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Edited version of your written advice
Authorisation Number: 1012683960947
Ruling
Subject: Application of Subdivision 122A of the ITAA 1997
Will roll-over relief be available under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) where the Applicant transfers shares owned personally to a company wholly owned by the Applicant?
Answer
Yes
Question 2
Will the proposed transfer of shares be subject to the anti-avoidance provisions contained in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer
No
This ruling applies for the following period
Year ended 30 June 2015
The scheme commences on
1 July 2014
Relevant facts and circumstances
1. The Applicant acquired shares after 19 September 1985.
2. The shares owned by the Applicant are unencumbered and are held by the Applicant on capital account.
3. The Applicant has been an Australian tax resident at all times.
4. The Applicant plans to transfer X% of its shareholding newly incorporated company wholly-owned by the Applicant.
5. The Applicant will be the sole shareholder of the wholly owned company. The company will be incorporated in Australia.
6. The only consideration the Applicant will receive for transferring its shares to the wholly owned company will be ordinary shares in the wholly owned company.
7. The market value of the share in the wholly owned company the Applicant will receive in consideration for the transfer of the shares to the wholly owned company will be substantially the same as the market value of the shares at the time of transfer.
8. The wholly owned company will obtain a tax file number and lodge annual income tax returns declaring assessable income derived and allowable deductions incurred during each financial year. The wholly owned company will not be an exempt entity for Australia income tax purposes.
Relevant legislative provisions
Income Tax Assessment Act 1936 Part IVA
Income Tax Assessment Act 1936 subsection 177C(1)
Income Tax Assessment Act 1936 paragraph 177C(2)(a)
Income Tax Assessment Act 1936 section 177F
Income Tax Assessment Act 1936 subsection 177F(1)
Income Tax Assessment Act 1936 subsection 177A(1)
Income Tax Assessment Act 1997 subdivision 122-A
Income Tax Assessment Act 1997 section 122-15
Income Tax Assessment Act 1997 section 122-20
Income Tax Assessment Act 1997 subsection 122-20(1)
Income Tax Assessment Act 1997 subsection 122-20(2)
Income Tax Assessment Act 1997 section 122-25
Income Tax Assessment Act 1997 subsection 122-25(1)
Income Tax Assessment Act 1997 subsection 122-25(2)
Income Tax Assessment Act 1997 subsection 122-25(3)
Income Tax Assessment Act 1997 subsection 122-25(6)
Income Tax Assessment Act 1997 section 122-35
Reasons for decision
Question 1
Will roll-over relief be available under Subdivision 122-A of the ITAA 1997 where the Applicant transfers shares owned personally to a company wholly owned by the Applicant?
Summary
Roll-over relief will be available under Subdivision 122-A of the ITAA 1997 where the Applicant transfers shares owned personally to a company wholly owned by the Applicant.
Detailed reasoning
1. Generally, Subdivision 122-A of the ITAA 1997 allows for the "roll-over" of a capital gain or loss where a taxpayer disposes of a CGT asset to a company in which, just after the disposal, the taxpayer owns all the shares.
2. In order for an individual to obtain roll-over relief under Subdivision 122-A of the ITAA 1997, the CGT even which triggers the capital gain or loss must be one listed in the table of section 122-15 of the ITAA 1997. In the present case the transfer of shares in the Applicant's name to a wholly owned company will trigger CGT event A1 (Trigger event), a CGT event listed in the table of section 122-15 of the ITAA 1997 and therefore this requirement is satisfied.
3. In addition, the circumstances of the transfer must also satisfy the conditions listed in sections 122-20 to 122-35 of the ITAA 1997.
4. Subsection 122-20(1) of the ITAA 1997 requires that the consideration received for the Trigger event must either be shares in the wholly owned company or in addition to shares in the wholly owned company, the company undertaking to discharge any liabilities in respect of the asset.
5. In addition, subsection 122-20(2) of the ITAA 1997 requires that the shares received in the wholly owned company, as a result of the Trigger event, must not be redeemable shares. The shares market value must be substantially the same as the market value of the assets disposed of, less any liabilities the company agrees to discharge.
6. In the present case the requirements of section 122-20 of the ITAA 1997 are satisfied. In consideration of the transfer of the shares, the Applicant will receive ordinary shares in the wholly only company and the market value of the shares received will be substantially the same as the market value of the shares transferred.
7. Section 122-25 of the ITAA 1997 lists further requirements that must also be satisfied for roll-over relief to be available under Subdivision 122-A of the ITAA 1997.
8. Specifically, subsection 122-25(1) of the ITAA 1997 requires that all the shares in the wholly owned company must be owned by the individual, immediately after the Trigger event. Subsection 122-25(2) specifies that the assets being transferred must not be an asset listed in the table in subsection 122-25(2). Further, the asset being disposed of to the wholly owned company must not be a 'precluded asset' a term given the meaning in subsection 122-25(3) and refers to:
122-25(3) |
9. |
A precluded asset is:
(a) a *depreciating asset; or
(b) *trading stock; or
(c) an interest in the copyright in a *film referred to in section 118-30; or |
|
(d) a *registered emissions unit. | |
10. Subsection 122-25(6) of the ITAA 1997 requires that the company to which the shares are being transferred must not be an exempt entity and therefore its ordinary and statutory income exempt from income tax in the income year in which the Trigger event occurs.
11. Lastly subsection 122-25(6) of the ITAA 1997 specifies that at the time of the Trigger event, an individual must be:
122-25(6) |
If you are an individual at the time of the trigger event, either:
(a) you and the company must both be Australian residents at that time; or
(b) both of the following requirements must be satisfied:
(i) each asset must be *taxable Australian property at that time;
(ii) the shares in the company mentioned in subsection 122-20(1) must be taxable Australian property just after that time.
12. The proposal to transfer the Applicant's shares to a wholly owned company meets the requirements of section 122-25 of the ITAA 1997. The Applicant will own all the shares in the company immediately after the Trigger event as specified in subsection 122-25(1). The shares being transferred to the wholly owned company are also not assets listed in the table in subsection 122-25(2) of the ITAA 1997 and are not precluded assets as described in subsection 122-25(3).
13. The Applicant is, and will still be an Australian resident at the time of the Trigger event and the wholly owned company to which the shares are transferred will be incorporated in Australia, in satisfaction of subsection 122-25(6) of the ITAA 1997.
14. The further conditions listed in section 122-35 of the ITAA 1997, which deal with the circumstances where a company undertakes to discharge one or more liabilities in respect of the shares, is not relevant for this ruling as the shares are unencumbered.
15. Accordingly, the transfer of the shares from the Applicant to a wholly owned company, in circumstances described in the facts, will enable the Applicant to roll-over of any capital gain or loss as specified in Subdivision 122-A of the ITAA 1997 should the Applicant so choose.
Question 2
Will the proposed transfer of shares be subject to the anti-avoidance provisions contained in Part IVA of the ITAA 1936?
Summary
The proposed transfer of shares will not subject to the anti-avoidance provisions contained in Part IVA of the ITAA 1936.
Detailed reasoning
16. Part IVA of the ITAA 1936 gives the Commissioner the discretion to cancel a 'tax benefit' that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained by a taxpayer in connection with a scheme to which Part IVA applies. This discretion is found in subsection 177F(1) of the ITAA 1936.
17. Before the Commissioner can exercise the discretion in subsection 177F(1) of the ITAA 1936, the requirements of Part IVA of the ITAA 1936 must be satisfied. These requirements are that:
(i) a 'tax benefit', as identified in section 177C of the ITAA 1936, was or would, but for subsection 177F(1) of the ITAA 1936, have been obtained;
(ii) the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A of the ITAA 1936; and
(iii) having regard to section 177D of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies.
Scheme
18. The term 'scheme' is defined in subsection 177A(1) of the ITAA 1936 as 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.
19. It is considered that the proposed transaction to transfer shares from the Applicant to a wholly owned company falls within this definition and is a scheme as described in subsection 177A(1) of the ITAA 1936.
Tax benefit
20. Part IVA cannot apply unless a taxpayer has obtained, or would but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with a scheme.
21. Subsection 177C(1) of the ITAA 1936 defines four kinds of tax benefit, relating broadly to:
• an amount not being included in the assessable income of the taxpayer of a year of income;
• a deduction being allowable to the taxpayer in relation to a year of income;
• a capital loss being incurred by the taxpayer during a year of income;
• a foreign tax credit being allowable to the taxpayer.
22. In the present case, the Applicant will obtain a tax benefit, being the amount of capital gain not included in the Applicant's assessable income in the income year in which the shares are transferred to the wholly owned company and roll-over relief is chosen.
23. However, paragraph 177C(2)(a) of the ITAA 1936 specifically notes that a reference to the obtaining by a taxpayer of a tax benefit, in connection with a scheme, shall be read as not including a reference to the assessable income of the taxpayer, of a year of income not including an amount, that would have been included in the assessable income of the taxpayer of that year, if the scheme had not been entered into or carried out, where:
the non-inclusion of the amount in the assessable income of the taxpayer is attributable to the making of a choice expressly provided for by the ITAA 1997; and
the scheme was not entered into or carried out by any person for the purpose of creating any circumstances or state of affairs the existence of which, is necessary to enable the choice to be made.
24. In the present case there is nothing in the scheme that is being carried out for the purpose of creating any circumstances necessary to enable the choice to be made. No steps are required to be taken or circumstances created, to enable the Applicant to be able to choose for the roll-over, specifically provided for under Subdivision 122A of the ITAA 1997, to apply. Any steps taken are taken solely to ensure compliance with the specific steps required to apply Subdivision 122A.
25. Therefore, in accordance with paragraph 177C(2)(a) of the ITAA 1936, the reference to a tax benefit being obtained shall be read such that it does not include the exclusion of assessable income that would otherwise have been included were it not for making a choice.
26. Accordingly, no tax benefit will arise and Part IVA of the ITAA 1936 will have no application.