Edited version of your private ruling

Authorisation Number: 1012433394860

Ruling

Subject: Private ruling application

Question 1

Will CGT event C2 under paragraph 104-25(1)(a) of the ITAA 1997 happen at the time when Y Coy's interest in X Coy is converted from a membership interest into a share in accordance with subsection 166(2) of the Corporations Act 2001?

Answer

Yes.

Question 2

Are the capital proceeds received by Y Coy for the cancellation of its membership interest under subsection 166(2) of the Corporations Act 2001 in X Coy as a company limited by guarantee the market value of the share it receives in X Coy as a company limited by shares under subsection 116-20(1) of the ITAA 1997?

Answer

Yes.

Question 3

If the answer to question 2 is no will the capital proceeds under section 116-30 of the ITAA 1997 from CGT event C2 be the market value of Y Coy's membership interest in X Coy just before it is cancelled and calculated as if the cancellation had not occurred and was never proposed to occur?

Answers

Not necessary to answer as the precondition in the question is not meant.

Question 4

Can Y Coy apply the 'exchange of shares or units' rollover provision in Subdivision 124-E of the ITAA 1997 and disregard any capital gains that would otherwise result on the conversion of the membership interest in X Coy into a share?

Answers

No.

This ruling applies for the following periods:

Income year ended 30 June 2013

Income year ended 30 June 2014

The scheme commences on:

The scheme will commence on the approval of a change of company type.

Relevant facts and circumstances

X Coy is a company limited by guarantee.

Y Coy is the sole member of X Coy.

The proposed restructure currently being considered by the directors of Y Coy involves converting X Coy into a company limited by shares from a company limited by guarantee, under Part 2B.7 of the Corporations Act 2001; and from a not-for-profit to a for-profit entity. The proposed restructure has not yet taken place.

X Coy will change its company type from a company limited by guarantee to a company limited by shares pursuant to item 4 in the table in subsection 162(1) of the Corporations Act 2001. In accordance with subsection 166(2) of the Corporations Act 2001, on the change of company type of X Coy from a company limited by guarantee to a company limited by shares, Y Coy's membership interest in X Coy is cancelled and Y Coy is issued ordinary shares in X Coy.

Y Coy will be an Australian resident at the time of the change of type of company for X Coy from a company limited by guarantee to a company limited by shares.

When the shares in X Coy are issued their market value just after they are issued will be at least equal to the market value of the interests that ceased in X Coy as a company limited by guarantee.

The facts include the Constitution of X Coy, provided as an attachment to the e-mail which includes details of the rights of the member.

X Coy does not have a share capital account. In accordance with section 9 of the Corporations Act 2001, X Coy is a company limited by guarantee and therefore it has members and the liability of its members is limited to the amount that the members undertake to contribute to X Coy on winding up.

Clause 6 of the Constitution of X Coy provides that Y Coy's liability on its membership interest in the event of winding up is limited to $Z.

There has been no capital subscribed or contributed by Y Coy to X Coy for use in Y Coy's business.

In accordance with paragraph 167(1)(e) of the Corporations Act 2001, if, and when, Y Coy converts into a company limited by shares, the business, assets and liabilities will be substantially the same as when it was a company limited by guarantee.

On the conversion of X Coy from a company limited by guarantee to a company limited by shares, Y Coy will be issued a fully paid up ordinary share in X Coy in accordance with paragraph 167(1)(d) of the Corporations Act 2001 in exchange for a sum of money. Accordingly, as Y Coy will pay money for the share, for the purposes of paragraph 163(3)(d) of the Corporations Act 2001 there will not be any non cash consideration. Y Coy will be the sole shareholder of X Coy and there will not be any unpaid shares on issue. There will be no written contract in respect of the issue of the share.

Relevant legislative provisions

Subsection 116-20(1) of the ITAA 1997

Section 124-240 of the ITAA 1997

Paragraph 124-240(e) of the ITAA 1997

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Question 1

Summary

CGT event C2 will happen upon the ending of Y Coy's membership interests in the company limited by guarantee.

Detailed reasoning

Subsection 108-5(1) of the ITAA 1997 provides that a CGT asset is any kind of property or a legal or equitable right that is not property. The membership interest in the company limited by guarantee comprises legally enforceable rights and therefore, in their totality, a CGT asset according to the definition in subsection 108-5(1).

Under paragraph 104-25(1)(a) CGT event C2 happens if your ownership of an intangible asset ends by the asset being redeemed or cancelled. CGT event C2 will happen to Y Coy's membership interest in X Coy when it ceases to be a member of X Coy on a change of type of company.

Question 2

Summary

The issue of the share in X Coy to Y Coy would be in respect of the ending of Y Coy's membership interest in X Coy.

Detailed reasoning

Subsection 116-20(1) of the ITAA 1997 provides as is relevant that the capital proceeds from a CGT event is the market value of any property you have received or are entitled to receive in respect of the event happening.

Taxation Ruling TR 2010/4 discusses the meaning of 'in respect of' as follows,

53. The prepositional phrase 'in respect of' usually connotes a connection of the broadest kind. When used within a statutory provision, the words 'in respect of' are capable of having:

the widest possible meaning of any expression intended to convey some connexion or relation between the two subject matters to which the words refer

(per Taylor J of the High Court of Australia in State Government Insurance Office (Qld) v. Crittenden (1966) 117 CLR 412 at 416; a case concerning personal injury insurance and the associated legislation).

54. Legislative history throws further light on the question. Section 116-20 of the ITAA 1997 re-enacts former provisions in section 160ZD of the ITAA 1936 defining the previous equivalent of 'capital proceeds', namely, consideration. Section 160ZD of the ITAA 1936 had identified 'the consideration in respect of the disposal of an asset' as 'the sum of the amounts of money' or 'the market value of property' a taxpayer 'has received or is entitled to receive' ' as a result of or in respect of the disposal' (emphasis added). The expression 'as a result of' denotes a causal relationship; the addition of the words 'in respect of' had the effect of extending the possible connection between the receipt of money or property and a disposal still further. Consequently, under the former section 160ZD of the ITAA 1936, the connection between disposal and the receipt of money or property which might suffice to constitute the money or property consideration for the purposes of that Act was very broad indeed, including both causal connections and other connections. Section 1-3 of the ITAA 1997 states that, where a previous provision has been re-enacted in 'a different form of words in order to use a clearer or simpler style', the ideas expressed by the Acts are not taken to be different just because the words are different. This is such a case. Thus nothing in the legislative history of this provision suggests that 'capital proceeds' is an expression to be construed narrowly…

The issue of the share in X Coy to Y Coy would be in respect of the ending of Y Coy's membership interest in X Coy. The issue of the share in X Coy to Y Coy would occur as a result of the change of company type from a company limited by guarantee to a company limited by shares under Part 2B.7 of the Corporations Act 2001 and therefore is not independent of or separate from the ending of Y Coy's membership interest in X Coy. There is a causal connection between the ending of Y Coy's membership interest and the issue of the share to Y Coy as they occur as part of X Coy's decision by special resolution to change its company type to a company limited by shares. Under subsection 116-20(1) of the ITAA 1997 the capital proceeds for the ending of Y Coy's membership interest in X Coy therefore would be the market value of the share issued in X Coy to Y Coy.

Question 3

Not applicable as question 2 was answered in the affirmative.

Question 4

Summary

Y Coy can not choose roll-over under section 124-240 of the ITAA 1997 as not all of the requirements for roll-over in that section are satisfied.

Detailed reasoning

Paid-up share capital

Paragraph 124-240(e) of the ITAA 1997 provides that in order for roll-over to be available for an exchange of shares in the same company the *paid-up share capital of the company just after the new shares were issued is the same as just before the original shares were redeemed or cancelled.

Paid-up share capital is defined in subsection 995-1(1) of the ITAA 1997 as 'of a company means the amount standing to the credit of the company's share capital account reduced by the amount (if any) that represents amounts unpaid on shares.'

Subsection 975-300(1) of the ITAA 1997 defines a company's share capital account as an account that the company keeps of its share capital.

X Coy as a company limited by guarantee has no share capital. As such the requirement in paragraph 124-240(e) of the ITAA 1997 that the paid-up share capital of the company just after the new shares were issued is the same as just before the original shares were redeemed or cancelled is not met. Share capital is not the same as capital (of which there has been none contributed to X Coy) or the combination of the business, assets and liabilities of X Coy.

Therefore roll-over under section 124-240 of the ITAA 1997 can not be chosen by Y Coy in respect of the arrangement.

Intention of the operation of section 124-240

You have advised that it is your understanding 'that it is the intention that section 124-240 of the ITAA 1997 operated to provide CGT rollover relief for entities that are governed under the CA 2001 prior to and after the CGT event occurring.' Based on this understanding you have contended 'Accordingly , it [the current arrangement] would align with the intention of the operation of section 124-240 of the ITAA 1997 to provide relief for entities that continue to be governed under the CA 2001 prior to and after the CGT event occurring.'

It is considered that the Explanatory Memorandum to the Income Tax Assessment Amendment (Capital Gains) Bill 1986 in respect of now repealed section 160ZZP of the Income Tax Assessment 1936 (the ITAA 1936) (the former equivalent provision in the ITAA 1936 to section 124-240 of the ITAA 1997) does not support your understanding and thus your contention. The following extract from that Explanatory Memorandum indicates a narrower intended application of the roll-over, that is an application to companies limited by shares;

Section 160ZZP extends roll-over relief to reorganisations of share capital within a company where, as part of the reorganisation , a shareholder surrenders all of his or her shares of a particular class to the company in exchange solely for other shares of the same company. This category of roll-over thus deals with transactions that may, broadly, be described as share splits and share consolidations. (emphasis added)

In discussing 'What is share capital' Ford's Principles of Corporations Law, 14th edition, Butterworths, Australia, 2010 discusses as indicated in the following extract from paragraph 17.100 the phrase in terms of its relationship to companies limited by shares;

Capital subscribed by members as such is called "share capital" rather than just capital. That is because the Corporations Act requires that in:

· a company limited by shares;

· an unlimited company; and

· a no liability company,

a member or a person proposing to be a member who has subscribed capital in the character of member or intending member should by so doing acquire the right to be issued by the company with a share or a number of shares in that subscribed capital.'

The reference to share splits and share consolidations in that Explanatory Memorandum is also indicative that section 160ZZP roll-over was dealing with companies limited by shares.

There is nothing in the Explanatory Memorandum to the Tax Law Improvement Bill (No.1) 1998 which indicates that there was any intended change in this respect as between section 124-240 of the ITAA 1997 and section 160ZZP of the ITAA 1936.

Class of share/membership interest

It is considered that the definition of class in subsection 995-1(1) of the ITAA 1997 being '*membership interests in a company or trust form a class if the interests have the same, or substantially the same rights' and the definition of membership interest in an entity in subsection 960-135 of the ITAA 1997 does not support a conclusion that a 'share in the capital of a company' includes a membership interest in a company limited by guarantee. The meaning of 'share' where it is used in paragraph 124-240(a) of the ITAA 1997 has no direct connection or link with the meaning of 'class' or 'membership interests' as defined in the ITAA 1997. Those definitions do not bear on the meaning of 'share' where it is used in paragraph 124-240(a) of the ITAA 1997.