Edited version of your written advice

Authorisation Number: 1012778160299

Ruling

Subject: Application of Part IVA of the Income Tax Assessment Act 1936 to a proposed restructure

Question 1

Are you entitled to choose to obtain scrip for scrip roll-over under Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) on the exchange of your shares in Company A for shares in New Company as part of a proposed restructure?

Answer

Yes.

Question 2

Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to you and Company A on the reclassification of ordinary shares in Company A into preference shares and on the choice for you to obtain scrip for scrip roll-over under Subdivision 124-M of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

1 July 2014 - 30 June 2015

1 July 2015 - 30 June 2016

The scheme commences on:

1 July 2014

Relevant facts and circumstances

1. You are the director and sole shareholder of Company A.

2. Company A's share capital consists of ordinary shares.

3. Due to pressures from imports in the industry you are considering a merger with Company B, another business in the same industry to remain competitive.

4. A merger with Company B would provide certain commercial advantages.

5. Initial analysis indicates an immediate potential profit increase of 20%, with a likely need to increase employment for both entities when they merge.

6. Company A's market value has been estimated to be approximately twice the market value of Company B.

7. It has been decided that the future profit sharing and voting power between Company A and Company B will be on the basis of 50/50 despite the apparent 2:1 ratio of market value.

8. You are considering a business restructure in preparation for the merger and the following issues are identified:

• Company A reported an amount of Retained Earnings as at 30 June 2014 as a result of growth and wealth accumulation since its establishment. The Retained Earnings are mostly in working capital rather than distributable funds.

• As the future profit sharing and voting entitlement between Company A and Company B have been agreed on the basis of 50/50 there is the need for Company A's prior years' earnings to be set aside to protect your interest.

• There is also the need to bring ordinary share values in Company A and Company B at approximately one to one ratio.

9. It is proposed that the following transactions take place to effect the restructure:

• Reclassification of shares: Half of Company A's ordinary shares is to be reclassified into non-convertible, non-participating, non-redeemable cumulative preference shares with face value equivalent to the value of Retained Earnings.

• Creation of New Company.

• Exchange of ordinary shares and preference shares in Company A for ordinary shares and preference shares in New Company by you.

10. The above transactions are collectively referred to as the Proposed Scheme.

11. Your shares in New Company will carry the same kind of rights and obligations as those attached to your shares in Company A.

12. No cash payment or dividend payment will be made to you on the exchange of shares.

13. Once you have exchanged your shares in Company A for shares in New Company, New Company will issue ordinary shares to Company B.

14. The Proposed Scheme provides an integrated solution to achieve the following goals:

• Meeting the 50/50 voting power, ownership and future profit sharing in New Company.

• Achieving asset and equity protection for you.

• Preserving working capital for the future business group to allow for rapid growth until such time as there is sufficient profit to fund dividend payments.

15. The reclassification of shares in Company A is authorised by its Constitution.

16. A schedule of dividend payments has been proposed for the preference shares. Payments of fully franked dividends are to be paid to you at each anniversary of the restructure until all of the face value of the preference shares is reduced to nil. The payments are subject to cash flow availability in New Company. The first payment is to be paid no earlier than 12 months from the restructure subject to cash flow availability.

17. Once the value of the preference shares has been reduced to nil by the dividend payments the preference shares will be cancelled.

18. The market values for Company A and Company B have been determined by you and the owner of Company B using the same methodology for both entities.

19. The valuations are subject to minor adjustments at the time of the restructure and no external valuation will be carried out.

20. As Company A does not have available funds, if a dividend distribution is required to be made to you before the restructure, the distribution would have to be converted to debt by a dividend declaration. This would create a large income tax liability for you in the year of the restructure.

21. A partial dividend would have to be paid to you to enable you to pay this tax liability. This would strip the working capital require to drive the growth the merger seeks to achieve and would negate the benefits of the merger.

22. You and New Company will jointly choose for you to obtain scrip for scrip roll-over under Subdivision 124-M of the ITAA 1997 on the exchange of your shares in Company A for shares in New Company.

23. On the exchange of shares by you New Company will become the holder of 100% of the voting share in Company A.

24. You acquired your shares in Company A after 20 September 1985.

25. All parties are dealing with each other at arm's length.

26. All parties are Australian residents for tax purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 124-780

Income Tax Assessment Act 1997 Section 124-782

Income Tax Assessment Act 1997 Section 124-783

Income Tax Assessment Act 1997 Section 124-785

Income Tax Assessment Act 1997 Section 124-795

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Subsection 177A(1)

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Subsection 177C(1)

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177D(1)

Income Tax Assessment Act 1936 Section 177D(2)

Reasons for decision

Question 1

Capital gains tax (CGT) event A1 will happen to you as a result of the disposal of your shares in Company A to New Company (subsections 104-10(1) and 104-10(2) of the ITAA 1997).

The time of the event is when you enter into the contract with New Company or if there is no contract, when the change of ownership occurs (subsection 104-10(3) of the ITAA 1997).

You will make a capital gain when CGT event A1 occurs as the capital proceeds from the disposal of shares in Company A will exceed their cost base.

Scrip for scrip roll-over may be available under Subdivision 124-M of the ITAA 1997 which will allow you to disregard the capital gain made on the disposal of your shares if you receive replacement shares in exchange (subsection 124-785(1) of the ITAA 1997). If scrip for scrip roll-over is available, the capital gain arising from the exchange of shares is disregarded until a future disposal of the replacement shares.

Subdivision 124-M of the ITAA 1997 contains a number of conditions for, and exceptions to, the eligibility of a shareholder to choose scrip for scrip roll-over. The main conditions and exceptions that are relevant to the arrangement that is the subject of this ruling are:

(a) shares are exchanged for shares in another company;

(b) the exchange occurs as part of a single arrangement that satisfies subsection 124-780(2) or 124-780(2A);

(c) conditions for roll-over under subsection 124-780(3) are satisfied;

(d) further conditions are not applicable; and

(e) exceptions to obtaining scrip for scrip roll-over are not applicable.

Conclusion

Based on the information provided, you are entitled to choose scrip for scrip rollover under Subdivision 124-M of the ITAA 1997 on the exchange of shares in Company A for shares in New Company.

Question 2

Part IVA of the ITAA 1936 applies to an arrangement where the following elements exist:

(a) there is a scheme as defined in subsection 177A(1) of the ITAA 1936,

(b) there is a tax benefit as defined in subsection 177C(1) of the ITAA 1936 obtained by a taxpayer in connection with the scheme,

(c) having regard to the eight matters listed in paragraph 177D(2) of the ITAA 1936 it would be concluded that a person who entered into or carried out the scheme did so for the dominant purpose of enabling the taxpayer to obtain a tax benefit in connection with the scheme,

(d) the Commissioner makes a determination under section 177F of the ITAA 1936 to cancel the relevant tax benefit.

Based on the facts provided, it cannot be concluded that the Proposed Scheme is to be entered into or carried out for the sole and dominant purpose of enabling you and Company A to obtain a tax benefit in connection with the scheme.

Part IVA of the ITAA 1936 does not apply to you and Company A on the reclassification of ordinary shares in Company A into preference shares and on the choice for you to obtain scrip for scrip roll-over under Subdivision 124-M of the ITAA 1997.