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Ruling

Subject: Capital gains tax: merger of wholly owned subsidiaries.

Question 1

Will the taxpayer be entitled to claim roll-over relief under Subdivision 126-B of the Income Tax Assessment Act 1997 (as modified by section 419 of the Income Tax Assessment Act 1936) in respect of the tainted assets held on capital account by B Co which are transferred as part of the merger?

Answer

Yes

Question 2

Will capital proceeds of nil be received by A Co under Division 116 of the Income Tax Assessment Act 1997 as a result of CGT event C2 happening on cancellation of the shares in B Co?

Answer

Yes

This ruling applies for the following periods:

2012 year of income

2013 year of income

2014 year of income

The scheme commenced on

During the 2012 year of income

Relevant facts and circumstances

All references are to the Income Tax Assessment Act 1997 unless otherwise indicated.

A resident company (the taxpayer) wholly owns a non-resident subsidiary (A Co). A Co wholly owns another non-resident subsidiary (B Co). A Co and B Co are each a controlled foreign company (CFC).

A Co and B Co amalgamate in accordance with a scheme of amalgamation ('scheme') and legislation in the jurisdiction in which they both reside. A Co will continue as the amalgamated company.

B Co holds assets on capital account that comprise tainted assets within the meaning of section 317 of the Income Tax Assessment Act 1936 (ITAA 1936). The scheme provides that A Co succeeds to all the assets, liabilities and obligations of B Co on a stated date. It further provides that at a later date, subsequent to the fulfilment of legislative and judicial requirements, the shares of B Co will be cancelled without payment or other consideration.

CGT event A1 happens upon transfer of the assets, liabilities and obligations of B Co to A Co (section 104-10).

CGT event C2 happens upon the cancellation of the B Co shares (section 104-25).

B Co did not acquire the CGT assets because of a single CGT event or a series of CGT events that have given rise to a roll-over under a previous application of Subdivision 126-B

A Co is not an exempt entity as defined in subsection 995-1(1).

Both A Co and B Co will choose to obtain the roll-over under Subdivision 126-B.

None of the assets for which roll-over relief is sought constitute trading stock of A Co just after the time of the trigger event. None of the assets for which roll-over will be jointly chosen are:

- rights or convertible interest under Division 130,

- exchangeable interests as defined in subsection 995-1(1), or

- options referred to in Division 134.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 317

Income Tax Assessment Act 1936 section 319

Income Tax Assessment Act 1936 section 333

Income Tax Assessment Act 1936 section 340

Income Tax Assessment Act 1936 section 362

Income Tax Assessment Act 1936 section 419

Income Tax Assessment Act 1936 subsection 419(1)

Income Tax Assessment Act 1936 section 432

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 subsection 116-20(1)

Income Tax Assessment Act 1997 section 116-30

Income Tax Assessment Act 1997 Subdivision 126-B

Income Tax Assessment Act 1997 subsection 126-45(1)

Income Tax Assessment Act 1997 subsection 126-45(2)

Income Tax Assessment Act 1997 section 126-50

Income Tax Assessment Act 1997 subsection 126-50(1)

Income Tax Assessment Act 1997 subsection 126-50(2)

Income Tax Assessment Act 1997 subsection 126-50(3)

Income Tax Assessment Act 1997 subsection 126-50(3A)

Income Tax Assessment Act 1997 subsection 126-50(4)

Income Tax Assessment Act 1997 subsection 126-50(5)

Income Tax Assessment Act 1997 subsection 126-50(6)

Income Tax Assessment Act 1997 subsection 126-50(7)

Income Tax Assessment Act 1997 subsection 126-50(8)

Income Tax Assessment Act 1997 subsection 126-50(9)

Income Tax Assessment Act 1997 section 727-615

Income Tax Assessment Act 1997 section 975-500

Income Tax Assessment Act 1997 section 975-505

Income Tax Assessment Act 1997 paragraph 975-505(1)

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

Reasons for decision

Issue 1

Summary

The requirements for roll-over in Subdivision 126-B are satisfied. The taxpayer is entitled to claim roll-over relief for any capital gain arising in respect of the tainted assets transferred as part of the scheme.

Detailed reasoning

Subdivision 126-B provides a roll-over that may be available for the transfer of a capital gains tax (CGT) asset between two companies, or the creation of a CGT asset by one company in another, if:

(a) both companies are members of the same wholly-owned group; and

(b) at least one of the companies is a foreign resident.

Subsection 126-45(1) states that there may be a roll-over if a CGT event (the trigger event) happens involving a company (the originating company) and another company (the recipient company) in the circumstances set out in section 126-50. Subsection 126-45(2) identifies the only CGT events that are relevant to this roll-over, including CGT event A1.

In this case, CGT event A1 will happen as there will be a change of ownership of the transferred assets from B Co (the originating company) to A Co (the recipient company). The time of the event is determined in accordance with subsection 104-10(3).

As CGT event A1 is identified as a relevant event in subsection 126-45(2) it is necessary to consider the requirements for roll-over in section 126-50. In this case, the requirements in section 126-50 are considered only in relation to the tainted assets of B Co which are transferred as part of the merger.

Requirements for roll-over:

1. Subsection 126-50(1): Are B Co and A Co members of the same wholly-owned group at the time of the trigger event?

Section 975-500 provides that two companies are members of the same wholly-owned group if:

(a) one of the companies is a 100% subsidiary of the other company; or

(b) each of the companies is a 100% subsidiary of the same third company.

Section 975-505 sets out when an entity is a 100% subsidiary. Relevantly, subsection 975-505(1) provides that a subsidiary company is a 100% subsidiary of 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.

In this case, at the time of the trigger event:

· 100% of the shares in A Co are held by two wholly owned subsidiaries of the taxpayer therefore A Co is a 100% subsidiary of the taxpayer pursuant to paragraph 975-505(1)(b); and

· 100% of the shares in B Co are beneficially owned by A Co where A Co is a 100% subsidiary of the taxpayer, meaning B Co is a 100% subsidiary of the taxpayer pursuant to paragraph 975-505(1)(b).

Accordingly, B Co and A Co are both members of the same wholly-owned group at the time of the trigger event.

2. Subsection 126-50(2): Will the CGT assets be trading stock of the A Co just after the time of the trigger event?

On the facts the assets are not trading stock of A Co just after the time of the trigger event.

3. Subsections 126-50(3) and (3A)

Subsections 126-50(3) and (3A) have no application in this case as none of the tainted assets are:

· rights or convertible interest under Division 130,

· exchangeable interests as defined in subsection 995-1(1), or

· options referred to in Division 134.

4. Subsection 126-50(4): Will the ordinary income and statutory income of A Co be exempt from income tax because it is an exempt entity for the income year of the trigger event?

An exempt entity is defined in subsection 995-1(1) to mean:

1. an entity all of whose *ordinary income and *statutory income is exempt from income tax because of this Act or because of another *Commonwealth law, no matter what kind of ordinary income or statutory income the entity might have; or

2. an *untaxable Commonwealth entity.

A Co is subject to income tax in Australia in respect of Australian sourced ordinary income and would also be subject to tax in Australia if it derived statutory income. It is not exempt from income tax no matter what kind of ordinary income or statutory income it might have. Therefore A Co is not an exempt entity for the purposes of subsection 126-50(4).

5. Subsection 126-50(5), as modified by section 419

Section 419 of the ITAA 1936 has effect such that the table in subsection 419(1) of the ITAA 1936 is substituted for the table in subsection 126-50(5) for the purposes of applying the Subdivision 126-B roll-over to a CFC.

On the facts, item 3 of that table is satisfied at the time of the CGT event. Under item 3 of the table in section 419 of the ITAA 1936 it does not matter what the roll-over asset is.

6. Subsection 126-50(6)

On the facts, subsection 126-50(6) does not apply.

7. Subsections 126-50(7)-(9):

Subsection 126-50(7) provides that if the originating company is a foreign resident, the company must not have acquired the CGT asset described in subsection 126-50(8) because of a previous single roll-over event or series of roll-over events. On the facts, B Co has not acquired the CGT assets because of such an event or events.

As the requirements of Subdivision 126-B are satisfied and both A Co and B Co are CFC's, the taxpayer is entitled to claim the roll-over relief in respect of the tainted assets transferred as part of the merger.

Issue 2

Summary

Capital proceeds of nil will be received by A Co under Division 116 as a result of CGT event C2 happening upon cancellation of the shares in B Co.

Detailed reasoning

CGT event C2 will happen upon the cancellation of the B Co shares (section 104-25).

Under subsection 116-20(1), the capital proceeds from a CGT event are, generally, the total of the money received (or entitled to be received) and the market value of any other property received (or entitled to be received) in respect of the event happening.

The scheme provides that the assets, liabilities and obligations of B Co are deemed to be transferred to A Co as at a stated date'. The date of cancellation of the shares in B Co is expected to be at a later date after the anticipated approval legal and other regulatory approvals. On the facts, it is accepted that the transfer of assets, liabilities and obligations of B Co to A Co and the cancellation of shares in B Co are separate and distinct steps.

As such, the transfer of assets, liabilities and obligations of B Co to A Co is not in respect of the CGT event C2 and the property transferred to A Co from B Co is not considered to be received in respect of CGT event C2 happening to those shares. As a result, there are no capital proceeds from the CGT event C2.

Generally, if no capital proceeds are received from a CGT event, the market value substitution rule in subsection 116-30(1) applies to substitute the market value of the CGT asset that is the subject of the event (worked out at the time of the event) as the capital proceeds. As the CGT event that happens on the cancellation of the B Co shares is CGT event C2, the market value of the shares is worked out as if the share cancellation had not occurred and was never proposed to occur (subsection 116-30(3A)).

As all the assets, liabilities and obligations of B Co will have been transferred out of B Co by a separate step prior to the cancellation of the B Co shares, it is accepted that the market value of the shares in B Co at the time of CGT event C2 will be nil. The market value substitution rule in subsection 116-30(1) will apply to treat A Co as having received nil capital proceeds from the CGT event C2.