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Edited version of private advice
Authorisation Number: 1012630767987
Ruling
Subject: Change of structure - CGT consequences
Question 1
Will the Association be liable for capital gain tax (CGT) under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) when they convert from an incorporated association under the Associations Incorporation Act to a company limited by guarantee under the Corporations Act 2001 (Corporations Act)?
Answer
No.
Question 2
If they are liable for CGT, will any gain be able to be disregarded under section 118-12(1) of the ITAA 1997, considering the Association is exempt from income tax under item 1.1 in section 50-5 of the ITAA 1997 and all assets are used solely for producing exempt income?
Answer
As it has been concluded in question 1 that the Association will not be liable for CGT this question is not applicable.
This ruling applies for the following period:
1 July 2014 to 30 June 2015.
The scheme commences on:
1 July 2014.
Relevant facts and circumstances
The Association is an incorporated association and a registered charity with the Australian Charities and Not-for-profits Commission (ACNC).
The Association will not change any other aspect of their organisation other than the structure, all the aims, objectives, activities, membership and control will remain the same.
The Association intends to convert to a company limited by guarantee (the Company) under the Corporations Act 2001 (Corporations Act). All the Association's assets will be transferred to the Company.
Relevant legislative provisions
Income Tax Assessment Act 1997 Part 3-1;
Income Tax Assessment Act 1997 section 50-5;
Income Tax Assessment Act 1997 section 960-100;
Income Tax Assessment Act 1997 section 995-1.
Reasons for decision
Question 1
Will the Association be liable for capital gain tax (CGT) under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) when they convert from an incorporated association under the Associations Incorporation Act to a company limited by guarantee under the Corporations Act 2001 (Corporations Act)?
Summary
The Association will not be liable for capital gains tax as it considered to be the same 'entity' for the purposes of the ITAA 1997 both before and after it converts to a company limited by guarantee, and as a consequence there will not be a CGT event.
Detailed reasoning
The Association is a body incorporated under the Associations Incorporation Act and will become an incorporated company under the Corporations Act 2001.
An organisation incorporated under the Associations Incorporation Act is a body corporate under that Act and at general law.
Section 995-1 of the ITAA 1997 defines an 'entity' to have the meaning in section 960-100 of the ITAA 1997. An 'entity' is defined to mean any of the following:
(a) an individual;
(b) a body corporate;
(c) a body politic;
(d) a partnership;
(e) any other incorporated association or body of persons;
(f) a trust;
(g) a superannuation fund.
In addition, section 995-1 of the ITAA 1997 defines a 'company' to mean:
(a) a body corporate; or
(b) any other unincorporated association or body of persons; but does not include a partnership.
Relevant to both definitions is the meaning of body corporate which takes its meaning at general law. For the purposes of the ITAA 1997, the Association, as a body corporate, is an 'entity' as defined in paragraph 960-100(b) of the ITAA 1997. It is also a 'company' as defined in section 995-1 of the ITAA 1997.
After the Association is registered under the Corporations Act as a company limited by guarantee, it will continue to be a 'body corporate', and a 'company' and 'entity' as relevantly defined in the ITAA 1997. Notwithstanding that the Association will transfer its incorporation from the Associations Incorporation Act to the Corporations Act, it will maintain its identity and continue to be the same legal entity.
The Corporations Act 2001 provides that where a body corporate that is not a company, is registered as a company, the registration will not create a new entity, or affect the existing body's property, rights or obligations (Section 601BM). The act of registering the Association under a different Act of itself will not create a 'new legal entity'.
The Association will be the same body corporate and 'entity' for the purposes of the ITAA 1997 both before and after it completes its transfer of incorporation. As such, there will be no CGT event when the Association changes to a company limited by guarantee.
Question 2
If they are liable for CGT, will any gain be able to be disregarded under section 118-12(1) of the ITAA 1997, considering the Association is exempt from income tax under item 1.1 in section 50-5 of the ITAA 1997 and all assets are used solely for producing exempt income?
Summary
As it has been concluded under question 1 that the Association will not be liable for CGT this question is not applicable.