Edited version of private ruling

Authorisation Number: 1011660306650

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Ruling

Subject: Request for PBR - transfer of foreign assets

This ruling is a private ruling for the purposes of Division 359 of Schedule 1 of the

Taxation Administration Act 1953.

Year of income to which this ruling applies:

Substituted Accounting Period 1 January 2011 to 31 December 2011

Commencement date of scheme:

1 January 2009

Issue 1:

Other than in respect of tainted assets, will a taxable capital gain or loss arise in the hands of ABC Pty Ltd as head company of the ABC tax consolidated group under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) upon the transfer of the XYZ business to XYZ Limited, a non-resident indirect holding company?

Answer:

No.

Issue 2:

Will the transfer of the XYZ business be a dividend under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) and subject to withholding tax under section 128B of the ITAA 1936?

Answer:

No.

Issue 3:

On the winding up of DEF Pty Ltd, will the transfer of the XYZ business give rise to an assessable liquidator distribution under subsection 47(1) of the ITAA 1936?

Answer:

No.

The scheme that is the subject of the ruling:

ABC Pty Ltd (ABCPL) is an Australian holding company and is 100% owned by a non-resident company, which is indirectly 100% owned by XYZ Limited (XYZL), a non-resident public company listed on the XYZ stock exchanges .

The group has had operations in XYZ for many years. The assets of the XYZ business are held directly or indirectly through non-XYZ-resident subsidiaries.

DEF Pty Ltd (DEFPL) is an Australian resident company and is a subsidiary member of the Australian tax consolidated group, of which ABCPL is the head company. DEFPL holds the XYZ business assets and operates some XYZ businesses.

All of DEFPL's income is derived through carrying on the business through a permanent establishment (PE) in XYZ. The assets of DEFPL's XYZ business are not taxable Australian property.

The group has proposed to restructure the group in order for the assets currently held by non-XYZ corporate entities to be directly owned by XYZL (the scheme), such that the current non-XYZ holding entities can be eliminated to reduce the complexity of the structure and accordingly, reduce the compliance costs associated with the structure.

The CGT assets to be disposed of being the XYZ business were used wholly or mainly for the purpose of producing foreign income in carrying on a business of the ABCPL tax consolidated group at or through a PE in XYZ.

The scheme involves approval to be given by a XYZ-regulator. Under the scheme, all assets and liabilities of the XYZ businesses are transferred on a going concern basis to XYZL for nil consideration. After XYZ regulatory approval is granted, all creditors of the current owners of the XYZ businesses have full legal rights as against XYZL as the new owner of the XYZ businesses.

With respect to the XYZ business held by DEFPL, the proposed steps for the restructure are set out below:

§ seeking XYZ-regulatory approval;

§ all the assets and all the liabilities of DEFPL will be transferred to XYZL;

§ the assets and liabilities of the XYZ business shall be recorded at book values in XYZL's account;

§ the transfer of the XYZ business will be on a going concern basis; and

§ no issue or allotment of shares in DEFPL will occur and therefore the transfer of the XYZ business will occur for nil consideration.

The directors and shareholder of DEFPL will approve the terms of the scheme, and the subsequent reduction of capital in DEFPL. This reduction of capital occurs in accordance with section 256B of the Corporations Act 2001. However, there is no return of capital to GHI Pty Ltd, the sole shareholder in DEFPL. Following implementation of the scheme, it is intended that the redundant Australian companies will be eliminated. No other entities in the group, other than XYZL, DEFPL and GHI Pty Ltd will pass any resolutions in respect of the scheme.

The scheme also involves an interim funding arrangement which has already been initiated by the board of directors for XYZ Pty Ltd. External funding has also been obtained.

A decision was made to 'on-lend' part of the funds borrowed by XYZL to DEFPL through a series of Redeemable Preference Shares (RPS) issues. This was required by external lenders to XYZL.

Once the scheme is implemented, the interim funding structure as outlined above will be collapsed. It is also the intention of ABCPL to convert or exchange the RPS issued by DEFPL into ordinary shares.

DEFPL may hold tainted assets at the time of the transfer of the XYZ businesses, ABCPL expects that no gain or loss will arise on the disposal of the tainted assets held with the exception of derivative financial instruments. For the majority of tainted assets held, the tax cost base is equal to their market value. Provisional unaudited financial statement information provided discloses derivatives of a somewhat small value.

Relevant provisions:

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Subsection 23AH(3)

Income Tax Assessment Act 1936 Subsection 23AH(4)

Income Tax Assessment Act 1936 Subsection 23AH(8)

Income Tax Assessment Act 1936 Subsection 23AH(9)

Income Tax Assessment Act 1936 Subsection 23AH(15)

Income Tax Assessment Act 1936 Subsection 44(1)

Income Tax Assessment Act 1936 Subsection 47(1)

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Section 116-30

Income Tax Assessment Act 1997 Section 116-55

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1997 Subdivision 802-A

Income Tax Assessment Act 1997 Section 802-30

Income Tax Assessment Act 1997 Section 855-15

Income Tax Assessment Act 1997 Section 855-20

Income Tax Assessment Act 1997 Subsection 995-1(1)

Does Part IVA apply to this ruling?

Part IVA of the ITAA 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 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 of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

Explanation: (This does not form part of the notice of private ruling)

Issue 1

Section 104-10 of the ITAA 1997 states that CGT event A1 happens if you dispose of a CGT asset. A capital gain is made if the capital proceeds from the disposal of a CGT asset exceed the asset's cost base. A capital loss is made if the capital proceeds from the disposal of a CGT asset are less than the asset's reduced cost base. However, under subsections 23AH(3) and (4) of the ITAA 1936 a capital gain or loss from a CGT event happening to a CGT asset is disregarded for the purposes of Part 3-1 of the ITAA 1997 if all of the requirements of the section are met.

Subsection 23AH(3) of the ITAA 1936 provides that a capital gain from a CGT event happening to a CGT asset is disregarded for the purposes of Part 3-1 of the ITAA 1997 if:

§ the gain is made by a company that is a resident; and

§ the company used the asset wholly or mainly for the purposes of producing foreign income in carrying on a business at or through a PE of the company in a listed country or unlisted country; and

§ the asset is not taxable Australian property.

Subsection 23AH(4) of the ITAA 1936 provides that a capital loss from a CGT event happening to a CGT asset is disregarded for the purposes of Part 3-1 of the ITAA 1997 if:

§ the loss is made by a company that is a resident; and

§ the company used the asset wholly or mainly for the purpose of producing foreign income in carrying on a business at or through a PE of the company in a listed country or unlisted country; and

§ had the loss been a gain, it would be disregarded under subsection (3).

In this case, based on information provided, ABCPL (of which DEFPL is a subsidiary member of the income tax consolidated group) is a resident company carrying on a business in XYZ through a PE and the assets are not taxable Australian properties. As such, the above requirements of subsections 23AH(3) and (4) of the ITAA 1936 would be met.

Issue 2

Subsection 6(1) of the ITAA 1936 provides that a dividend includes any distribution made by a company to any of its shareholders, whether in money or other property. For the purposes of the subsection, the general principle is that entry on the share register is a prerequisite for membership of a company, and that beneficial ownership of shares, without registration, is not sufficient to establish a person as a shareholder; Federal Commissioner of Taxation v. Patcorp Investments Limited (1976) 140 CLR 247; 76 ATC 4225; (1976) 6 ATR 420.

Under the proposed Scheme, DEFPL will transfer to XYZL for nil consideration the XYZ business. GHI Pty Ltd is the sole shareholder of DEFPL and whilst it will approve the capital reduction, it will not receive any money or property by way of distribution from DEFPL. The only transaction is the transfer of DEFPL's XYZ business to XYZL.

XYZL is not a shareholder of ABCPL or DEFPL, as that term is defined in subsection 6(1) of the ITAA 1936, as its name is not entered on the register of members of either company. Therefore, the transfer of the XYZ Business from DEFPL to XYZL is not a dividend paid by ABCPL or DEFPL.

As the transfer of the XYZ Business is not a dividend, it will not be subject to dividend withholding tax under section 128B of the ITAA 1936.

Issue 3

Subsection 47(1) of the ITAA 1936 provides, in brief, that distributions to shareholders of a company by a liquidator in the course of winding-up can be deemed to be dividends paid out of profits.

Here, the transfer of the XYZ business from DEFPL to XYZL will not result in any distribution being made to GHI Pty Ltd. Liquidation of DEFPL is likely, but this is not a step in the process of the transfer of XYZ business to XYZL. That is, any liquidation will take place after the transfer of the XYZ business to XYZL.