Edited version of private ruling

Authorisation Number: 1011635537213

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Ruling

Subject: The reorganisation of Company A and Company B by Shareholders 1 and 2

Question 1

Will Subdivision 124-G of the Income Tax Assessment Act 1997 (ITAA 1997) apply to Shareholder 1, pursuant to subsection 124-360(2) of the ITAA 1997, in relation to the reorganisation of Company A?

Answer

Provided Company X makes the election under subsection 124-380(5) of the ITAA 1997, Shareholder 1 will be taken to have chosen Subdivision 124-G roll-over pursuant to subsection 124-360(2) of the ITAA 1997.

Question 2

Will Subdivision 124-G of the ITAA 1997 roll-over be available to Shareholder 1 pursuant to subsection 124-360(1) of the ITAA 1997 in relation to the reorganisation of Company B?

Answer

Provided that Company X elects that subsection 124-385 of the ITAA 1997 applies, Shareholder 1 will have a choice to obtain roll-over under subsection 124-360(1) of the ITAA 1997.

Question 3

Will the Commissioner make a determination under section 177F of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to a tax benefit arising for Shareholder 1 as a consequence of the proposed reorganisation?

Answer

No.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Shareholder 1

Shareholder 1 is an Australian resident company for income tax purposes.

Shareholder 2

Shareholder 2 is an Australian resident company for income tax purposes.

Company A

Company A is an Australian resident company for income tax purposes.

Company B

Company B is an Australian resident company for income tax purposes.

Company X

Company X is an Australian resident company for income tax purposes.

Transaction

It is proposed to reorganise the interests of Shareholders 1 and 2 to establish a single corporate holding structure for Company A and Company B.

Additional facts for the purposes of Question 3

In addition to the scheme outlined, the following additional facts apply for the purposes of Question 3 of the ruling:

Shareholder 1 and Shareholder 2 will disregard any capital gain or capital loss that arises on the disposal of their interests in Company A and Company B.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 177C

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1997 section 124-360

Income Tax Assessment Act 1997 section 124-365

Income Tax Assessment Act 1997 section 124-380

Reasons for decision

Question 1

Subdivision 124-G of the ITAA 1997 applies where a taxpayer owns shares in a company and under a scheme for reorganising the affairs of the company, disposes of those shares with the result that the taxpayer becomes the owner of new shares in another company. Broadly, roll-over relief is available under this Subdivision for certain business reorganisations where no change occurs in the economic ownership of a particular underlying asset or where the underlying assets in which the taxpayer has an economic interest do not change.

Relevantly, subsection 124-360(1) of the ITAA 1997 provides the following:

You can choose to obtain a roll-over if:

(a) you are a *member of a company (the original company); and

(b) you and at least one other entity (the exchanging members) own all the *shares in it; and

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

and the requirements in sections 124-365 and 124-380 are satisfied.

However, in circumstances involving a reorganisation of a tax consolidated group where the interposed company chooses to continue the original tax consolidated group, subsection 124-360(2) of the ITAA 1997 applies:

You are taken to have chosen to obtain the roll-over if:

(a) immediately before the time referred to in section 124-365 as the completion time, the original company is the *head company of a *consolidated group; and

immediately after the completion time, the interposed company is the head company of the group.

Note: The consolidated group continues in existence because of section 703-70.

Additional requirements that must be satisfied in order to obtain Subdivision 124-G roll-over are provided in sections 124-365 and 124-380 of the ITAA 1997. Firstly, under section 124-365, the reorganisation must result in the economic interests of each former shareholder in the underlying assets of the restructured companies being maintained immediately after the completion time. This is determined by comparing the proportion, as well as the market value ratio, of the shareholders' interest in the total replacement shares issued by the interposed company with the total shares owned by the shareholders in the original company. Further, the shareholder wishing to choose roll-over must be an Australian resident (or alternatively satisfy further requirements if the shareholder is a foreign resident)

Secondly, under section 124-380 of the ITAA 1997, the shares issued in the interposed company must not be redeemable shares and must be held by the shareholders from the time they are issued to the completion time. Just after the completion time, for the purposes of this scheme, those shareholders must own all of the shares in the interposed company.

In respect of the reorganisation of Company A, the requirements for Subdivision 124-G roll-over, as set out in the preceding paragraphs, will be satisfied.

In addition to the requirements discussed above, special rules apply in circumstances where the original company is the head company of a tax consolidated group. Where the original tax consolidated group is able to continue to exist pursuant to subsection 124-380(5) of the ITAA 1997, Subdivision 124-G roll-over is taken to have been chosen by the member (subsection 124-360(2) of the ITAA 1997). In the present case, Company X will be entitled to make a choice under subsection 124-380(5) of the ITAA 1997. Accordingly, provided that Company X makes the election under subsection 124-380(5) of the ITAA 1997, Shareholder 1 will be taken to have chosen Subdivision 124-G roll-over pursuant to subsection 124-360(2) of the ITAA 1997.

Question 2

As discussed in the Reasons for decision for Question 1 above, an entity can choose Subdivision 124-G roll-over where the requirements of subsection 124-360(1) of the ITAA 1997 are satisfied. That subsection provides:

You can choose to obtain a roll-over if:

(a) you are a *member of a company (the original company); and

(b) you and at least one other entity (the exchanging members) own all the *shares in it; and

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

and the requirements in sections 124-365 and 124-380 are satisfied.

In addition, the requirements in sections 124-365 and 124-380 of the ITAA 1997 must also be satisfied.

While the requirements in section 124-365 are satisfied Company X will not be eligible to make a choice under subsection 124-380(5) of the ITAA 1997.

In cases where subsection 124-380(5) of the ITAA 1997 does not apply, subsections 124-380(6) and 124-365(7) of the ITAA 1997 require the interposed company to choose that section 124-385 of the ITAA 1997 applies as follows:

124-380(6) If subsection (5) of this section does not apply, the interposed company must choose that section 124-385 apply.

124-380(7) In either case, the interposed company must make the choice within 28 days after the completion time, or within such further time as the Commissioner allows. The choice cannot be revoked.

As such, Company X will be required to elect that section 124-385 of the ITAA 1997 applies, which therefore satisfies the requirements in section 124-380 of the ITAA 1997. Therefore, in respect of the reorganisation of Company B, provided that Company X elects that subsection 124-385 applies, the requirements for Subdivision 124-G roll-over will be satisfied.

Accordingly, provided that Company X elects that subsection 124-385 of the ITAA 1997 applies, Shareholder 1 will have a choice to obtain roll-over under subsection 124-360(1) of the ITAA 1997.

Question 3

Part IVA of the ITAA 1936 (Part IVA) is a general anti-avoidance provision. Its role is to ensure that the purpose of the primary operative provisions is not defeated in circumstances where the other provisions should, but have not, operated.

Part IVA gives the Commissioner the discretion to cancel a 'tax benefit' that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. This discretion is found in subsection 177F(1) of the ITAA 1936.

Before the Commissioner can exercise the discretion in subsection 177F(1) of the ITAA 1936, the requirements of Part IVA must be satisfied. These requirements are contained in section 177D of the ITAA 1936 which provides that Part IVA applies where there is:

1. a 'tax benefit', as identified in section 177C, was or would, but for subsection 177F(1), have been obtained;

2. the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A; and

3. having regard to section 177D, the scheme is one to which Part IVA applies.

The requirements are further discussed below.

Scheme

A scheme, for the purposes of Part IVA, is broadly defined in section 177A of the ITAA 1936 and includes:

a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

b) any scheme, plan, proposal, action, course of action or course of conduct.

The scope of this definition has been considered in a number of judgments, most notably being the judgment of the High Court in Hart v. Federal Commissioner of Taxation (2005) 148 FCR 198; (2005) 61 ATR 519; 2005 ATC 5022. This case confirmed the view that the definition of 'scheme' in section 177A of the ITAA 1936 is extremely wide. According to the judgment in this case, a scheme can be narrowly defined as a single step or event and it is not relevant to ask whether that scheme is capable of standing on its own.

In the present circumstances, the scheme is set out in the facts of this ruling.

It is specifically noted that the scheme for the purposes of Part IVA also includes the fact that Shareholder 1 and Shareholder 2 will choose to disregard any capital gain or capital loss arising from the disposal of their interests in Company A and Company B.

Tax benefit

For Part IVA to apply, a taxpayer must have obtained, or would but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with a scheme.

The identification of a tax benefit for the operation of Part IVA necessarily requires consideration of the income tax consequences of an 'alternative hypothesis' or an 'alternative postulate' (referred to as the counterfactual).

A number of possible counterfactuals have been considered, however when compared with the scheme, none of these counterfactuals would result in a tax benefit to Shareholder 1.

Conclusion

As the requirements of Part IVA are not satisfied, the Commissioner will not make a determination under section 177F of the ITAA 1936 to cancel a tax benefit arising for Shareholder 1 as a consequence of the scheme.