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Edited version of your private ruling
Authorisation Number: 1012583726452
Ruling
Subject: Interpretation of section 110-25 of the ITAA 1997
Question
Will section 110-25 of the Income Tax Assessment Act 1997(ITAA 1997) apply to the amounts to be contributed by Entity A as head company of the consolidated group to Entity B, by way of a non scrip capital contribution, such that the amount will be included in the cost base of the shares held in Entity B by Entity A?
Answer
Yes
This ruling applies for the following period:
1 April 2013 to 31 March 2018
The scheme commences on:
1 April 2013 to 31 March 2018
Relevant facts and circumstances
Entities involved
Entity A is the head company of the income tax consolidated group.
Entity B is an investment holding company and has not been a subsidiary member of Entity A at any time, on the basis it is not an Australian resident entity.
Entity C is a company incorporated in Australia and a subsidiary of Entity A. Entity C is the sole shareholder of Entity B
The non-scrip capital contribution
It is expected that Entity C will make a capital contribution to Entity B.
No shares will be issued by Entity B under this capitalisation. The capital contribution account in the shareholder's equity section of Entity B's balance sheet will be increased immediately after the capital contribution, and the value of the shares in Entity B will be increased as a result of the receipt of the capital contribution.
It is expected that as at the date of the capital contribution, Entity B will have a positive market value.
Entity C's shareholder rights will not be affected as a result of the capital contribution. The distributions Entity C will or may receive or is entitled to receive from Entity B will not change or be changed as a result of the capital contribution.
There will be no change to the par value of the existing Entity B shares as a result of the capital contribution, as no additional shares will be issued to Entity C.
The capital contribution will not result in any changes to the type or class of shares in Entity B, nor any of the rights attaching to the Entity B shares.
There will be no amendments, restatements and/or revisions made to Entity B's constitution as a result of the capital contribution.
The amount of the capital contribution will be part of, and will increase the equity of Entity B.
The purpose of the non-share capital contribution is to fund allow Entity B to redeem outstanding redeemable preference shares held by Entity C.
The capital contribution by Entity C will not be a loan. Entity C will not be provided with any financial instrument or document, nor enter into any separate agreement or undertaking with Entity B for the capital contribution. There are no terms and/or conditions attached and/or linked to the capital contribution.
Journal entries
Journal entries will be made in the accounts of Entity B and Entity C to record the transaction.
Future non-scrip capital contributions
It is expected that further capital contributions will be made by Entity C to Entity B at one or more dates in the future.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 110-25
Reasons for decision
The non-scrip capital contribution made by Entity A to Entity B as head company of the consolidated group can be included in the fourth element of the cost base of shares held in Entity B by Entity A under subsection 110-25(5) of the ITAA 1997.
The purpose of the capital contribution to Entity B is to allow Entity B to redeem outstanding redeemable preference shares held by Entity C.
The capital contribution will form part of Entity B's shareholder equity. The expected effect of this increase in shareholders equity over the same number of shares on issue is that the value of the shares on issue for Entity B would be increased.
Conclusion
The capital contribution to Entity B satisfies the requirement of paragraph 110-25(5)(a) that the expected effect of the expenditure is to increase or preserve the value of the shares (being the relevant asset) in Entity B. The expenditure can be included in the fourth element of the cost base of the shares held in Entity B by Entity A.