Edited version of private ruling

Authorisation Number: 1012726889785

Date of advice: 13 November 2014

Ruling

Subject: CGT rollover

Questions

1. Do Client 1 and Client 2 satisfy the roll-over relief under Subdivision 124-G of the ITAA 1997 in respect of their disposal of shares in Company A in exchange for shares in New Co 1?

Answer: Yes

2. Do Client 1 and Client 2 satisfy the roll-over relief under Subdivision 124-G of the ITAA 1997 in respect of their disposal of shares in Company B in exchange for shares in New Co 2?

Answer: Yes

3. Do Client 1 and Client 2 satisfy the roll-over relief under Subdivision 124-G of the ITAA 1997 in respect of their disposal of shares in New Co 2 in exchange for shares in New Co 1?

Answer: Yes

4. Do Client 1 and Client 2 satisfy the roll-over relief under Subdivision 124-G of the ITAA 1997 in respect of their disposal of shares in Company C in exchange for shares in New Co 1?

Answer: Yes

5. Do Client 1 and Client 2 satisfy the roll-over relief under Subdivision 124-G of the ITAA 1997 in respect of their disposal of shares in Company D in exchange for Shares in New Co 1?

Answer: Yes

6. Will the requirement in subsection 124-380(7) of the ITAA 1997 be satisfied if the directors of New Co 1 and New Co 2 sign a minute or resolution within 28 days of the exchange of shares confirming its choice that section 124-385 of the ITAA 1997 applies?

Answer: Yes

7. Is the cost base of the shares for Client 1 and Client 2 in New Co 1 after the proposed restructure the same as their original cost base as the shares in Companies A, B, C, D and New Co 2 (Original Companies)?

Answer: Yes

8. Will the Shareholders be entitled to the 50% general discount within Division 115 of the ITAA 1997 upon the sale of their shares in New Co 1 less than one year after the restructure steps?

Answer: Yes

This ruling applies for the following period

Year ended 30 June 201X

Year ended 30 June 201X

Year ended 30 June 201X

The scheme commenced on

1 July 201X

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.

Client 1 and Client 2 are individuals collectively are referred to as 'the Shareholders'.

All companies are Australian resident companies.

Company B assets are post CGT. Accordingly, the Shareholder's interest in Company B is post CGT pursuant to section 104-230 of the ITAA 1997.

The shareholders' interests in Company C are post-CGT.

Companies A and D were incorporated after 20 September 1985.

The Shareholders own all the shares in Companies A, B C and D in equal proportions and all their interest in Company A, B, C and D are post-CGT interests.

The parties propose to undertake a restructure to simplify the business structure to simplify the business structure by which:

- A company yet to be incorporated (New Co 1) will be interposed between the Shareholders and Companies A, C and D.

- A company yet to be incorporated (New Co 2) will be interposed between the Shareholders and Company B

Companies A, B, C, D and New Co 2 are collectively referred to as 'Original Companies'

The proposed restructure will be implemented by the following steps:

a. New Co 1 will be formed with Client 1 and Client 2 each holding 50 ordinary shares in New Co 1 (Original New Co 1 Shares).

b. New Co 2 will be formed with Client 1 and Client 2 each holding 50 ordinary shares in New Co 2 (Original New Co 2 Shares).

c. The Shareholders will dispose of their shares in Company A in exchange for the issue of shares in New Co 1. The number of shares that the Shareholders receive will be in proportion with their holdings in Company A. The Original New Co 1 Shares will be redeemed for their nominal value before the completion of this step.

d. The Shareholders will each choose the roll-over under section 124-360 of the ITAA 1997 in respect of their exchange of shares in Company A worked out just before the disposal.

e. The Shareholders will dispose of their shares in Company B in exchange for the issue of shares in New Co 2. The number of shares that the Shareholders receive will be in proportion with their holdings in Company B. The Original New Co 2 Shares will be redeemed for their nominal value before the completion of this step.

f. The Shareholders will each choose the roll-over under section 124-360 of the ITAA 1997 in respect of their exchange of shares in Company B. Each Shareholder will inform New Co 2 in writing of the CGT cost base of its shares in Company A worked out just before the disposal.

g. At least one day after Steps (c) and (d), the Shareholders will dispose of their shares in New Co 2 in exchange for the issue of shares in New Co 1. The number of shares that the Shareholders receive will be in proportion with their holdings in New Co 2.

h. At least one day after Steps (e) and (f), the Shareholders will dispose of their shares in Companies C and D in exchange for the issue of shares in New Co 1. The number of shares that the Shareholders receive will be in proportion with their holdings in Companies C and D.

i. The Shareholders will each choose the roll-over under section 124-360 of the ITAA 1997 in respect of their exchange of shares in Company C and Company D. Each shareholder will inform New Co 1 in writing of the CGT cost base of its shares in Company C and Company D worked out just before the disposal.

All the shares issued by New Co 1 and New Co 2 will be fully paid shares, non-redeemable, and carry the same rights and obligations as those attaching to the shares in Company C and Company D worked out just before the disposal.

For the purposes of section 318 of the ITAA 1936, the Shareholders are associates.

Client 1 and Client 2 will make a capital gain from the exchange of shares in the Original Companies. The Shareholders are residents at the time of the exchange of their shares in the Original Companies.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 31-8

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-230

Income Tax Assessment Act 1997 section 124 - 360

Income Tax Assessment Act 1997 section 124 - 360

Income Tax Assessment Act 1997 section 124 - 365

Income Tax Assessment Act 1997 section 124 -380

Income Tax Assessment Act 1997 section 124 -385

Income Tax Assessment Act 1997 section 124-15

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 subsection 104-10(4)

Income Tax Assessment Act 1997 subsection 110-25(2)

Income Tax Assessment Act 1997 subsection 110-35(2)

Income Tax Assessment Act 1997 subsection 115-25(1)

Income Tax Assessment Act 1997 subsection 115-30(1)

Income Tax Assessment Act 1997 subsection 124-15(2)

Income Tax Assessment Act 1997 subsection 124-15(3)

Income Tax Assessment Act 1997 subsection 124-380(7)

Reasons for decision

CGT event A1

CGT event A1 in section 104-10 of the ITAA 1997 will happen when the Shareholders:

- dispose of their Company A shares in exchange for New Co 1 shares

- dispose of their Company B shares in exchange for New Co 2 shares

- dispose of their New Co 2 shares in exchange for New Co 1 shares and

- dispose of their Company C and D shares in exchange for New Co 1 shares.

Division 124 roll-over

Roll-over relief may be available under Division 124 of the ITAA 1997 when a taxpayer who owns a CGT asset gives up, or surrenders that asset, or the taxpayer's ownership of the asset comes to an end in some other way, and as part of the same transaction or circumstances the taxpayer receives another CGT asset to replace the original asset. If a roll-over is available, the effect is to defer to a later CGT event any capital gain or loss which would otherwise be triggered by the event which brings the taxpayer's ownership of the original asset to an end.

Sections 124-10 and 124-15 of the ITAA 1997 set out the general rules for replacement asset roll-overs. If a taxpayer chooses to apply a roll-over, the capital gain or capital loss from the original asset(s) is disregarded: subsections 124-10(2) and 124-15(2) of the ITAA 1997.

Subdivision 124-G - Exchange of shares in one company for shares in another company

A taxpayer who is a shareholder in a company (the original company) can choose to obtain a roll-over when the company reorganises its affairs. The taxpayer will be eligible for roll-over relief if:

- the taxpayer and all other shareholders in the company dispose of all their shares to a second company (the “interposed company”) in exchange for shares in that second company; and

- the conditions in section 124-365 of the ITAA 1997 are satisfied.

- The requirements of section 124-365 of the ITAA 1997 are as follows:

- the interposed company owns all of the shares in the original company when the exchanging members have disposed of their shares (the completion time)

- at that time, each exchanging member now owns a whole number of shares in the interposed company in the same percentage as that member owned in the original company

- the ratio of the market value of each exchanging member's shareholding in the interposed company to the total market value of shares in that company must be the same as the ratio of the market value of that member's shareholding in the original company to the total market value of the shares in the original company; and

- the taxpayer must be an Australian resident at the time the shares in the original company are disposed of or if not, the shares in the original company must be 'taxable Australian property' just before that time and the share in the interposed company must be 'taxable Australian property' just after the completion time.

Outcome of the proposed scheme

It is considered that the proposed scheme will meet the requirements of sections 124-360, 124-365 and 124-380 of the ITAA 1997. Therefore The Shareholders will be able to choose the roll-over relief provided for in Subdivision 124-G of the ITAA 1997.

Consequences of Roll-over

The facts indicate that The Shareholders did not hold any shares as revenue assets or as trading stock.

The consequences of the roll-over relief under Subdivision 124-G of the ITAA 1997 for the Shareholders who hold their Original Companies shares as capital assets will be as follows:

- the first element of the cost base/reduced cost base for each New Co 1 share acquired under the exchange is equal to the cost base of each corresponding original share disposed of under the exchange pursuant to subsection 124-10(3) of the ITAA 1997 .

- The first element of the cost base (subsection 110-25(2) of the ITAA 1997) of the new shares acquired on or after 20 September 1985 (post -CGT), is worked out according to the following formula:

The total of the cost bases of all the original assets that you acquired on or

after 20 September 1985 (worked out when your ownership of them ended)

Number of remaining new assets

- The first element of the reduced cost base (subsection 110-35(2) of the ITAA 1997) of each new share is worked out in the same way under subsection 124-15(3) of the ITAA 1997.

Discount capital Gain

Subsection 115-25(1) of the ITAA 1997 states that a capital gain can only be a discount capital gain where the asset which gave rise to the capital gain was acquired at least 12 months before the relevant CGT event. Table item 2 in subsection 115-30(1) of the ITAA 1997 treats a replacement asset, acquired in a replacement-asset rollover, as having been acquired at the time the original asset was acquired.

Accordingly, the Shareholders will be eligible for discount capital gain as their shares in New Co 1 are taken as having been acquired at the time the shares in the Original Companies was acquired.