Edited version of private advice

Authorisation Number: 1052407850420

Date of advice: 12 June 2025

Ruling

Subject:CGT - disposal of shares

Question 1

Will the Proposed Transaction give rise to a CGT event A1 under Subdivision 104-A of the ITAA 1997 for Parent Co?

Answer 1

Yes.

Question 2

For the purpose of determining whether any capital gain or capital loss made by Parent Co on the Proposed Transaction is disregarded under section 855-10 of the ITAA 1997, will the CGT assets (excluding any rights granted over the Management Units) that arise under the MLR Agreements that are held by the Aus Co and its wholly owned subsidiaries constitute taxable Australian real property as defined in section 855-20 of the ITAA 1997?

Answer 2

No.

This ruling applies for the following period

Income year ending XXXX

The scheme commenced on:

1 January 20XX

Relevant facts and circumstances

Head Co

Head Co is incorporated in Country A. The Head Co is the parent company of a multinational group (Head Co Group) that has world-wide operations carried on through legal entities in a number of jurisdictions including Australia.

One of the primary business operations of the Head Co Group is running a management letting agent business.

The Head Co Group is divided into two operating divisions headed by Hold Co 1 and Hold Co 2. Both are incorporated and tax residents of Country A.

The majority of shares in Hold Co 1 are held by Head Co, with a small minority interest. Hold Co 2 is a wholly owned subsidiary of Head Co.

Parent Co

Parent Co is incorporated in Country B and is a wholly-owned subsidiary of Hold Co 1.

New Parent Co

New Parent Co is incorporated in Country B and is a wholly-owned subsidiary of Hold Co 2.

Aus Co

Aus Co is incorporated in Australia and is a wholly-owned subsidiary of Parent Co.

Aus Co and its wholly owned subsidiaries (Aus Co Group) operate a management letting agent business in Australia.

Proposed Transaction

Head Co is proposing to undertake an internal restructure. As such, there will be a transfer of the shares in Aus Co from Parent Co to New Parent Co.

MLR Agreements

The Aus Co Group has entered into Management Letting Rights (MLR) Agreements for a number of properties that it manages which provide the contractual basis for its management letting agent business in Australia.

Broadly, the MLR Agreements provide the Aus Co Group with the following rights:

•                     The right to perform caretaking duties as building manager (the Caretaking Rights);

•                     The right to conduct a letting agent business (the Management Agent Letting Rights); and

•                     The right to exclusive use and occupation of a manager's office (the Management Unit).

The Aus Co Group enters into an 'Appointment of Agent' or residential tenancy agreements (RTA) agreements with individual apartment owners as part of providing its letting services.

Under the 'Appointment of Agent' agreements, apartment owners under receive accommodation revenue earned by the Aus Co Group less commissions, charges and fees as set out in the applicable agreements.

Under the RTA agreements, the Aus Co Group enters in lease agreement with individual apartment owners. The apartment owners are provided with an agreed fixed rent every month, less the fees charged by the Aus Co Group (i.e., property management fee, advertising fee and administration fee) and other expenses paid by the Aus Group Co as agreed by the owner. The net rent is received by the owner is irrespective of whether the apartment is sub-let or not and is not related to the occupancy income earned by the Aus Co Group.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 104-A

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 Subdivision 855-A

Income Tax Assessment Act 1997 section 855-10

Income Tax Assessment Act 1997 section 855-15

Income Tax Assessment Act 1997 section 855-20

Income Tax Assessment Act 1997 subsection 995-1

Income Tax Assessment Act 1936 subsection 6(1)

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/gaar.

Reasons for decision

Question 1

Will the Proposed Transaction give rise to a CGT event A1 under Subdivision 104-A of the ITAA 1997 for Parent Co?

Summary

The Proposed Transaction will give rise to CGT event A1 for Parent Co.

Detailed reasoning

Subsection 108-5(1) states that a CGT asset is any kind of property or a legal or equitable right that is not property. Note 1 of section 108-5 lists a number of examples of CGT assets, including the shares in a company.

CGT event A1 happens to an entity if it disposes of a CGT asset: subsection 104-10(1). The entity disposes of the asset if there is a change of ownership of the asset from the entity to another entity. Merely ceasing to be the legal owner is insufficient - there must be a change in beneficial ownership: subsection 104-10(2). The time of the event is when the entity enters into the contract for the disposal, or if there is no contract, when the change of ownership occurs: subsection 104-10(3).

The shares in Aus Co held by Parent Co are a CGT asset by virtue of section 108-5 of the ITAA 1997. The Proposed Transaction involves the transfer of shares in Aus Co from Parent Co to New Parent Co which results in a change of ownership.

The Proposed Transaction will give rise to CGT event A1 for Parent Co pursuant to subsection 104-10(1) of the ITAA 1997. CGT event A1 will occur on the date the contract for the share transfer is entered into pursuant to paragraph 104-10(3)(a) of the ITAA 1997.

Question 2

For the purpose of determining whether any capital gain or capital loss made by Parent Co on the Proposed Transaction is disregarded under section 855-10 of the ITAA 1997, will the CGT assets (excluding any rights granted over the Management Units) that arise under the MLR Agreements that are held by Aus Co and its wholly owned subsidiaries constitute taxable Australian real property as defined in section 855-20 of the ITAA 1997?

Summary

The CGT assets (excluding any rights granted over the Management Units) that arise under the MLR Agreements that are held by the Aus Co and its wholly owned subsidiaries will not constitute taxable Australian real property under Division 855 of the ITAA 1997.

Detailed reasoning

Section 108-5 - CGT assets

Subsection 108-5(1) states that a CGT asset is any kind of property, or a legal or equitable right that is not property. Note 1 to section 108-5 lists a number of examples of CGT assets, including rights enforceable by contractual obligation.

Section 104-10 - Disposal of a CGT asset: CGT event A1

CGT event A1 happens to an entity if it disposes of a CGT asset: subsection 104-10(1). The entity disposes of the asset if there is a change of ownership of the asset from the entity to another entity. Merely ceasing to be the legal owner is insufficient - there must be a change in beneficial ownership: subsection 104-10(2). The time of the event is when the entity enters into the contract for the disposal, or if there is no contract, when the change of ownership occurs: subsection 104-10(3).

The entity makes a capital gain if the capital proceeds from the disposal exceed the asset's cost base, or a capital loss if the capital proceeds are less than the asset's reduced cost base: subsection 104-10(4).

A 'foreign resident' is defined in subsection 995-1(1) to mean a person who is not a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

Subsection 6(1) of the ITAA 1936 provides that a 'non-resident' means a person who is not a resident of Australia.

Subdivision 855-A - Disregarding a capital gain or loss by foreign residents

Subsection 855-10(1) provides that a capital gain or loss from a CGT event that happens in relation to a CGT asset that is not 'taxable Australian property' is disregarded if you are a foreign resident, or the trustee of a foreign trust for CGT purposes, just before the CGT event happens.

There are five categories of CGT assets that are taxable Australian property. The categories are set out in the table in section 855-15 of the ITAA 1997 as follows.

Table 1: Section 855-15

Section 855-20 provides that a CGT asset is TARP if it is:

(a)           real property situated in Australia (including a lease of land, if the land is situated in Australia); or

(b)           a * mining, quarrying or prospecting right (to the extent that the right is not real property), if the * minerals, * petroleum or quarry materials are situated in Australia.

Taxation Determination 2009/18 Income Tax: does the term 'real property' in paragraph 855-20(a) of the Income Tax Assessment Act 1997 include a leasehold interest in land? confirms the Commissioner's view that in the context of Division 855 of ITAA 1997, the term 'real property' in paragraph 855-20(a) of ITAA 1997 includes a leasehold interest in land.

A 'lease' is not defined in the Act and accordingly it bears its common law meaning. The distinguishing characteristic of a lease of land is that a lease confers on the lessee the legal right to exclusive possession over the premises. In Radaich v Smith (1959) 101 CLR 209, the Full Court of the High Court said that in determining whether a particular instrument created a lease or a licence, the decisive factor was whether the right it conferred was a right to exclusive possession.

Application to facts

Parent Co is a foreign resident as it does not meet the criteria for being a resident of Australia, and so Parent Co satisfies the condition in paragraph 855-10(1)(a).

As set out in the reasons for decision for Question 1 of this ruling, the Proposed Transaction will give rise to CGT event A1 for Parent Co pursuant to subsection 104-10(1) of the ITAA 1997.

As to whether the condition in paragraph 855-10(1)(b) is satisfied, of the five categories of taxable Australian property mentioned in the table in section 855-15, the relevant CGT assets do not satisfy the description in items 2,3,4 or 5. It remains to determine whether or not the CGT assets constitute taxable Australian real property as defined in section 855-20.

Management Agent Letting Rights and Caretaking Rights

We consider that the CGT assets arising from the MLR Agreements (excluding the right to use of the Management Unit) is not a leasehold interest in land as there is no right to exclusive possession. As such these CGT assets are not TARP under section 855-20.

Management Units

The MLR Agreements grant the right to use the Management Unit on part of the Common Property which may be used by Aus Co and its wholly owned subsidiaries as an office to undertake its letting and caretaking business. As this entitles Aus Co and its wholly owned subsidiaries with the right to exclusive occupation to use the space to conduct its business, we consider these CGT assets to be TARP under section 855-20.

Conclusion

Based on the review of the MLR Agreements, the CGT assets (excluding any rights granted over the Management Units) that arise under the MLR Agreements that are held by the Aus Co's subsidiaries will not constitute taxable Australian real property under Division 855 of the ITAA 1997.

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