Edited version of private ruling

Authorisation Number: 1011792338338

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Subject: Capital gains tax (CGT) event J1

Ruling

Question 1

Would capital gains tax (CGT) event J1 apply as a result of the proposed restructure of the X Co group on the basis that the insertion of a partnership in the X Co group structure as part of the proposed restructure would cause a company of the A2 Co MEC group to cease to be a 100% subsidiary of the ultimate holding company of the group?

Ruling:

No.

This ruling applies for the following period(s):

1 July 200X to 30 June 200Y

The scheme commences on:

1 July 200X

Question 2

Will the proposed restructure of the X Co group cause the A2 Co MEC group to cease to exist?

Answer 2:

No.

This ruling applies for the following period(s):

1 July 200X to 31 June 200Y

The scheme commences on:

1 July 200X

Relevant facts and circumstances

The applicant advises that at the time the reorganisation occurs, the relevant facts and circumstances will be as follows:

X Co is a non-resident company.

The X Co group includes an Australian multiple entry consolidated (MEC) group (the "A2 Co MEC group") of which X Co is the top company and A2 Co is the provisional head company.

The X Co group proposes to restructure by inserting a partnership (the "Partnership") into the structure between A Co and Z Co.

The restructure will also involve the internal transfer of shares in certain companies within the X Co group.

The partners of the Partnership will be three existing wholly owned non-resident subsidiary companies of X Co:

a. A Co

b. B Co, and

c. C Co.

The shares in Z Co are to be contributed to the capital of the Partnership and become partnership property.

The Partnership is to be formed as a general partnership pursuant to the provisions of the relevant legislation except as expressly provided in the Partnership Agreement.

All interests between the members of the A2 Co MEC group and the Partnership, and between the Partnership and X Co are 100% ordinary or preferred shares with voting, dividend and capital rights which satisfy the 100% subsidiary definition in section 975-505 of the Income Tax Assessment Act 1997 (ITAA 1997).

The 'roll-over assets' or the 'intra-group assets' referred to in the Private Ruling Application are shares in some of the subsidiary members in the A2 Co MEC group.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-175.

Income Tax Assessment Act 1997 Subdivision 126B.

Income Tax Assessment Act 1997 Section 703-30.

Income Tax Assessment Act 1997 Paragraph 703-30(1)(b).

Income Tax Assessment Act 1997 Paragraph 703-30(2)(a).

Income Tax Assessment Act 1997 Section 719-5.

Income Tax Assessment Act 1997 Subsection 719-5(7).

Income Tax Assessment Act 1997 Section 719-15.

Income Tax Assessment Act 1997 Section 719-20.

Income Tax Assessment Act 1997 Subsection 719-20(1).

Income Tax Assessment Act 1997 Section 960-130.

Income Tax Assessment Act 1997 Section 960-135.

Income Tax Assessment Act 1997 Section 975-100.

Income Tax Assessment Act 1997 Section 975-505.

Income Tax Assessment Act 1997 Paragraph 975-505(1)(b).

Reasons for decision

Question 1

Summary of decision

CGT event J1 would not apply as a result of the proposed restructure of the X Co group because the insertion of the Partnership in the X Co group structure would not cause a member of the A2 Co MEC group to cease to be a 100% subsidiary of X Co.

Detailed reasoning

CGT event J1

CGT Event J1 happens under section 104-175 of the ITAA 1997 (ITAA 1997), where there is a roll-over under Subdivision 126-B of the ITAA 1997 for a CGT event that happens in relation to a CGT asset involving two companies in the same wholly-owned group and the recipient company leaves the wholly-owned group.

A company is taken to have left the wholly-owned group when it ceases to be a 100% subsidiary of a member of the group.

There is concern that when the X Co group restructure occurs the recipient companies (that is, relevant members of the A2 Co MEC group) will cease to be 100% subsidiaries of the ultimate holding company (that is, X Co), thereby triggering CGT event J1 in respect of all the assets subject to roll-over under Subdivision 126-B of the ITAA 1997.

100% subsidiary

The term '100% subsidiary' is defined in section 975-505 of the ITAA 1997. The section provides that a company is a 100% subsidiary of another company (the holding company) if all the shares in the subsidiary company are beneficially owned by:

(a) the holding company, or

(b) one or more 100% subsidiaries of the holding company, or

(c) the holding company and one or more 100% subsidiaries of the holding company.

The term '100% subsidiary' is relevant for the definition of wholly-owned group in section 975-100 of the ITAA 1997 which, in turn, provides that two companies will be members of the same wholly-owned group if one of the companies is a 100% subsidiary of another company or each company is a 100% subsidiary of another company.

Following the X Co group restructure each of the corporate partners in the Partnership will clearly be a 100% subsidiary of X Co under paragraph 975-505(1)(b) of the ITAA 1997. Further, it is noted that the Partnership is not a separate legal entity distinct from its partners. The question at issue is whether the recipient companies will remain 100% subsidiaries of X Co (the holding company) after the restructure. They will only be 100% subsidiaries if all the shares in Z Co are beneficially owned by one or more 100% subsidiaries of X Co under paragraph (1)(b) of section 975-505 of the ITAA 1997.

The phrase 'beneficially owned' is not defined for Australian income tax purposes. Generally speaking, one company 'beneficially owns' shares in another company if the former company holds the bundle of rights associated with ownership of those shares for its own benefit, and not for the benefit of others. Holding the bundle of rights for its own benefit will mean that the company enjoys all the benefits and carries all the risks associated with ownership of those shares.

The meaning of 'beneficial ownership' 'is to be constructed in context and must reflect the purposes of the section in which it occurs'.

The Explanatory Memorandum to Taxation Laws Amendment Act 1993 which enacted section 160ZZOA of the ITAA 1936, the predecessor to section 104-175 of the ITAA 1997, stated that:

Provided an asset remains within the beneficial control of its ultimate holding company, no disposal and re-acquisition of the asset will be deemed under new section 160ZZOA. (Emphasis added)

The control of the recipient companies of the A2 Co MEC group will continue to be with X Co as the ultimate holding company.

The Commissioner considers that the corporate partners collectively hold the full bundle of ownership rights in Z Co and X Co in turn ultimately holds the full bundle of ownership rights in each of the interposed 100% subsidiaries in the Partnership for its own benefit.

Consequently, it is considered that CGT event J1 would not apply as a result of the proposed restructure of the group on the basis that the insertion of the Partnership in the X Co group structure would not of itself cause a member of the A2 Co MEC group to cease to be a 100% subsidiary of X Co.

This conclusion is in accord with the Commissioner's view set out in ATO Interpretative Decision 2009/43.

Question 2

Summary of decision

The proposed restructure of the X Co group will not cause the A2 Co MEC group to cease to exist because X Co will continue to be eligible to be a top company and all of the companies that were eligible tier-1 company members prior to the insertion of the partnership will continue to be eligible tier-1 companies of X Co after the restructure.

Detailed reasoning

The top company of the A2 Co MEC group is X Co. Under the proposed restructure the residency and ownership structure of X Co will not change and it will continue to meet the requirements in subsection 719-20(1) of the ITAA 1997 to be a top company.

The members of the A2 Co MEC group are derived from the eligible tier-1 companies of X Co which chose to form the MEC group and continue to be eligible tier-1 companies of the top company (section 719-5 of the ITAA 1997). If any of the eligible tier-1 companies that chose to form the A2 Co MEC group continue to be eligible tier-1 companies of X Co, the MEC group will continue to exist with X Co as the top company.

A company is an eligible tier-1 company of X Co if it meets the tax treatment, residence and ownership requirements of item 2 in the table in subsection 719-20(1) of the ITAA 1997 and the requirements in section 719-15 of the ITAA 1997.

With the exception of A1 Co, the proposed restructure will not affect the tax treatment, residency or ownership structure of any of the eligible tier-1 company members of the A2 Co MEC group. These companies will continue to be eligible tier-1 companies of X Co.

The proposed insertion of the Partnership will not affect the tax treatment or residency of A1 Co, but will change the structure of its ownership. However, A1 Co continues to be a wholly-owned subsidiary of X Co and, therefore, to be an eligible tier-1 company of X Co.

Section 703-30 of the ITAA 1997 sets out when an entity is a wholly-owned subsidiary of another:

703-30(1)

One entity (the subsidiary entity) is a wholly-owned subsidiary of another entity (the holding entity) if all the ^*membership interests in the subsidiary entity are beneficially owned by:

(a) the holding entity; or

(b) one or more wholly-owned subsidiaries of the holding entity; or

(c) the holding entity and one or more wholly-owned subsidiaries of the holding

entity.

703-30(2)

An entity (other than the subsidiary entity) is a wholly-owned subsidiary of the holding entity if, and only if:

(a) it is a wholly-owned subsidiary of the holding entity; or

(b) it is a wholly-owned subsidiary of a wholly-owned subsidiary of the holding entity;

because of any other application or applications of this section.

The Partnership is a wholly-owned subsidiary of X Co

The Partnership will be a wholly-owned subsidiary of X Co if the partners, A Co, B Co and C Co, beneficially own all of the membership interests in the Partnership.

A membership interest is defined as each interest, or set of interests, in an entity (or each right, or set of rights, in relation to the entity), by virtue of which a member of an entity is a member of the entity (section 960-135 of the ITAA 1997). The members of a partnership are the partners in the partnership (section 960-130 of the ITAA 1997). They are members of a partnership by virtue of their partnership interests. For the purposes of determining whether a partnership is a wholly-owned subsidiary of another entity, partnership interests are, therefore, membership interests.

A partner's interest in a partnership comprises the totality of rights the partner enjoys under the partnership agreement, and under the general law. The precise nature of the interest depends on the partnership agreement but generally includes a right to a proportionate share in the net proceeds of the sale of the partnership property after the payment of all partnership liabilities on dissolution of the partnership.

The phrase 'beneficially owned' is not defined in section 703-30 of the ITAA 1997, or elsewhere in the Income Tax Assessment Act. It is generally accepted that where an entity holds the bundle of rights associated with the ownership of the relevant asset for its own benefit, and not for the benefit of others, it will have beneficial ownership (J Sainsbury plc v. O'Connor (Inspector of Taxes) [1991] 1 WLR 963).

When the Partnership is formed, each of the partners will beneficially own their partnership interest in the Partnership. Each partner will be entitled to all of the benefits, rights and entitlements attached to their partnership interest.

As all of the membership interests in the Partnership are beneficially owned by entities that are wholly-owned subsidiaries of X Co, the Partnership is a wholly-owned subsidiary of X Co (paragraphs 703-30(1)(b) and 703-30(2)(a) of the ITAA 1997).

Z Co is a wholly-owned subsidiary of X Co

Z Co will be a wholly-owned subsidiary of the Partnership if the Partnership beneficially owns all of the membership interests in Z Co.

The membership interests are the shares in Z Co (sections 960-130 and 960-135 of the ITAA 1997). Z Co will be a wholly-owned subsidiary of the Partnership if the Partnership beneficially owns all of the shares in Z co.

In English law, the firm (section 4 of The Partnership Act 1890 defines the persons who have entered into partnership with one another collectively as 'the firm') is not generally recognised as an entity distinct from the partners composing it. The individual partners are the legal owners of partnership property.

The shares in Z Co are partnership property. Section 20 of The Partnership Act 1890 provides that partnership property 'must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement'.

Regardless of which partner, or partners, legally holds the shares in Z Co they are to be held and used exclusively for the benefit of the Partnership. The benefits provided by the shares are dealt with in accordance with The Partnership Act 1890 and the Partnership Agreement. The Partnership is the beneficial owner of the shares in Z Co.

As all of the membership interests in Z Co are beneficially owned by a wholly-owned subsidiary of X Co (the Partnership), Z Co is a wholly-owned subsidiary of X Co.

Y Co is a wholly-owned subsidiary of Z Co, and therefore of X Co. Its wholly-owned subsidiary A1 Co is therefore also a wholly-owned subsidiary of X Co (paragraph 703-30(1)(b) of the ITAA 1997).

A1 Co therefore will continue to an eligible tier-1 company of X Co. Its tax treatment and residence is not changed by the interposition of the Partnership, and it will continue to be a wholly-owned subsidiary of the top company, X Co (sections 719-20 and 719-15 of the ITAA 1997).

As X Co continues to be eligible to be a top company, and all of the companies that are eligible tier-1 company members of the A2 Co MEC group prior to inserting the Partnership continue to be eligible tie-1 companies of X Co, the A2 Co MEC group does not cease to exist (subsection 719-5(7) of the ITAA 1997) as a result of the restructure.

This conclusion is in accord with the Commissioner's view set out in ATO Interpretative Decision 2009/44.