Edited version of private ruling

Authorisation Number: 1011708175325

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Ruling

Subject: Replacement Asset Roll-over

Question

If the shareholders choose to obtain roll-over relief under Subdivision 124-G of the Income Tax Assessment Act 1997 ('ITAA 1997') will some of the shares which company C owns in company A be taken to be acquired prior to 20 September 1985?

Answer

No. All of the shares that company C will own in company A will be taken to have been acquired after 20 September 1985.

This ruling applies for the following period:

1 July 2010 to 30 June 2012

Relevant facts and circumstances

Under a proposed scheme shareholders in companies A and B (the original companies) will dispose of all their shares to company C (the interposed company) in exchange for shares in company C. The shareholders will own shares in company C in the same proportions that they held shares in companies A and B.

Company A previously held assets which were acquired prior to 20 September 1985. However, several years ago there was a change in majority underlying interests in the company which resulted in the assets becoming post-CGT assets due to the operation of Division 149 of the Income Tax Assessment Act 1997 ('ITAA 1997').

Reasons for decision

Division 124 -Replacement asset rollovers

A rollover may be available under Division 124 of the ITAA 1997 when a taxpayer who owns a CGT asset gives up, or surrenders that asset, or the taxpayer's ownership of the asset comes to an end in some other way, and as part of the same transaction or circumstances the taxpayer receives another CGT asset to replace the original asset. If a rollover is available, the effect is to defer to a later CGT event any capital gain or loss which would otherwise be triggered by the event which brings the taxpayer's ownership of the original asset to an end. If the original asset was acquired by the taxpayer before 20 September 1985, the usual effect of the rollover will be to treat the replacement asset as a pre-CGT asset.

Sections 124-10 and 124-15 of the ITAA 1997 set out the general rules for replacement asset rollovers. If a taxpayer chooses to apply a rollover, the capital gain or capital loss from the original asset(s) is disregarded (subsections 124-10(2) and 124-15(2) of the ITAA 1997). If the original asset(s) was acquired before 20 September 1985 the new asset(s) are taken to have been acquired before that day (subsections 124-10(4) and 124-15(4) of the ITAA 1997). However this general rule is qualified by a note in each of the subsections:

'A capital gain or loss you make from a CGT asset you acquired before 20 September 1985 is generally disregarded: see Division 104. This exemption is removed in some situations: see Division 149.'

Division 149 of the ITAA 1997 sets out the circumstances in which an asset stops being a pre-CGT asset.

Subdivision 124-G - Exchange of shares in one company for shares in another company

A taxpayer who is a shareholder in a company (the "original company") can elect to obtain a rollover when the company reorganises its affairs. The taxpayer will be eligible for rollover relief if:

· The taxpayer and all other shareholders in the company dispose of all their shares to a second company (the "interposed company") in exchange for shares in that second company; and

· The conditions in section 124-365 of the ITAA 1997 are satisfied.

The requirements of section 124-365 of the ITAA 1997 are as follows:

· The interposed company owns all of the shares in the original company when the exchanging members have disposed of their shares (the "completion time")

· At that time, each exchanging member now owns a whole number of shares in the interposed company in the same percentage as that member owned in the original company

· The ratio of the market value of each exchanging member's shareholding in the interposed company to the total market value of shares in that company must be the same as the ratio of the market value of that member's shareholding in the original company to the total market value of the shares in the original company; and

· The taxpayer must be an Australian resident at the time the shares in the original company are disposed of, or if not, the shares in the original company must be "taxable Australian property" just before that time and the share in the interposed company must be "taxable Australian property" just after the completion time.

Outcome of the proposed scheme

Under the terms of the proposed Share Sale Agreement (SSA) the shareholders in companies A and B will dispose of all their shares in companies A and B to company C in the same transaction in exchange for shares in company C.

As a result of the transaction, company C ('the interposed company') will own all of the shares in companies A and B. The former shareholders ('exchanging members') will now be shareholders of company C and, according to the SSA, own a whole number of shares in the interposed company in the same percentage as the shareholders owned in the original companies.

However the rollover will not affect the CGT status of the assets of companies A and B as there will not be a change in the majority underlying interests in the CGT assets.

The meaning of 'majority underlying interests' is set out in section 149-15 of the ITAA 1997. The section relevantly states:

Majority underlying interests in a *CGT asset consist of:

(a) more than 50% of the beneficial interests that *ultimate owners have (whether directly or *indirectly) in the asset; and

(b) more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any *ordinary income that may be *derived from the asset.

* denotes a term defined in section 995-1 of the ITAA 1997.

The outcome of the SSA is that the ultimate owners who previously had direct beneficial interests in the assets of companies A and B will have indirect beneficial interests in those assets through their ownership of shares in company C.

Each shareholder will own shares in company C in the same proportion that they owned shares in companies A and B. Therefore the provisions of Division 149 of the ITAA 1997 are not enlivened by this transaction.

Status of company Cs' shares in company A

The applicant has argued that, applying the same reasoning as Taxation Ruling TR 2004/18, the same exception should be applied when determining whether an asset is taken to have been acquired before 20 September 1985 under subsection 124-385(1) of the ITAA 1997. Under this subsection the interposed company will be taken to have acquired a certain number of pre-CGT shares in the original company if the original company holds any pre-CGT assets. The shareholding is apportioned on the ratio of the value of pre-CGT assets to the total value of all assets held by the original company.

The exception referred to is that for the purposes of applying CGT event K6, under section 124-385(1) of the ITAA 1997, property deemed by Division 149 of the ITAA 1997 to have been acquired on or after 20 September 1985 shall continue to be treated as being pre-CGT property. The reason the Taxation Ruling gives for this is as follows:

"Continuing to treat the item of property as acquired pre-CGT is consistent with the objective of CGT event K6. As an anti-avoidance or transitional provision, it is designed to capture the accumulation of post-CGT acquired property in a company with pre-CGT shareholders. CGT event K6 is not targeted at the accumulation of property which is only deemed post-CGT acquired because of the operation of another anti-avoidance or transitional provision in Division 149. Extending the context of the deeming in Division 149 to the operation of CGT event K6 could lead to one deemed result from an anti-avoidance provision adversely interacting with another deemed result from another anti-avoidance provision." (paragraphs 65, 66 and 67)

We do not agree that the reasoning in TR 2004/18 is applicable in the present circumstances.

Under the proposed SSA there will be an exchange of shares in the original companies for shares in another where the shareholders can choose Subdivision 124-G roll-over. There has been an application of Division 149 to one of the original companies prior to the transaction covered by the SSA. The application of Division 149 has resulted in assets of that company stopping being pre-CGT assets.

Subsection 149-30(1) of the ITAA 1997 states that an asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not held by the ultimate owners who held the interests immediately before 20 September 1985.

In these circumstances we do not have, as we do in the circumstances dealt with in TR 2004/8, one deemed result from an anti-avoidance provision adversely interacting with another deemed result from another anti-avoidance provision.

It is our view that the CGT provisions are clear and are not open to any alternative interpretation. Under subsection 149-30(1A) of the ITAA 1997, Parts 3-1 and 3-3 apply to each relevant asset as if the entity acquired it when it stopped being a pre-CGT asset. In addition, section 149-10 of the ITAA 1997 states that an asset is a pre-CGT asset if, and only if, it was acquired before 20 September 1985, and it has not stopped being a pre-CGT asset under Division 149 (or under the provisions listed in paragraph 149-10(b) of the ITAA 1997).

Therefore the shares in company A that will be held by company C will be deemed to have been acquired after 20 September 1985.