Edited version of your written advice

Authorisation Number: 1012788292635

Ruling

Subject: Capital gains tax rollover relief

Question 1

Can the Partnership access rollover relief pursuant to subdivision 122-B of the Income Tax Assessment Act 1997 (the "ITAA 1997")?

Answer

Yes

Question 2

Can Company 1 access rollover relief pursuant to subdivision 124-G of the Income Tax Assessment Act 1997 (the "ITAA 1997")?

Answer

Yes

Question 3

Will the anti-avoidance provisions contained in Part IVA of the Income Tax Assessment Act 1936 (the "ITAA 1936") apply to the proposed restructure?

Answer

No.

This ruling applies for the following periods:

Income Year ending 30 June 2015

Income Year ending 30 June 2016

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

1. The Partnership consists of two Australian resident partners;

2. The partners each have a 50% interest in the assets and liabilities of the Partnership;

3. All of the CGT asserts held by the Partnership are post-CGT assets;

4. Company 1 is an Australian resident private company;

5. Company 1 was incorporated with two fully paid $1 shares;

6. The shareholders consist of the partners of the Partnership;

7. The shares on issue are ordinary shares;

Proposed restructure

8. A new subsidiary ("New Sub") will be incorporated and will be wholly owned by Company 1;

9. The Partnership will transfer its assets to Company 1 utilising a section 122-B rollover. Company 1 will issue ordinary shares to the partners (in equal amounts) in consideration for the partnership asset. The shares will not be redeemable;

10. A tax consolidated group will be formed, with Company 1 being the head company and New Sub being the subsidiary member;

11. A new Head Company ("New Hold Co") will be interposed above Company 1 utilising a section 124-G rollover.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 177A,

Income Tax Assessment Act 1936 section 177C,

Income Tax Assessment Act 1936 section 177CB,

Income Tax Assessment Act 1936 section 177D,

Income Tax Assessment Act 1997 section 122-125,

Income Tax Assessment Act 1997 section 122-130,

Income Tax Assessment Act 1997 section 122-135,

Income Tax Assessment Act 1997 section 122-170,

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 703-70, and

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Summary

The conditions in subdivision 122-B will be satisfied, and therefore, the partners can access the rollover relief.

Detailed reasoning

The relevant legislation is the Income Tax Assessment Act 1997 (the "ITAA 1997"). All references to legislation are to the ITAA 1997, unless otherwise stated.

Subdivision 122-B (sections 122-120 to 122-205) enables a partner in a partnership to obtain a roll-over when transferring a capital gains tax ("CGT") asset, or all the assets of a business, to a company.

There are six basic conditions that must be met for the replacement asset roll-over in section 122-125 to apply to disposals by partners in a partnership to a wholly owned company, which are detailed below:

1. The consideration for the disposal or the creation of rights must be non-redeemable shares in the company or, where assets are disposed of, non-redeemable shares together with the company undertaking to discharge liabilities in respect of the assets - the partners must own all the shares (subsections 122-130(1), (2) and 122-135(1)). Redeemable shares are defined in section 995-1(1) as shares that are liable to be redeemed, including at the option of the issuing company;

2. The market value of the shares received must be substantially the same as the market value of the partners' interests in the asset(s) disposed of (less any liabilities the company undertakes to discharge) or the market value of what would have been the partners' interests in any asset created in the company if it were a partnership asset (subsection 122-130(3));

3. The asset transferred or created must not be a personal use asset, a collectible, or a precluded asset (subsection 122-135(3));

4. if the asset in question is a right, option, or convertible note, the asset acquired by the company on the exercise or conversion of the right, etc., must not become trading stock of the company just after acquisition (subsection 122-135(4));

5. The company acquiring the asset(s) cannot be an exempt entity (subsection 122-135(5)); and

6. If any of the partners, or the company, is not an Australian resident, the roll-over is confined to those assets that have the necessary connection with Australia (subsections 122-135(6) and (7)).

Application to your circumstances

Based on the facts you have provided, the relevant CGT event is A1, because the partners will be disposing of their interests in the CGT assets of the partnership to a company.

For the roll-over to apply, section 122-125 must be satisfied. In this instance, the partners own all the shares in the company just after the trigger event (disposal of partnership assets), and they will each hold the same percentage of shares in the company as their interests in the partnership. Therefore, based on the facts provided, section 122-125 will be satisfied.

The partners will receive non-redeemable shares (ordinary shares) in consideration for the transfer of the assets of the partnership. Each of the partners will receive the same number of ordinary shares in Company 1, and each will own 50% of the ordinary shares in Company 1. Each partner has a 50% interest in the assets of the partnership. The market value of each partner's interest in the partnership asset is 50% of the market value of the partnership assets. The market value of the shares each Partner receives in Company 1 will be substantially the same as the market value of the interests each partner has in the partnership assets (50% of the value of the asset). Section 122-130 will be satisfied. Furthermore, section 122-135 will be satisfied, as the partners own all the shares in the company just after the trigger event, and each partner holds the same percentage of shares in the company, as their interests in the partnership.

Finally, regarding any capital gain or capital loss realised by the partners, section 122-170 states:

If the partners choose a roll-over for *disposing of their interests in all the assets of a *business to the company, a *capital gain or *capital loss any partner makes from the disposal is disregarded.

The above will apply, as the partners have satisfied the roll-over conditions in subdivision 122-B.

Question 2

Summary

The conditions in subdivision 124-G will be satisfied, and therefore, Company 1 can access the rollover relief.

Detailed reasoning

The relevant legislation is the Income Tax Assessment Act 1997 (the "ITAA 1997"). All references to legislation are to the ITAA 1997, unless otherwise stated.

Subdivision 124-G (sections 124-350 to 124-390) makes provision for a roll-over in two different circumstances, or "cases", in which a taxpayer owns shares in a company (the "original company") that is restructured, with the result being that the taxpayer becomes the owner of new shares in another company (the "interposed company").

Broadly, roll-over relief is available under subdivision 124-G for certain business reorganisations, where no change occurs in the economic ownership of a particular underlying asset, or where the underlying assets in which the taxpayer has an economic interest do not change.

The two cases in which the roll-over becomes available are:

• Disposal of shares in one company for shares in another company (sections 124-360 and 124-365); and

• Redemption or cancellation of shares in one company for shares in another company (sections 124-370 and 124-375).

Original company and interposed company members of consolidated group

With effect from 1 July 2002, the roll-over is taken to be chosen where (subsection 124-360(2)):

• The "original company" is the head company of a tax consolidated group, and it ceases to be the head company because, through a share exchange, the interposed company becomes the owner of all of the shares in the original company, and

• the interposed company replaces "original company" as the head company of the tax consolidated group. The interposed company makes an irrevocable choice, under subsection 124-380(5), that the tax consolidated group is to continue in existence. The group continues in existence under subsection 703-70(1).

In all other circumstances, the roll-over is optional, at the election of shareholders in the original company.

Disposal of shares

The first situation in which a rollover becomes available is where:

• The taxpayer is a member of a company;

• The taxpayer, and at least one other entity (the "exchanging members") own all the shares in the company; and

• There is a scheme for reorganising the affairs of the company, under which the exchanging members dispose of all their shares to another company (the interposed company) in exchange for shares in the interposed company (and nothing else).

The roll-over is optional, except in the circumstances explained above. The following conditions must be satisfied in all cases:

1. The interposed company owns all the shares in the original company immediately after the "completion time" (i.e. when the exchanging members have disposed of their shares in the original company) (subsection 124-365(1));

2. Just after the completion time, each exchanging member must own:

(i) A whole number of shares in the interposed company (paragraph 124-365(2)(a)); and

(ii) A percentage of the shares in the interposed company that were issued to all exchanging members that is equal to the percentage of the shares in the original company that the member owned (paragraph 124-365(2)(b)).

1. The following two ratios must be equal (subsection 124-365(3)):

(i) The market value of each exchanging member's shares in the interposed company to the market value of the shares in the interposed company issues to all the exchanging members; and

(ii) The market value of each exchanging 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 to the interposed company.

1. The member is an Australian resident at the time of the disposal or, in the case of a non-resident, both the original shares and the interposed company share are "taxable Australian property" (subsection 124-365(4)).

The following rules must also be satisfied:

1. The shares issued in the interposed company cannot be redeemable shares (subsection 124-380(1));

2. Each exchanging member who is issued with shares in the interposed company must own the shares from the time they are issued to the completion time (subsection 124-380(2));

3. Just after the completion time: (a) the exchanging members must own all of the shares in the interposed company, or (b) entities other than those members must own no more than five 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 (subsection 124-380(3)).

Application to your circumstances

As stated in your PBR application:

• New Hold Co (the interposed company) will hold 100% of Company 1 shares just after the completion time;

• The shareholders of New Hold Co will be the exchanging members, i.e. the Company 1 shareholders just before completion time;

• The exchanging members (i.e. the Company 1 shareholders just before completion time) will be Australian residents;

• The shares in New Hold Co will not be redeemable shares; and

• Each exchanging member's interest in New Hold Co will be 50% of the shares issued by New Hold Co to the exchanging members, which will be equal to the percentage of shares that each exchanging member held in Company 1 (50%). The market value of the shares each exchanging member receives in New Hold Co (50% of the value of the company) will be equal to the market value of the shares each exchanging member held in Company 1 (50% of the value of the company).

The requirements for rollover in subdivision 124-G will be satisfied.

In this instance, the 124-G rollover will occur under subsection 124-360(2), as the original company (Company 1) will be the head company of a consolidated group just before the restructure is completed, and, by virtue of a share exchange, the interposed company (New Hold Co) will take its place as the head company of the consolidated group straight after the restructure.

Question 3

Summary

Part IVA of the ITAA 1936 will not apply to the scheme.

Detailed reasoning

The relevant legislation is the Income Tax Assessment Act 1936 (the "ITAA 1936"). All references to legislation are to the ITAA 1936, unless otherwise stated.

Part IVA of the ITAA 1936 will apply where:

• There is a scheme, as defined in section 177A of the ITAA 1936; and

• A tax benefit, as defined in section 177C of the ITAA 1936, would, or might reasonably be expected to be obtained in connection with a scheme, but for subsection 177F(1) of the ITAA 1936; and

• Having regard to the factors in section 177D of the ITAA 1936, the scheme is one to which part IVA of the ITAA 1936 applies.

Scheme

Section 177A of the ITAA 1936 defined 'scheme' as:

(a) 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

(b) any scheme, plan, proposal, action, course of action or course of conduct.

The proposed restructure includes the following steps:

• A new subsidiary ("New Sub") will be incorporated and will be wholly owned by Company 1;

• The Partnership will transfer its assets to Company 1 utilising a section 122-B rollover. Company 1 will issue ordinary shares to the partners (in equal amounts) in consideration for the partnership asset. The shares will not be redeemable;

• A tax consolidated group will be formed, with Company 1 being the head company and New Sub being the subsidiary member;

• A new Head Company ("New Hold Co") will be interposed above Company 1 utilising a section 124-G rollover.

The steps in the proposed restructure are considered to be a 'scheme' in accordance with section 177A of the ITAA 1936, and the relevant scheme for the purposes of section 177D of the ITAA 1936.

Tax benefit in connection with a scheme

Subsection 177C(1) of the ITAA 1936 provides that a tax benefit obtained by a taxpayer in connection with a scheme includes:

(a) An amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out…

In deciding whether an amount "would have been included" or "might reasonably be expected to be included" in the assessable income of the taxpayer, had the scheme not been entered into or carried out, subsection 177CB of the ITAA 1936 requires consideration to be given to the following:

…

(2) A decision that a tax effect would have occurred if the scheme had not been entered into or carried out must be based on a postulate that comprises only the events or circumstances that actually happened or existed (other than those that form part of the scheme).

(3) A decision that a tax effect might reasonably be expected to have occurred if the scheme had not been entered into or carried out must be based on a postulate that is a reasonable alternative to entering into or carrying out the scheme.

(4) In determining for the purposes of subsection (3) whether a postulate is such a reasonable alternative:

(a) have particular regard to:

(i) the substance of the scheme; and

(ii) any result or consequence for the taxpayer that is or would be achieved by the scheme (other than a result in relation to the operation of this Act); and

(b) disregard any result in relation to the operation of this Act that would be achieved by the postulate for any person (whether or not a party to the scheme).

In accordance with section 177C(2) of the ITAA 1936, a tax benefit is not obtained by the making of a choice, election, or selection etc. provided for in the Act, unless the relevant scheme was carried out for the sole of dominant purpose of creating the circumstances necessary to enable the making of the choice.

In your circumstances, you state that the proposed restructure is the result of a business expansion. Subdivisions 122-B and 124-G both (essentially) involve restructures of an existing group. When a rollover involves a restructure, and an entity joins the tax consolidated group, there is little change with respect to the ultimate ownership of the assets of the joining entity. You are merely utilising the rollovers as they are intended to be applied.

The reorganisation of the business, namely the creation of New Sub, enabling the group to access the consolidation regime in section 703-10(2) necessitates a head company and subsidiary member before a consolidated group can be formed. Therefore, in order to access the consolidation regime, and the rollover relief in subdivisions 122-B and 124-G, relevant changes to the structure of the group will be required.

Therefore, as the proposed scheme will not be entered into for the purpose of enabling an election to be made, paragraph 177C(2)(a)(i) will apply, with the effect that there will be no tax benefit obtained in connection with the scheme.

Conclusion

Company 1 will not obtain a tax benefit in connection with the scheme. Therefore, Part IVA will not apply to the scheme.