Edited version of your written advice

Authorisation Number: 1012861982343

Date of advice: 18 August 2015

Ruling

Subject: Income tax: Capital gains tax CGT events K1 to K12 - other CGT events

Question 1

Will a gain arise under capital gains tax (CGT) event K6 on the disposal of the pre-CGT shares you own in Holding Co?

Answer

No

This ruling applies for the following period:

1 July 2015 to 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

History of the business carried on by The Company and history of your shareholding in The Company

1. The original business of The Company was established prior to 20 September 1985 and remains the same business to this day.

2. One third of your shares in The Company were acquired by you prior to 20 September 1985.

3. Two thirds of the shares in The Company were acquired by you after 20 September 1985.

Proposed restructure of The Company and sale of your shares

4. You propose to interpose a new holding entity (Holding Co) above The Company (the Proposed Restructure).

5. It is proposed that a rollover election would be made under 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) to defer any capital gains as a result of the Proposed Restructure.

6. Under the Proposed Restructure you would dispose of all your shares in The Company to Holding Co in exchange for an equivalent number of shares in Holding Co.

7. Once the Proposed Restructure is completed it is proposed that your pre-CGT shares (deemed as such by subsection 122-40(3) of the ITAA 1997) you hold in Holding Co be sold at their market value.

Assumption

The market value of goodwill will constitute more than 25% of the net value of the assets of The Company.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 104-230

Income Tax Assessment Act 1997, subsection 104-230(1)

Income Tax Assessment Act 1997, subsection 104-230(2)

Income Tax Assessment Act 1997, subdivision 122-A

Income Tax Assessment Act 1997, subsection 122-40(3)

Income Tax Assessment Act 1997, Division 149

Income Tax Assessment Act 1936, former Division 20

Reasons for decision

Issue 1

Question 1

Summary

Assuming the market value of the goodwill of The Company constitutes more than 25% of the net value of the assets of The Company, CGT event K6 will not be triggered if you were to dispose of your pre-CGT shares in Holding Co.

Detailed reasoning

CGT Event K6

CGT event K6 is an anti-avoidance measure designed to prevent the possible avoidance of CGT where the owners of interests in a company or trust, acquired prior to 20 September 1985 (Pre-CGT Interest), dispose of these interests, rather than actual property of the company or trust acquired after 20 September 1985 (Post-CGT Property).

Specifically under subsection 104-230(1) of the ITAA 1997, CGT event K6 happens when:

• you own shares in a company or an interest in a trust you acquired before 20 September 1985,

• CGT event A1, C2, E1, E2, E3, E5, E6, E7, E8, J1 or K3 (the Other CGT Event) happens in relation to the shares or interest in the trust,

• there is no roll-over for the Other CGT Event, and

• the 75% test in subsection 104-230(2) of the ITAA 1997 is satisfied.

The 75% test in subsection 104-230(2) of the ITAA 1997 is satisfied when just before the Other CGT Event happened:

• the market value of property of the company or trust (that is not trading stock) that was acquired on or after 20 September 1985, or

• the market value of interests in the company or trust owned through interposed companies or trusts in property (except trading stock) that was acquired on or after 20 September 1985,

must be at least 75% of the net value of the company or trust.

Division 149

Division 149 of the ITAA 1997 also contains anti-avoidance measures which apply when there is change in the majority underlying interests in a pre-GCT asset owned by a company or trust. More specifically Division 149 of the ITAA 1997 deems an asset acquired by a company or trust prior to 20 September 1985, to have been acquired at a time after the 20 September 1985, when the majority underlying interests of the asset were not had by the ultimate owners who had majority underlying interests immediately before 20 September 1985.

Interaction between CGT event K6 and Division 149

Taxation Ruling TR 2004/18 Income tax: capital gains: application of CGT event K6 (about pre-CGT shares and pre-CGT trust interests) in section 104-230 of the Income Tax Assessment Act 1997, provides the Commissioners view on the interaction of CGT event K6 and Division 149, specifically paragraph 15 states:

An exception [to the change in the acquisition date] applies where the CGT asset is treated as having been acquired post-CGT because of the operation of Division 149 of the ITAA 1997. In this case, the item of property continues to be treated as having been acquired pre-CGT for the purposes of CGT event K6.

The reasoning behind the statement in paragraph 15 of TR 2004/18 is provided in paragraphs 64 to 67 of TR 2004/18, which state:

64. For CGT event K6 purposes, the item of property is taken to have been acquired at the time the ITAA 1936 or ITAA 1997 treats the CGT asset as having been acquired. Thus, for example, if a CGT asset is taken to have been acquired before 20 September 1985 under a roll-over provision within Parts 3-1 and 3-3, the item of property will also be taken to have been acquired before that date for CGT event K6 purposes.

65. An exception applies where the CGT asset is treated as having been acquired post-CGT because of the operation of Division 149. In this case, the item of property continues to be treated as having been acquired pre-CGT for the purposes of CGT event K6.

66. Continuing to treat the item of property as acquired pre-CGT is consistent with the objective of CGT event K6. As an anti-avoidance or transitional provision, it is designed to capture the accumulation of post-CGT acquired property in a company with pre-CGT shareholders. CGT event K6 is not targeted at the accumulation of property which is only deemed post-CGT acquired because of the operation of another anti-avoidance or transitional provision in Division 149.

67. Extending the context of the deeming in Division 149 to the operation of CGT event K6 could lead to one deemed result from an anti-avoidance provision adversely interacting with another deemed result from another anti-avoidance provision.

Thus, in circumstances where the provisions in Division 149 of the ITAA 1997 act in conjunction with CGT event K6 the exception in paragraph 15 of TR 2004/18 will apply allowing the CGT asset which would normally be deemed to be a post-CGT asset by the operation of Division 149 of the ITAA 1997 to remain a pre-CGT asset for the purposes of the application of CGT event K6.

Goodwill as a pre-CGT asset

Taxation Ruling TR 1999/16 Income tax: capital gains: goodwill of a business expresses inter alia the Commissioners view regarding the pre-CGT status of goodwill owned by a business that commenced prior to 20 September 1985, in particular paragraph 17 states:

The whole of the goodwill of a business that commenced before 20 September 1985 remains the same single pre-CGT asset (subject to Division 149 - about when an asset stops being a pre-CGT asset - see paragraph 90) provided the same business continues to be carried on. This is so even though:

(a) the sources of the goodwill of a business may vary during the life of the business; or

(b) there are fluctuations in goodwill during the life of the business.

Paragraph 89 of TR 1999/16 provides the explanation for this view:

The goodwill of a business that commenced before 20 September 1985 remains a pre-CGT asset provided the same business continues to be carried on. As the majority justices of the High Court said in the Murry case (98 ATC at 4594; 39 ATR at 143), 'as long as the business remains the "same business" (cf Avondale Motors (Parts) Pty Ltd v. FC of T (1971) 124 CLR 97), the goodwill acquired or created by a taxpayer is the same asset as that which is disposed of when the goodwill of the business is sold or otherwise transferred'. For a business that commenced before 20 September 1985, any accretion to its goodwill since 20 September 1985 is not a post-CGT asset.

It is important to note that paragraph 90 of TR 1999/16 goes on to qualify the statements made in paragraph 89 in circumstances where Division149 of the ITAA 1997 might apply:

If an entity started business before 20 September 1985, with its goodwill being acquired on commencement of the business, Division 149 (about when an asset stops being a pre-CGT asset) of the 1997 Act needs to be considered in respect of that pre-CGT goodwill. Although the entity may have disposed of all of its other pre-CGT assets, if the pre-CGT goodwill no longer has the same majority underlying ownership it is treated by Division 149 as being post-CGT goodwill.

Thus in circumstances where the majority underlying interest of the pre-CGT goodwill of a company or trust has changed, Division 149 of the ITAA 1997 can operate to deem the goodwill to be a post-CGT asset.

Application to your Circumstances

The Company operates a business that was established prior to 20 September 1985 (the Original Business) and one third of your shares in The Company were acquired by you prior to 20 September 1985 (Pre-CGT Shares).

It is proposed that a new holding company, Holding Co, will be interposed above The Company in accordance with the rollover provisions in subdivision 122-A of the ITAA 1997. Once this rollover is complete your will hold pre-CGT shares in Holding Co in the same proportion as you held pre-CGT shares in The Company, as a result of the operation of subsection 122-40(3) of the ITAA 1997. You then propose to sell your pre-CGT shares in Holding Co.

On the face of it because the goodwill of The Company has been deemed to be a post-CGT asset, under the former Division 20 of the ITAA 1936, when you dispose of your shares in Holding Co CGT event K6 will be triggered. This is because the conditions in subsection 104-230(1) of the ITAA 1997 will be satisfied, specifically:

n You own shares in Holding Co which, due to roll over provisions, are deemed to be shares acquired before 20 September 1985,

n CGT event A1 would occur when you dispose of these shares,

n there is no rollover for the CGT A1 event upon disposal of the shares, and

n because the goodwill of The Company has been deemed to be a post-CGT asset the 75% test in subsection 104-230(2) of the ITAA 1997 will be satisfied. Essentially because all the assets of The Company will be treated as post-CGT assets the condition in subsection 104-230(2)(b) of the ITAA 1997 will be satisfied.

However in this instance the exception in paragraph 15 of TR 2004/18 will apply, because the goodwill of The Company has been made a post-CGT asset by the operation of Division 149 of the ITAA 1997, meaning for the purposes of CGT event K6 the goodwill will remain a pre-CGT asset.

Assuming that the market value of the goodwill held by The Company is more than 25% of the net value of the assets of The Company, the condition in subsection 104-230(2)(b) of the ITAA 1997 will not be satisfied, meaning CGT event K6 will not apply to the disposal of the pre-CGT shares you own in Holding Co.