and

(b)          the ratio of the market value of that member's shares in the original entity that were disposed of under the scheme to the market value of all the shares or units in the original company that were disposed of under the scheme (worked out immediately before the first disposal).

18.         Subsection 615-20(2) provides the following example:

Example 1: There are 100 shares in A Pty Ltd (the original entity), all having the same rights. B Pty Ltd (the interposed company) acquires all the shares in A by issuing each shareholder in A 10 shares in itself for each share they have in A. All shares in B have the same rights. Bill owned 15 shares in A and received 150 shares in B in exchange.

19.         Under the Proposed Restructure, the market value ratio of each shareholder's shares in Holding Company immediately after the completion time will equal the market value ratio they held of the Original Entity shares immediately before the first disposal, because at the relevant test times in July 2024:

•                     each shareholder will hold the same proportion of the total shares in both companies;

•                     the Original Entity shares held by the shareholders that are transferred under the scheme all have the same rights; and

•                     the Holding Company shares issued to each of the shareholders will all have the same rights.

Accordingly, the requirements of subsection 615-20(2) will be satisfied.

20.         Subsection 615-20(3), in part, requires that you are an Australian resident at the time your shares in the original entity are disposed of, redeemed or cancelled under the scheme.

21.         In this case, the shareholders are Australian residents, and will be at the time their shares in the Original Entity will be disposed of under the Proposed Restructure, therefore the requirement in subsection 615-20(3) will be satisfied.

Requirements relating to the interposed company

22.         Subsection 615-25(1) states that shares in the interposed company must not be redeemable shares. The shares issued in Holding Company will not be redeemable shares. Therefore, this condition will be satisfied.

23.         Subsection 615-25(2) requires that each exchanging member who is issued shares in the interposed company must own the shares from the time they are issued to the completion time. This condition is also satisfied as each shareholder will own the shares in Holding Company issued to them from the time they are issued until at least the completion time.

24.         Subsection 615-25(3) requires that, just after the completion time:

(a)          the exchanging members must own all the shares in the interposed company; or

(b)          entities other than those members must own no more than 5 shares in the interposed company and the market value of those shares expressed as a percentage of the market value of all the shares in the interposed company must be such that it is reasonable to treat the exchanging members as owning all the shares.

25.         In this case, paragraph 615-25(3)(a) is satisfied because, immediately after the completion time, the shareholders will collectively own all the shares in Holding Company.

Interposed company must make a particular choice

26.         Subsection 615-30(1) provides that, unless subsection 615-30(2) applies, the interposed company must choose that section 615-65 applies.

27.         Subsection 615-30(2) states that the interposed company must choose that a consolidated group continues in existence at and after the completion time with the interposed company as its head company, if:

(a)          immediately before the completion time, the consolidated group consisted of the original entity as head company and one or more other members (the other group members); and

(b)          immediately after the completion time, the interposed company is the head company of a consolidated group consisting only of itself and the other group members.

28.         In this case, immediately before the completion time, the Original Entity is not a member of a consolidated group. Under the Proposed Restructure, Holding Company will make the choice under subsection 615-30(1), that section 615-65 applies. As a result, the conditions in section 615-30 will be satisfied.

Conclusion

29.         As the requirements in subsection 615-5(1) will be satisfied, the shareholders will be eligible for roll-over relief in relation to the disposal of their shares in the Original Entity under the Proposed Restructure.

CGT consequences of the rollover

30.         The CGT consequences of the Division 615 rollover for the shareholders are highlighted in the note to section 615-40 and will be as follows:

(a)          any capital gain or capital loss that arises from the disposal of the shares in the Original Entity under the Proposed Restructure will be disregarded; and

(b)          the cost base of the new shares issued by Holding Company will be calculated by reference to the cost base of the shares in the Original Entity.

Question 2

Summary

Under Item 2 of the table in section 115-30, the shareholders will be taken to have acquired their shares in Holding Company at the time they acquired their original shares in the Original Entity.

Detailed reasoning

31.         Item 2 applies to replacement asset rollovers, which are defined in section 995-1(1). The definition provides that these rollovers are listed in section 112-115, which includes at Item 14D of the table therein the exchange of shares in one company for shares in an interposed company under Division 615.

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