Edited version of your written advice

Authorisation Number: 1012776780008

Ruling

Subject: Capital gains tax - Division 615 rollover

Question 1

If a new holding company is interposed between the current shareholders and A Pty Ltd (A P/L) under a proposed share restructure, can roll-over relief be applied under the provisions of Division 615 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period

1 July 20XY to 30 June 20XZ

The scheme commenced on

1 July 20XY

Relevant facts and circumstances

The shareholders of A P/L are:

• an individual - XX ordinary shares

• the trustee for an Investment Trust (IT) - YY ordinary shares

A new holding company will be formed with two redeemable shares issued - one owned by an individual and the other by the trustee for IT.

The current shareholders will transfer all of the shares in A P/L to the new holding company.

In consideration for the transfer, the new holding company will issue XXYY ordinary shares as follows:

• an individual - XX ordinary shares

• the trustee for an Investment Trust (IT) - YY ordinary shares

Immediately upon doing this, the company will redeem the redeemable shares.

The shareholders will dispose of all of their shares in the original company in exchange for shares in an interposed company and nothing else.

The shares issued by the interposed company are ordinary shares (not redeemable).

The interposed company owns all of the shares in the original company just after the shareholders dispose of their shares in the original company (the completion time).

Just after the completion time each shareholder will own:

• a whole number of shares in the interposed company, and

• the same percentage of shareholding in the interposed entity as in the original company prior to the restructure.

You have submitted the following:

• each shareholder will be an Australian resident at the time of disposal of the original company shares

• the market value of the shares in the original company and the interposed company will be the same for each shareholder

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 615

Income Tax Assessment Act 1997 section 615-5

Income Tax Assessment Act 1997 section 615-15

Income Tax Assessment Act 1997 section 615-20

Income Tax Assessment Act 1997 section 615-25

Income Tax Assessment Act 1997 section 960-130

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Summary

As the proposed share restructure meets the requirements of Division 615 of the ITAA 1997, the original interest holders in A P/L can choose roll-over relief under Subdivision 615-A.

Detailed reasoning

Division 615 states that you can choose for transactions under a scheme to restructure a company's business to be tax neutral if, under the scheme you cease to own shares in the company and in exchange you become the owner of new shares in another company.

Subdivision 615-5 of the ITAA 1997 states that you can choose to obtain the rollover if:

• you are a member of a company (the original entity), and

• you and at least one other entity (the exchanging members) own all of the shares in it, and

• under the scheme for re-organising its affairs the exchanging members dispose of all their shares to an interposed company in exchange for shares in the interposed company (and nothing else), and

• the requirements of Subdivision 615-B are satisfied.

Subsection 995-1(1) of the ITAA 1997 states that a 'member', in relation to an entity, has the meaning given by section 960-130. Section 960-130 states that where an entity is a company, a stockholder is a member of the company. In this case the shareholders being an individual and the trustee for IT are shareholders who own XX and YY ordinary shares respectively of the original entity and therefore satisfy the requirement to be a member of the original entity.

The trustee for IT and an individual (the exchanging members) own all of the shares in the original entity therefore that condition is satisfied.

Paragraph 615-5(1)(c) of the ITAA 1997 requires that, under a scheme for re-organising its affairs, the exchanging members dispose of all their shares in the original company to another company (the interposed company) in exchange for shares in the interposed company (and nothing else).

The proposed restructure involves a scheme for re-organising the affairs of the company where the new holding company will be formed with a redeemable share issued to each of the current shareholders. The current shareholders (being an individual and the trustee for the IT) will then transfer all of their shares in A P/L to the new holding company. The new holding company will then issue XXYY ordinary shares in the same ratio as those previously owned by an individual and the trustee for the IT. The new holding company will then redeem the redeemable shares leaving the only shareholding in the new company in the same number and holding as that previously held in the original entity.

The requirements of paragraph 615-5(1)(c) of the ITAA 1997 are satisfied as the shares in the original entity and the new holding entity have undergone an equal exchange and the shareholders have received nothing else as a result of the transaction.

Further requirements are imposed by Subdivision 615-B of the ITAA 1997. They are:

• the interposed company must own all the original interests (section 615-15 of the ITAA 1997)

• there are special requirements relating to your interests in the original entity (subsections 615-20(1),(2) and (3) of the ITAA 1997)

• there are special requirement relating to the interposed company (section 615-25 of the ITAA 1997), and

• the interposed company must make a particular choice (section 615-30 of the ITAA 1997 - not addressed in this ruling).

Section 615-15 states that the interposed company must own all of the shares in the original entity immediately after the time (the completion time) all the exchanging members have had their shares in the original entity disposed of, redeemed or cancelled under the scheme.

This requirement is satisfied as the interposed company will own all the shares in A P/L just after the exchanging members have disposed of the shares in that company.

Subsection 615-20(1) of the ITAA 1997 requires that just after the completion time, each exchanging member must own:

• a whole number of shares in the interposed company; and

• a percentage of the shares in the interposed company that were issued to all the exchanging members that is equal to the percentage of the shares in the original company (that were disposed of to the interposed company) that the member owned.

This condition is satisfied as each original interest owner is an exchanging member who will own a whole number of shares in the new holding company, and the percentage of shares in the new holding company that will be issued to all original interest holders will equal the percentage of shares they originally held A P/L.

Subsection 615-20(2) of the ITAA 1997 requires that the ratio of the market value of each exchanging member's shares in the interposed company to the market value of the shares in the interposed company issued to all the exchanging members (worked out just after the completion time) is equal to the ratio of the market value of that member's shares in the original company that were disposed of to the interposed company to the market value of all the shares in the original company that were disposed of to the interposed company (worked out just before the first disposal).

This condition is satisfied in the present case as each exchanging member will receive shares in the interposed company in the same proportion as their holding in A P/L, the original company. As each share issued by the original company carries the same rights and obligations, it follows that the proportionate market value of the shares acquired by each original interest holder in the new holding company will be the same as that entity's shares in A P/L.

Paragraph 615-20(3)(a) of the ITAA 1997 also imposes certain additional requirements for exchanging members who are foreign residents at the time of the disposal. You have submitted that the residency issue is satisfied in these circumstances.

Section 615-25 of the ITAA 1997 imposes requirements specifically relating to the interposed company. Subsection 615-25(1) states that shares in the interposed company must not be redeemable shares. In the arrangement described the new holding company will temporarily issue a redeemable share to the individual and another to the trustee for the IT however these will be redeemed immediately following the issue of the ordinary shares therefore the end result will be that the only shares held in the interposed company will be ordinary shares. Therefore that condition is satisfied.

Subsection 615-25(2) of the ITAA 1997 requires that each exchanging member who is issued shares in the interposed company must own the shares from the time they are issued to the completion time. You have submitted that this condition will be satisfied.

Subsection 615-25(3) requires alternatively that just after the completion time:

• the exchanging members must own all the shares in the interposed company; or

• entities other than those members must own no more than 5 shares in the interposed company and the market value of those shares expressed as a percentage of the market value of all the shares in the interposed company is such that it is reasonable to treat the exchanging members as owning all the shares.

The proposed restructure will satisfy the first alternative. The owners of shares in the new holding company will between them hold all of the shares issued in the new company. The redeemable shares will have been redeemed and no further shares will be available for ownership by any other entity.

Therefore, the proposed transaction satisfies the conditions found in Division 615 of the ITAA 1997 for roll-over relief. The interposed entity (in this case the new holding company) must make the choice for the roll-over to apply.

Further issues for you to consider

Under the repealed Subdivisions 124-G and 124-H of the ITAA 1997 a company had 28 days, or such further time as the Commissioner of Taxation allowed, to make the choice for a corporate business restructure and two months for a restructure of a trust into a company.

As a result of the introduction of Division 615 of the ITAA 1997, the new company will always have two months (or such further time as the Commissioner may allow) to choose for the rollover to apply, unless the restructure involves the replacement of the head company of a consolidated group.