Edited version of your written advice

Authorisation Number: 1012776806587

Ruling

Subject: Rollover and Part IVA

Question 1

Are you eligible to elect to rollover any capital gain made on disposal of your shares in the company to the new company?

Answer

Yes.

Question 2

Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the rollover of the X Class share in the company from you to a new company?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

1 July 2014

Relevant facts and circumstances

Prior to a date, you owned one X Class share in the company. You had owned this share since the company was established after 19 September 1985. X Class shareholders are not entitled to vote and are not entitled to participate in the distribution of any surplus assets. They are only entitled to receive dividends declared by the Directors on that class of shares under a clause of the Constitution. They do not have a preferential right to receive dividends.

Prior to a date, the shareholding of the company was: XX ordinary share(s) owned by shareholder 2, YY X Class share(s) owned by you; YY Y Class share owned by shareholder 3; YY Z Class share(s) owned by shareholder 4; and YY B Class share(s) owned by shareholder 5.

You have recently separated from the sole director and major shareholder of the company (your spouse, shareholder 2). The creation of the new company is to provide an investment entity and asset protection for you. The new company was created on an earlier date. Since a date, your Class X share in the company has been held by the new company. As a result of this transfer, you received one ordinary share in the new company. You now own a few ordinary shares in the new company, which constitute 100% of the issued shares in the new company.

You are an Australian resident for tax purposes.

The new company is an Australian resident for tax purposes and not a tax exempt entity. It did not hold any other assets or liabilities at the time of acquiring the company share.

Presently no dividend has been paid or declared by the director of the company to the X Class shareholder. A dividend will be paid to the X Class shareholder in the near future. This payment will be fully franked and will be a one-off payment. No dividends will be paid to other shareholders at the same time. The dividend payment is to facilitate the split of marital assets between you and shareholder 2, and will be a balancing amount that ensure that split of all of your assets are split 50:50. Family Court proceedings are yet to commence. You are not giving up any assets or undertaking any tasks in exchange for the dividend payment.

The dividend will be paid from retained profits and not from a share capital account.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 122-15

Income Tax Assessment Act 1997 section 122-20

Income Tax Assessment Act 1997 Section 122-25

Income Tax Assessment Act 1936 Part IVA.

Income Tax Assessment Act 1936 Section 177A.

Income Tax Assessment Act 1936 Section 177C.

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177F.

Reasons for decision

Subdivision 122-A of the Income Tax Assessment Act 1997

A taxpayer makes a capital gain or a capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset.

Shares acquired on or after 20 September 1985 are considered to be CGT assets.

A disposal of a CGT asset is a CGT event A1 and includes disposals of shares by an individual to a wholly owned company. However, replacement asset roll-over relief is available under section 122-15 of the Income Tax Assessment Act 1997 (ITAA 1997), to an individual who disposes of a CGT asset, or all the assets of a business, to a company in which the individual owns all the shares.

However, there are a number of conditions in sections 122-20 and 122-25 of the ITAA 1997 which must be met before roll-over relief is available, which are as follows: 

1. Under section 122-15 of the ITAA 1997, a 'trigger event', must happen involving the individual and a company. In the case of a CGT event A1, the trigger must be the disposal of a CGT asset to a company. A CGT asset is any kind of property acquired after 19 September 1985, including shares in a company.

In your case, when you disposed of your share in the company to the new company, a CGT event A1 happened to your share, and therefore, this condition will be satisfied.

2. In the case of shares being the consideration you receive for the trigger event happening, under paragraph 122-20(1)(a) and subsection 122-20(2) of the ITAA 1997, the shares must be non-redeemable and in the company.

In your case, you received only a non-redeemable share in the new company as consideration for the transfer of your share in a company. Accordingly, condition 2 will be satisfied.

3. Under subsection 122-20(3) of the ITAA 1997, the market value of the shares that you will receive for the trigger event happening must be substantially the same as the asset disposed.

In your case, the market value of the share you received for the event equalled the market value of the share transferred, given that the new company had no other assets or liabilities. Therefore, you will comply with this condition.

4. Under subsection 122-25(1) of the ITAA 1997, you must own all the shares in the company immediately after the time of the trigger event and in the same capacity as you owned the assets that the company comes to own.

In your case, you own all the shares in the new company, in the same capacity as you owned the assets prior to the transfer, and so this condition will be met.

5. Under section 122-25(2) of the ITAA 1997, it is stated that the Subdivision does not apply to disposal of assets listed in the table included under the subsection (collectables, personal use assets, precluded assets, trading stock, assets that become registered emissions units).

In your case, the shares in the new company were not assets of a type listed in the table, so this condition will be satisfied.

6. Also under subsection 122-25(6) and subsection 122-25(7) of the ITAA 1997, if you or the company, or both, are not a resident then each asset must be taxable Australian property at the time of the trigger event.

In your case, you and the new company were residents of Australia for taxation purposes at the time of the trigger event, and so this condition will be been satisfied.

7. Under subsection 122-25(5) of the ITAA 1997, the company must not be exempt from income tax on its ordinary and statutory income because it is an exempt entity for the income year of the trigger event.

In your case, the new company is not an exempt entity and its income will not be exempt, and so this condition will be met.

As all conditions have been complied with, you will be able to choose the replacement asset roll-over relief available under Subdivision 122-A of the ITAA 1997 on the disposal of your company shares to the new company.

Part IVA of the ITAA 1936

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.

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:

• 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;

• the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A of the ITAA 1936; and

• having regard to section 177D of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies.

Scheme

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.

It is considered that the transaction transferring a company share from you to the new company falls within this definition and is a scheme as described in subsection 177A(1) of the ITAA 1936.

Tax benefit

Part IVA of the ITAA 1936 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.

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.

In your case, you will obtain a tax benefit, being the amount of any capital gain not included in your assessable income because you have chosen roll-over relief to apply.

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.

In your 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 you 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.

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.

Accordingly, no tax benefit will arise and Part IVA of the ITAA 1936 will have no application