Edited version of private ruling

Authorisation Number: 1011700417248

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Ruling

Subject: Capital gains tax upon the transfer of assets to a parent company

Question 1

Will CGT event A1 under section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to Company A when it transfers assets to its parent company?

Answer

Yes.

Question 2

Can Company A reduce any capital gain made upon the transfer of assets to its parent company by 50% under section 152-205 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011.

The scheme commences on:

30 June 2011.

Relevant facts and circumstances

Company A is a wholly owned subsidiary of Company B which was set up in the 1960's originally to hold property assets on behalf of Company B (a Public Company Limited by Guarantee).

Company B is an endorsed tax concession charity under Division 50 of the ITAA 1997. Company A is not an endorsed tax concession charity, and is a taxable company. Company B and Company A are not eligible to form a tax consolidated group under Item 1 of subsection 703-20(2) of the ITAA 1997 as Company B is tax exempt under Division 50 of the ITAA 1997.

Company B wishes to consolidate its operations into one company and deregister Company A. It is proposed that Company A will transfer all of its assets to Company B. Company A will not receive any consideration for transferring these assets.

The merger is proposed to reduce the administrative paperwork of maintaining two companies, plus allow Company B to apply for bank loans or overdrafts in its own right by bringing these physical assets under the control of the one company.

The assets that Company A proposes to transfer consist of property and assets specific to the running of the business of Company B. All assets were acquired post 1985.

Company B operates a business from the property subject to the proposed transfer. A portion of the building is also leased out to subtenants. The property's main use is the operation of Company B's business as the subtenants lease only a minor area of the floor space of the property. All rent received from the property is redirected back to Company B.

The net value of the assets held by Company A and Company B at the time of transfer as defined by section 152-15 of the ITAA 1997 will be less than $6 million. Company A and Company B do not have any other connected entities or affiliates as defined by the ITAA 1997.

If Company A will be liable for capital gains tax upon as a result of this transaction, the two companies will continue to operate as they are currently structured.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-5.

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Subsection 104-10(4).

Income Tax Assessment Act 1997 Section 116-20.

Income Tax Assessment Act 1997 Section 116-30.

Income Tax Assessment Act 1997 Paragraph 116-30(2)(b).

Income Tax Assessment Act 1997 Subdivision 152-C.

Income Tax Assessment Act 1997 Section 152-205.

Reasons for decision

Question 1

CGT event A1 under section 104-10 of the ITAA 1997 will apply to Company A when it transfers assets to its parent company.

Company A will make a capital gain if the market values of the assets at the time of the transfer are more than their cost base.

Detailed reasoning

Section 102-20 of the ITAA 1997 states that you can make a capital gain or capital loss if and only if a CGT event happens. The gain or loss is made at the time of the CGT event.

Section 104-10 of the ITAA 1997 provides that CGT event A1 happens if you dispose of a CGT asset. A disposal of a CGT asset occurs if there is a change in ownership of the asset from one entity to another entity.

A CGT asset is any kind of property or a legal or equitable right that is not property. It is considered that the assets Company A intends to transfer to Company B are CGT assets and CGT event A1 will occur when Company A transfers those assets.

When CGT event A1 occurs, you make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. The timing of the CGT event will be at the time a contract is entered into for the transfer of the assets or otherwise when the transfer occurs.

The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset.

Section 116-20 of the ITAA 1997 provides that the capital proceeds from most CGT events are the total amount of money or the value of any property you receive, or are entitled to receive in respect of the event happening.

However, a special rule exists in section 116-30 of the ITAA 1997 in respect of capital proceeds. Where no capital proceeds are received from a CGT event, you are taken to have received the market value of the CGT asset that is the subject of the event. The market value is worked out as at the time of the event. As Company A will not receive any consideration for the transfer of the assets, it is taken to have received the market value of the assets at the time of the transfer.

If alternatively, Company B provides a nominal amount of consideration to Company A for the transfer of the assets, the market value substitution rule will still apply due to the operation of paragraph 116-30(2)(b) of the ITAA 1997 as the entities are considered to not be acting at arm's length.

If the market value of the assets at the time of the transfer is more than their cost base, Company A will make a capital gain equal to the difference of these amounts upon the transfer. Any net capital gain will be included in the assessable income of Company A under section 102-5 of the ITAA 1997 in the income year of the transfer.

The Income Tax Assessment Act 1997 does not provide a Commissioner's discretion to disregard a capital gain in certain circumstances.

Question 2

Summary

Company A will be eligible to reduce any capital gain made upon the transfer of the assets to Company B by 50% under section 152-105 of the ITAA 1997.

Detailed reasoning

The CGT small business concessions provide certain CGT concessions for small business that meet certain eligibility requirements.

One of the eligibility requirements is that you and all of your connected entities and affiliates have net CGT assets of less than $6 million. As the net assets of Company A and Company B will be less than $6 million and they have no other connected entities or affiliates, Company A may be eligible for the small business CGT concessions.

There are four main small business CGT concessions. The only concession that Company A may be eligible to apply is the small business 50% active asset reduction under Subdivision 152-C of the ITAA 1997. The concession allows you to choose to reduce the capital gain by 50% after applying any current year capital losses or unapplied net capital losses from a previous year.

You may be eligible to choose the small business 50% active asset reduction if the CGT asset in respect of the capital gain is an active asset. A CGT asset is an active asset if you own it and you use it or hold ready for use in the course of carrying on a business of yours, or a business of your affiliates or connected entities. The CGT asset must be an active asset for either 7.5 years if you have owned it for more than 15 years, or half of the test period if you have owned it for 15 years or less.

It is considered that the assets specific to the operation of Company B's business will be active assets as they are used in carrying on Company B's business, and have done so since their acquisition. Therefore Company A will be eligible to choose to any capital gain made upon the transfer of these assets to Company B by 50% under section 152-205 of the ITAA 1997.

Assets whose main use is to derive rent will not be active assets. The property intended to be transferred to Company B is leased out to subtenants, and is used to derive rent. In considering the main use of the asset, you must treat any use by your affiliate or connected entity as yours. Therefore, the fact that you are leasing the property to Company B will not prevent the property being an active asset, as Company B is carrying on a business on the property.

As the tenants only lease a minor area of the floor area of the property, the main use of the property is to operate the business by Company B. Consequently, the property will be an active asset and Company A will be eligible to reduce any capital gain made upon the transfer of the assets to Company B by 50% under section 152-205 of the ITAA 1997.