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Ruling

Subject: Return of Capital

Question 1

Will the dividend component of the proposed return of capital of X cents per share be assessed as a dividend under subsection 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Advice/Answers

Yes.

Question 2

Will the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the return of share capital?

Advice/Answers

No.

Question 3

Will the Commissioner confirm that capital gains tax (CGT) event G1 under section 104-135 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to each shareholder on the return of capital of Y cents per share? Will the Commissioner also confirm that the full amount debited by Company A against its share capital account will not be treated as a dividend for income tax purposes?

Advice/Answers

Yes.

Question 4

Assuming that the shareholder is an individual, trust or complying superannuation entity and has held their share for greater than 12 months, will the Commissioner confirm that:

Any gain arising under CGT event G1 will be a discount capital gain in terms of section 115-5 of the ITAA 1997?

The rationalisation and transfer of group assets between entities below Company B will not cause section 115-45 of the ITAA 1997 to treat the capital gain as not being a discount capital gain?

Advice/Answers

(a) Yes.

(b) Yes.

This ruling applies for the following period:

30 June 2013

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Group Structure and Background

Company A is a private resident Australian company that is the parent company of a tax consolidated group. Company B is a wholly owned subsidiary of Company A.

Company B has over XX subsidiary entities.

The shareholders of Company A consist of trusts, companies, individuals and superannuation funds.

The Proposed Scheme

The consolidated group wishes to simplify its structure to create efficiencies and be more attractive to investors.

This will involve the following.

· A reduction in the subsidiary entities of the consolidated group from XX to less than 30. This will involve the moving of assets within the consolidated group below Company B.

· A creation of an investment unit trust, with its units to be initially held by the existing shareholders of Company A in the same proportion as their current shareholding. The unit trust will raise and provide finance for the consolidated group.

· A re-weighting of Company A's existing/debt equity mix by Company A borrowing from external sources and undertaking a return of capital representing approximately 50% of its existing share capital.

· A proportion of the capital will be invested by the Company A shareholders in the investment unit trust, via the subscription of units. Funds will be on-lent to Company A at an arm's length rate of interest. The unit holders will receive an annual revenue stream in the form of interest and or trust distributions.

· The remainder of the capital will be retained by Company A shareholders to reduce any debts incurred in purchasing their shares or meeting any tax obligations in relation to the distribution.

· Employee shareholders who acquired their shares under employee arrangements will be required to apply their distribution to the repayment of existing loans owing by them to Company A.

Other Matters

As at 30 June 20XX the consolidated group had no franking account balance and had accumulated tax losses.

Company A's sole asset (apart from a relatively small amount of cash and related party loans) is its shares in Company B that were acquired more than 12 months prior to the proposed return of capital. Company A funded its investment in Company B predominantly through a scrip issue.

No dividends have been paid in respect of the ordinary shares in Company A since formation, apart from dividends paid on special shares held by two shareholder trusts.

The payment of dividends in relation to ordinary shares has been difficult due to the accumulated loss position and the minimal unrealised profits.

Company A's share capital account is untainted.

Utilising the slice approach in paragraph 74 of PS LA 2008/10, part of the proposed distribution is to be debited against the company's share capital account as a return of capital and part of the distribution is to be treated as an unfranked dividend for taxation purposes.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 6(1),

Income Tax Assessment Act 1936 Section 44(1),

Income Tax Assessment Act 1936 Section 45B,

Income Tax Assessment Act 1936 Section 45C,

Income Tax Assessment Act 1936 Section 177A,

Income Tax Assessment Act 1936 Section 177D(b),

Income Tax Assessment Act 1936 Section 318,

Income Tax Assessment Act 1997 Section 104-135,

Income Tax Assessment Act 1997 Section 115-5,

Income Tax Assessment Act 1997 Section 115-25,

Income Tax Assessment Act 1997 Section 115-45,

Income Tax Assessment Act 1997 Section 112-20, and

Income Tax Assessment Act 1997 Section 701-1.

Reasons for decision

Question 1

The component of the proposed return of capital of X cents per share will be assessed as a dividend in accordance with section 44(1) of the ITAA 1936.

Subsection 44(1) of the ITAA 1936 includes in a shareholder's assessable income any dividends, as defined in subsection 6(1) of the ITAA 1936, paid to a resident shareholder out of profits derived by the company from any source.

The term dividend in subsection 6(1) of the ITAA 1936 includes any distribution made by a company to any of its shareholders. However, this broad definition is limited by later paragraphs in the definition, which expressly excludes certain items from being a dividend for income tax purposes.

Relevantly, paragraph (d) of the definition within subsection 6(1) of the ITAA 1936 excludes any distribution which is debited against the share capital account of a company. The component of the return of capital (Y cents per share) that is to be debited against Company A's untainted share capital account will not be a dividend as defined in subsection 6(1) of the ITAA 1936.

The component of the return of capital (X cents per share) that is to be debited to a non-share capital account or profit and loss account will constitute a dividend as defined by section 6(1) of the ITAA 1936 and be an assessable dividend under section 44(1) of the ITAA 1936.

Question 2

The Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the return of capital.

Section 45B of the ITAA 1936 was introduced to ensure that certain amounts are treated as dividends where the payments, allocations or distributions are made in substitution for dividends. In particular, section 45B of the ITAA 1936 applies where:

· there is a scheme under which a person is provided with a capital benefit by a company;

· under the scheme, a taxpayer obtains a tax benefit; and

· having regard to the relevant circumstances of the scheme, it would be concluded that the scheme was entered into or carried out for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer to obtain a tax benefit.

Scheme

A scheme is defined in section 177A of the ITAA 1936 to mean:

· any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

· any scheme, plan, proposal, action, course of action or course of conduct.

Given the wide definition of scheme, the proposed return of capital will constitute a scheme for the purposes of section 45B of the ITAA 1936.

Capital benefit

Under the scheme, a person must be provided with a capital benefit. The definition of capital benefit is the same as for section 45A of the ITAA 1936. Therefore, the proposed return of capital is a scheme under which the shareholders of Company A will be provided with a capital benefit.

Tax benefit

Subsection 45B(9) of the ITAA 1936 provides that a relevant taxpayer obtains a tax benefit where an amount of tax payable (or other amount payable under the ITAA 1936) by the relevant taxpayer would, apart from section 45B of the ITAA 1936, be less than the amount that would have been payable, or would be payable at a later time than it would have been payable, if the capital benefit had been a dividend.

In applying this definition to the circumstances of Company A, it is likely that the Company A shareholders will obtain a tax benefit under the scheme.

By way of example, if the shareholder holds the shares in Company A on capital account, a tax benefit may arise where the return of capital simply reduces the capital gains tax cost base of each share.

Alternatively, a tax benefit may arise if any capital gain deemed to arise as a consequence of CGT event G1 happening (refer section 104-135 of the ITAA 1997) is also a discount capital gain within the meaning of section 115-5 of the ITAA 1997.

Therefore it is reasonable to assume that the shareholders will obtain a tax benefit by receiving a capital benefit via a return of capital rather than a dividend.

Subsection 45B(2)(c) of the ITAA 1936 provides that section 45B of the ITAA 1936 only applies, if, having regard to the relevant circumstances of the scheme it could be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer to obtain a tax benefit.

The conclusion about the requisite purpose is drawn by having regard to a number of objective matters listed in subsection 45B(8) and subparagraphs 177D(b)(i) to (viii) of the ITAA 1936 in turn. Similarly to Part IVA, section 45B of the ITAA 1936 does not require any enquiry into the subjective motives of the relevant taxpayer or persons who entered into or carried out the scheme or any part of it. Thus, section 45B of the ITAA 1936 is concerned with determining the objective purpose of the persons who entered into or carried out the scheme.

Whose purpose

The purpose of any one of the persons who entered into or carried out the scheme is sufficient to attract the operations of section 45B of the ITAA 1936. This includes Company A and its shareholders.

A more than incidental purpose

The purpose does not have to be the most influential or prevailing purpose but it must be more than an incidental purpose and includes the main or substantial purpose. The Explanatory Memorandum to the Taxation Laws Amendment (Company Law Review) Bill 1998 (EM) in respect of the then new section 45B stated:

Thus while new Section 45B does not require the purpose of obtaining a tax benefit to be the ruling, most influential or prevailing purpose, neither does it include any purpose which is not a significant purpose of the scheme.

The more than incidental purpose will not include circumstances where it occurs fortuitously or in subordinate conjunction with one of the main or substantial purposes or merely follows that purpose as a natural incident (EM, paragraphs 1.31 and 1.32).

Arising out of the purpose test is the proposition that one of the chief indicators against the application of section 45B of the ITAA 1936 will be the non-tax objects or commercial effects of the return of capital scheme.

Relevant circumstances

Subsection 45B(8) of the ITAA 1936 lists the relevant circumstances of the scheme the Commissioner must have regard to when determining whether or not the requisite purpose exists. The list of circumstances is not exhaustive as the list is commenced with the words "the relevant circumstances of a scheme include". The Commissioner may have regard to other circumstances which he considers relevant.

The final condition for section 45B of the ITAA 1936 to apply is that, having regard to the relevant circumstances of the scheme, it would be concluded that a person entered into the scheme or any part of the scheme for a purpose of enabling a taxpayer to obtain a tax benefit. The purpose need not be the dominant purpose but it must be more than an incidental purpose.

In determining the purpose of a person who entered into a scheme, it is necessary to have regard to the relevant circumstances as listed in subsection 45B(8) of the ITAA 1936.

The relevant circumstances include:

The extent to which the capital benefit is attributable to profits of the company or of an associate of the company.

Paragraph 45B(8)(a) of the ITAA 1936 refers to the extent to which the capital benefit is attributable to capital and profits (realised and unrealised) of the company or of an associate (within the meaning of section 318 of the ITAA 1936) of the company.

Paragraph 45B(8)(a) of the ITAA 1936 directs attention to the extent to which, despite the distribution taking the form of share capital, it can be ascribed as belonging to or appropriate to the company's share capital or the profits of the company or its associates.

This requires careful consideration of the characteristics of share capital and profits and the availability of each in the particular circumstances of the company. This is illustrated in paragraph 1.35 of the Explanatory Memorandum to the Taxation Laws Amendment (Company Law Review) Bill 1998 (EM), which states: 

if a company makes a profit from a transaction, for example the disposal of business assets, and then returns capital to shareholders equal to the amount of the profit that would suggest that the distribution of capital is a substituted dividend. On the other hand, if a company had disposed of a significant part of its business at a profit and distributed an amount of share capital which could reasonably be regarded as the share capital invested in that part of the business, the distribution of capital would not be seen as a substituted dividend because no amount would be attributable to profits.

Company A has minimal unrealised/realised profits to fund the capital reduction.

Company A intends to fund the return of capital by way of debt and is being undertaken to re-weight the existing debt/equity mix of the group and its shareholders.

Company A has accumulated tax losses and has not been in a position to distribute dividends to its shareholders.

Company A's main asset is its shares in Company B with other relatively minor assets relating to cash and loans. Company A funded its investment in Company B predominantly through a scrip issue.

In view of the above it is considered that the capital reduction is not in substitution for a dividend out of realised or unrealised profits.

This factor does not tend towards the requisite purpose.

The pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or by an associate (within the meaning in section 318) of the company.

Company A has not paid a dividend to its shareholders since its formation, apart from the dividends paid on special shares.

As at 30 June 20XX, Company A disclosed a consolidated accumulated loss.

Company A has stated that due to accumulated losses and minimal unrealised profits significant uncertainty exists, under the current structure, for Company A to pay dividends to its shareholders. Company A's inability to provide dividends to its investors is a major factor behind the proposed restructure and creation of an investment unit trust.

This factor does not tend towards the requisite purpose.

Whether the relevant taxpayer has capital losses that, apart from the scheme, would be carried forward to a later year of income.

No capital losses will be utilised by any of the shareholders as a result of the proposed return of capital.

It is considered that this factor is neutral.

Whether some or all of the ownership interests in the company or in an associate (within the meaning in section 318) of the company held by the relevant taxpayer were acquired, or are taken to have been acquired, by the relevant taxpayer before 20 September 1985.

It is considered that this factor is neutral.

Whether the relevant taxpayer is a non-resident.

The application for private binding ruling states that all Company A shareholders are Australian residents.

This factor is neutral.

Whether the cost base (for the purposes of the ITAA 1997) of the relevant ownership interest is not substantially less than the value of the applicable capital benefit.

The tax cost base of the Company A shares varies between each shareholder as shown in the table encompassed in the application for private binding ruling. Some of the shareholders will make a capital gain on the proposed return of capital.

For the majority of the Company A shares the cost base is not substantially less than the value of the applicable capital benefit.

It is considered that this factor is neutral.

If the scheme involves the distribution of share capital or share premium whether the interest held by the relevant taxpayer after the distribution is the same as the interest would have been if an equivalent dividend had been paid instead of the distribution of share capital or share premium.

There will be no change in the share rights of any Company A shareholder that participates in the proposed return of capital.

It is considered that this factor is neutral.

If the scheme involves the provision of ownership interests and the later disposal of those interests, or an increase in the value of ownership interests and the later disposal of those interests:

The scheme does not involve the provision of ownership interests and subsequent disposal of those interests. 

This is not applicable.

For a demerger only:

This is not applicable

Any of the matters referred to in subparagraphs 177D(b)(i) to (viii) Part IVA the general anti-avoidance provisions.

The eight matters referred to in subparagraphs 177D(b)(i) to (viii) are as follows:

The manner in which the scheme was entered into or carried out;

The proposed capital return is a commercial transaction to be undertaken in accordance with the Corporations Act 2001. The capital reduction will achieve the commercial objective of re-weighting the balance of debt and equity funding for the consolidated group. It is also preparatory to the creation of an investment unit trust that will be used to provide finance to the consolidated group and income to the unit holders in the form of interest and trust distributions.

It is considered that this factor is neutral.

The form and substance of the scheme;

Both the form and the substance of the capital return lead to the same result.

It is considered that this factor is neutral.

The time at which the scheme was entered into and the length of the period during which the scheme was carried out;

The timing of the arrangement is of no particular significance.

It is considered that this factor is neutral.

The result, but for Part IVA, which would be achieved by the same scheme;

The alternative to a return of capital is the payment of a dividend for the same amount. This would generally result in more tax being payable (depending on the individual circumstances of each taxpayer). As Company A does not have sufficient distributable reserves to pay such a dividend, the payment of a dividend is not an option.

It is considered that this factor is neutral.

Any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

Capital will be returned to all shareholders. There will be no a change in the underlying rights of any shareholders, except to the extent that each shareholders proportionate entitlement to the capital of Company A has reduced by the amount of the return of capital.

It is considered that this factor is neutral.

Any change in the financial position of any person who has, or has had, any connection with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

The shareholders will receive an amount of cash from the return of capital. However, the entitlement of a shareholder to capital of Company A will be reduced by the same amount.

It is considered that this factor is neutral.

Any other consequence for the relevant taxpayer, or for any connected person, of the scheme having been entered into or carried out;

It is submitted that there are no other relevant consequences arising from the proposed return of capital.

It is considered that this factor is neutral.

The nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any connected person.

Not applicable.

It is considered that this factor is neutral.

Having regard to all of the above factors, it must be considered whether the dominant purpose of the scheme, being the proposed return of capital, could be considered to be undertaken for the purpose of obtaining a tax benefit.

None of the matters referred to in subsection 45B(8) and subparagraphs 177D(b)(i) to (viii) of the ITAA 1936, are of particular relevance to the determination of purpose in relation to the capital return. Further, it is submitted that any tax benefit obtained by the shareholders of Company A is merely incidental to the overall commercial objectives of the capital return, being to obtain an optimal debt and equity mix. The return of capital also will enable the existing Company A shareholders to acquire units in the investment unit trust, which will provide funds to Company A and a return on the unit holders' investment. Company A expects the new structure will be more attractive to potential investors given the prospect of returns via interest and distributions.

Further, as Company A has not paid dividends in the past and currently has limited capacity to pay a dividend, the return of capital should not be construed to be in substitution of the payment of a dividend. Section 45B of the ITAA 1936 should not apply in relation to the proposed capital return.

It is submitted that, on the basis that section 45B of the ITAA 1936 has no application (as detailed in the above analysis), section 45C(3) of the ITAA 1936 also has no application to the proposed return of capital.

Question 3

The Commissioner confirms that capital gains tax (CGT) event G1 under section 104-135 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to each shareholder on the return of capital and the amount debited against Company A's share capital account will not be treated as a dividend for income tax purposes.

CGT event G1 will happen for each Company A share on the return of the capital component per share on payment date (section 104-135(1) of the ITAA 1997).

A Company A shareholder will make a capital gain if the return of the capital component amount was more than the cost base of their Company A share. The capital gain will equal the amount of the excess (subsection 104-135(3) of the ITAA 1997).

If a Company A shareholder makes a capital gain, the cost base and the reduced cost base of the share is reduced to nil. It is not possible to make a capital loss when CGT event G1 happens (subsection 104-153(3) of the ITAA 1997).

If the return of capital component was equal or less than the cost base of the share at the time of the payment, the cost base and reduced cost base of the share is reduced (but not below nil) by that amount of the return of capital (subsection 104-135(4) of the ITAA 1997).

Reiterating part of the answer to Question 1, the component of the return of capital that is to be debited against Company A's untainted share capital account will not be a dividend in accordance with paragraph 6(1)(d) of the ITAA 1936.

Question 4

If the Company A shareholder is an individual, trust or complying superannuation entity and has held their share for greater than 12 months:

· any gain arising under CGT event G1 will be a discount capital gain in terms of section 115-5 of the ITAA 1997; and,

· the rationalisation and transfer of group assets between entities below Company B will not enliven section 115-45 of the ITAA 1997 to deny the 50% capital gains tax discount.

Section 115-5

A capital gain can only be a discount capital gain if it meets certain requirements. One of the requirements is that the capital gain must result form a CGT event happening to an asset that the entity acquired at least 12 months before the CGT event (subsection 115-25(1) of the ITAA 1997).

Section 115-45

Section 115-45 of the ITAA 1997 is concerned with the integrity of the CGT discount. Broadly, this section ensures that a taxpayer does not make a discount capital gain from a CGT event happening to an interest in a non-widely held entity which they acquired at least 12 months previously if the majority of the entity's CGT assets were acquired within 12 months.

Section 115-45 of the ITAA 1997 provides that a taxpayer will not be entitled to a discount capital gain where all of the following three conditions are satisfied:

· The taxpayer (and associates) beneficially owned at least 10% by value of the interests in the entity just before the CGT event (subsection 115-45(3) of the ITAA 1997);

· The total of the cost bases of the CGT assets that the entity owned at the time of the CGT event and had acquired less than 12 months before (new assets) is more than half of the total of the cost bases of all the CGT assets that the entity owned at the time of the CGT event (subsection 115-45(4) of the ITAA 1997);

· Assuming a disposal at market value of all of the entity's CGT assets just before the CGT event, the net capital gain from the new assets would be more than half of the net capital gain from all of the CGT assets owned by the entity just before the CGT event (subsections 115-45(5)-(7) of the ITAA 1997).

As subsection 104-135(2) of the ITAA 1997 provides that the time of CGT event G1 is when the entity makes payment to its shareholders, section 115-45 of the ITAA 1997 will need to be applied at the time that each payment is made. Where the distribution is paid after the consolidated group was formed, section 115-45 of the ITAA will need to be applied on the basis that the "single entity rule" is not relevant as the shareholders of the head company are not considered to be members of the consolidated group.

Single entity rule

The single entity rule (SER) is defined in section 701-1 of the ITAA 1997. Subsection 701-1(1) of the ITAA 1997 provides that:

'If an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary member of the group are taken for [head company and entity core] purposes to be parts of the head company of the group, rather than separate entities, during that period.'

Head company and entity core purposes are defined in subsections 701-1(2) and 701-1(3) of the ITAA 1997 and are relevant in working out the head company's and the subsidiary's income tax liability or loss. Accordingly, on entry to a consolidated group, a subsidiary loses its individual income tax identity and is treated as part of the head company for the purposes of working out the tax liability of the head company and subsidiary.

However, section 701-1 of the ITAA 1997 expressly confines the SER to the head company and entity core purposes. The SER does not apply for the purposes of working out the income tax liability of an entity outside the group. This view is confirmed in Taxation Ruling TR 2004/11 at paragraph 12 which states that:

'The SER does not affect the application of those laws to an entity outside of the consolidated group. The income tax position of entities outside of the group will not be affected by the SER when they deal or transact with a member of the consolidated group.'

When a non group entity, including an individual, needs to ascertain the tax consequences of its interaction with a consolidated group, the ordinary income tax law applies and the non group entity must treat the head company and its subsidiary members as separate income tax entities. Accordingly, as the shareholders of Company A are not members of the consolidated group, the tax liability of the each shareholder needs to be ascertained without reference to the SER.

Interaction between Section 115-45 and Single Entity Rule

Section 115-45 of the ITAA 1997 will need to be applied on the basis that the SER is not relevant as each shareholder is not a member of the consolidated group. Accordingly, the only relevant assets for the purpose of carrying out the calculations in section 115-45 will be the assets directly owned by Company A, excluding the assets of the subsidiaries.

Transactions that have been conducted inside the consolidated group that have not been accounted for due to the operation of the SER may need to be reconstructed in order to apply section 115-45 of the ITAA 1997 to the Company A shareholders. For example, if subsidiaries have transferred CGT assets to Company A after consolidation, these transfers would be ignored under the SER but would need to be reconstructed for the purposes of section 115-45 of the ITAA 1997. If no consideration was given for the transfer, or the parties have dealt other than at arms length, the CGT market value substitution rule in section 112-20 of the ITAA 1997 may apply.

Company A has advised that the rationalisation of underlying subsidiary entities that will require the transfer of contracts, assets, licences etc., within the consolidated group will involve Company B and its subsidiaries. Company A will not directly be party to any transactions or transfers.

Accordingly the only relevant assets for the purposes of carrying out the calculations in section

115-45 of the ITAA 1997 will be the assets directly owned by Company A, predominantly its shares in Company B.

First condition - Beneficial ownership of 10% or more of the value of the shares. [Section 115-45(3)]

If a shareholder, [and associate(s)], beneficially own at least 10% of the total value of the entity's shares, just prior to the CGT event, the first condition of section 115-45 of the ITAA 1997 will be satisfied. However, the information in the private ruling application does not provide sufficient detail for the Commissioner to calculate the percentage that each Company A shareholder beneficially owns. This is because shareholders that are trustees of discretionary trusts cannot beneficially own shares in a company. Also, the Commissioner is unaware of any associates that may exist for each shareholder.

Therefore the Commissioner can only advise that where a Company A shareholder, [and associate(s)] beneficially own at least 10% of the value of the Company A shares then the first condition of section 115-45 of the ITAA 1997 will be met.

Second condition - Greater than 50% of the cost base of the CGT assets have been held for less than 12 months. [Section 115-45(4)]

If the total of the cost bases of the CGT assets that the entity owns at the time of the CGT event and had acquired less than 12 months before the CGT event (new assets) is more than 50% of the total cost bases of all the CGT assets that the entity owned at the time of the CGT event then the second condition will be satisfied.

Company A's assets consist predominantly of shares in Company B that were acquired more than 12 months prior to the CGT event. Therefore, greater than 50% of Company A's assets will have been held for greater than 12 months at the time of the CGT event. The second condition will not be met.

Third condition - Greater than 50% of the market value of the CGT assets have been held for less than 12 months. [Section 115-45(5)-(7)]

Assuming a disposal at market value of all the entity's CGT assets just before the CGT event, if the net capital gain from the new assets is more than 50% of the net capital gain from the total assets owned by the entity just before the CGT event, then the third condition will be satisfied.

Company A's assets consist predominantly of shares in Company B. The shares in Company B were acquired more than 12 months prior to the CGT event. Therefore, assuming a notional sale of all Company A's assets just before the CGT event, more than 50% of the net capital gain would be attributable to assets held for greater than 12 months. The third condition will not be met.

Therefore, assuming the shareholder is an individual, trust or complying superannuation fund entity and has held their shares for greater than 12 months:

· any gain arising under CGT event G1 will be a discount capital gain in terms of section 115-5 of the ITAA 1997; and

· section 115-45 of the ITAA 1997 will not apply to treat the capital gain as not being a discount capital gain and the rationalisation and transfer of group assets between entities below Company B will not alter this.