Edited version of your written advice

Authorisation Number: 1012885744181

Date of advice: 28 September 2015

Ruling

Subject: Part IVA of the Income Tax Assessment Act 1936

Questions and answers

Does Part IVA of the Income Tax Assessment Act 1936 apply to the proposed scheme to cancel tax benefits arising under the scrip-for-scrip roll-over under subdivision 124-M of the Income Tax Assessment Act 1997?

No.

This ruling applies for the following periods

1 July 2013 to 30 June 2014

1 July 2014 to 30 June 2015

1 July 2015 to 30 June 2016

Relevant facts and circumstances

1. Taxpayer 1, taxpayer 2 and taxpayer 3 are related (the siblings). Together with their spouses and entities that they control, they are the Family Group.

2. The businesses are presently carried on by companies forming part of the Family Group.

3. Historically, not all of the siblings have been involved in all of the businesses. Some of the businesses have been the concern of taxpayer 1 and taxpayer 2, one has involved all siblings and one has been the sole concern of taxpayer 3.

4. The Family Group has embarked upon a strategy to aggregate the businesses under the umbrella of a single holding company (the holding company) and grow the businesses with the ultimate objective of listing the holding company on the Australian Securities Exchange (ASX).

5. The growth of the businesses is to be funded in part by way of the introduction of an arm's length investor (the investor), which proposes to invest in the group by becoming a shareholder in the holding company. The investor has expressed a strong preference for its investment in the businesses to be structured as an investment in a single entity.

6. The aggregation of the businesses under the umbrella of the holding company is a practical and commercial necessity both to facilitate the investment of the investor and to structure the ownership of the businesses in a form that is suitable for listing on the ASX.

7. To facilitate the aggregation of the businesses under the umbrella of the holding company, it is now proposed that;

i. One Family Group company will act as the holding company, and will acquire all of the shares in the other Family Group companies under six simultaneous scrip-for scrip exchanges; and

ii. In relation to each of those exchanges, the relevant vendors each

choose a Capital Gain Tax (CGT) roll-over under subdivision 124-M of

the income Tax Assessment Act 1997 (ITAA 1997).

Current business ownership/structure

8. The company was incorporated.

The company shareholders are:

• Taxpayer 1 & spouse

• AB1 (controlled by taxpayer 2)

9. Company 3 owns intellectual property that is licensed to other companies within the Family Group for use in their respective businesses.

Company 3 shareholders are:

• AB3 (controlled by taxpayer 1)

• XY3 (controlled by taxpayer 2)

The intellectual property assets of company 3 were previously owned by its shareholders in partnership. Company 3 acquired those assets from its shareholders during the current income year by way of a CGT roll-over under subdivision 122-B of the ITAA 1997.

The market value of the business, partnership between AB3 and XY3, was determined by way of a valuer's opinion.

10. Company 4 carries on a business.

Company 4 shareholders are:

• AB4 (controlled by taxpayer 1)

• XY4 (controlled by taxpayer 2)

• CDT (controlled by taxpayer 3)

The business of company 4 was previously carried on by its shareholders in partnership. Company 4 acquired the business from its shareholders during the current income year by way of a CGT roll-over under subdivision 122-B of the ITAA 1997.

The market value of the business, partnership between AB4, XY4 and CDT, was determined by way of a valuer's opinion.

11. Company 5 carries on a business.

Company 5 shareholders are;

• AB5 (controlled by taxpayer 1)

• XY5 (controlled by taxpayer 2)

The business of company 5 was previously carried on by its shareholders in partnership. Company 5 acquired the business from its shareholders during the current income year by way of a CGT roll-over under subdivision 122-B of the ITAA 1997.

The market value of the business, partnership between AB5 and XY5, was determined by way of a valuer's opinion.

12. Company 6 carries on a business.

Company 6 shareholders are;

• AB6 (controlled by taxpayer 1)

• XY6 (controlled by taxpayer 2)

The business of company 6 was previously carried on by its shareholders in partnership. Company 6 acquired the business from its shareholders during the current income year by way of a CGT roll-over under subdivision 122-B of the ITAA 1997.

The market value of the business, partnership between AB6 and XY6, was determined by way of a valuer's opinion.

13. Company 7 carries on a business.

Company 7 shareholders are;

• AB7 (controlled by taxpayer 1)

• XY7 (controlled by taxpayer 2)

The business of company 7 was previously carried on by its shareholders in partnership. Company 7 acquired the business from its shareholders during the current income year by way of a CGT roll-over under subdivision 122-B of the ITAA 1997.

The market value of the business, partnership between AB7 and XY7, was determined by way of a valuer's opinion.

14. Company 8 carries on a business.

The sole shareholder of company 8 is a Family Trust controlled by taxpayer 3.

The business of company 8 was previously carried on by its shareholders in partnership. Company 8 acquired the business from its shareholders during the current income year by way of a CGT roll-over under subdivision 122-B of the ITAA 1997.

Proposed arrangement

15. It is now proposed that the holding company will be the company, the company will; purchase all of the shares in company 3, company 4, company 5, company 6, company 7 and company 8 in consideration for the allotment of shares in the company to the relevant vendors.

16. The company will continue to carry on the businesses after it becomes the holding company and will elect to become the head company of a consolidated group.

17. In relation to each of those transactions the requirements for a CGT roll-over under subdivision 124-M of the ITAA 1997 will be satisfied, and each vendor will choose a CGT roll-over under that subdivision.

18. The proposed disposal of shares is required to facilitate the ownership of all of the businesses under the umbrella of the holding company.

19. The applicant states the proposed arrangement's dominant purpose is to facilitate the investment of the investor, which is in turn required to fund the growth of the businesses in anticipation of listing.

20. It is contemplated that the investor would subscribe for shares in the company, and would also purchase shares in the company from some of the shareholders.

Alternative postulate

21. The alternative arrangement would be for the investor to become a shareholder in the company, company 3, company 4, company 5, company 6, company 7 and company 8.

22. The proposed arrangement is preferred because;

• the investor will only acquire shares in the company, and

• when the company becomes the sole shareholder of the other companies it will simplify the management of the group as a whole.

23. The alternative arrangement does not facilitate the ASX listing.

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 subsection 177CB(2)

Income Tax Assessment Act 1936 subsection 177CB(3)

Income Tax Assessment Act 1936 subsection 177CB(4)

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 Section 177F

Reasons for decision

24. The applicant has advised that under the arrangement the requirements for a capital gains tax roll-over under subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) will be satisfied.

25. Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance provision, giving the Commissioner the discretion to cancel a 'tax benefit' that has been obtained, or would (but for section 177F ITAA 1936) have been obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

26. In order for Part IVA of the ITAA 1936 to apply, the following requirements must be satisfied:

• there is a scheme to which Part IVA of the ITAA 1936 applies;

• a tax benefit was or would (but for subsection 177F(1) of the ITAA 1936) have been obtained;

• the identified tax benefit was or would have been obtained in connection with the identified scheme; and

• the person who entered into or carried out the identified scheme (or any part of the scheme) did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit.

Scheme

27. A 'scheme' is broadly defined in subsection 177A(1) of the ITAA 1936 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.

28. Under this definition, a scheme can be a series of steps taken together or a single step.

29. What constitutes a scheme is ultimately meaningful only in relation to the tax benefit that has been obtained since the tax benefit must be obtained in connection with the scheme. Likewise, the dominant purpose of a person entering into or carrying out the scheme, and the existence of the tax benefit, must both be considered against a comparison with an alternative.

30. The scheme being considered for the purposes of subsection 177A(1) of the ITAA 1936 is the restructure of the Family Group whereby the holding company will be the company, and the company will purchase all of the shares in company 3, company 4, company 5, company 6, company 7 and company 8 in consideration for the allotment of shares in the company to the relevant vendors.

31. In relation to each of those transactions the requirements for a CGT roll-over under subdivision 124-M of the ITAA 1997 will be satisfied, and each vendor will choose a CGT roll-over under that subdivision.

Tax Benefit

32. Having established the existence of a scheme, Part IVA of the ITAA 1936 will only apply if it is determined that a tax benefit was or would have been obtained in connection with that scheme.

33. Broadly, subsection 177C(1) of the ITAA 1936 identifies four types of tax benefits as follows:

• an amount not being included in the taxpayer's assessable income;

• a deduction being allowable to the taxpayer;

• a capital loss being incurred by the taxpayer; and

• a foreign tax credit being allowable to the taxpayer.

34. In order to determine that a tax benefit has been obtained, it is necessary to compare the tax consequence of the scheme in question with the tax consequences that would have arisen, or might reasonably be expected to have arisen, if the scheme had not been entered into or carried out.

Section 177CB of the ITAA 1936 - The bases for identifying tax benefits

35. Section 177CB of the ITAA 1936 provides the framework for deciding under section 177C of the ITAA 1936 whether any of the following tax effects would have occurred, or might reasonably be expected to have occurred, if the scheme had not been entered into or carried out:

(a) an amount being included in the assessable income of the taxpayer;

(b) the whole or part of a deduction not being allowable to the taxpayer;

(c) the whole or part of a capital loss not being incurred by the taxpayer;

(d) the whole or part of a foreign income tax offset not being allowable to the taxpayer;

(e) the taxpayer being liable to pay withholding tax on an amount.

36. Subsection 177CB(2) of the ITAA 1936 confirms that;

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).

37. Subsection 177CB(3) of the ITAA 1936 explains that;

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.

38. Under subsection 177CB(4) of the ITAA 1936 in determining for the purposes of subsection (3) whether such a postulate is a reasonable alternative;

i. 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); but

(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).

39. In conclusion the tax benefit, in this case, is the non-inclusion of an amount in the assessable income of an applicant on account of net capital gains from the shareholder's disposal of shares to the company.

Dominant Purpose

40. Section 177D of the ITAA 1936 provides that Part IVA applies to a scheme if it would be concluded (having regard to the matters in subsection (2)) that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of:

(a) enabling a taxpayer (a relevant taxpayer) to obtain a tax benefit in connection with the scheme; or

(b) enabling the relevant taxpayer and another taxpayer (or other taxpayers) each to obtain a tax benefit in connection with the scheme;

whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers.

41. Subsection (2) states that you have regard to the following matters:

(a) The manner in which the scheme was entered into or carried out;

(b) The form and substance of the scheme;

(c) The time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(d) The result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(e) Any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result from the scheme;

(f) Any change in the financial position of any person who has, or has had any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(g) Any other consequences for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out;

(h) The nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f).

Application to your circumstances

42. Considering the scheme as described in the facts (in particular, to achieve ownership of all of the businesses under the umbrella of the holding company to facilitate the investment of the investor, which is required to fund the growth of the businesses in anticipation of listing) in the context of whether or not it was entered into for the dominant purpose of obtaining a tax benefit it is considered that the scheme does not contain the elements of artificiality or unnecessary complexity, and the commercial drives sufficiently explain the need for the restructuring of the group.

43. An alternative postulate that did not result in a rollover would be unduly complex and not meet the commercial aspects of the group restructure, that being the ability to list the company on the ASX.

44. In light of the commercial objectives of the scheme and having regard to substance of the scheme and the eight matters listed above, the Commissioner does not consider that any party to the scheme entered into the scheme for the sole dominant purpose of obtaining a tax benefit.

45. Consequently, Part IVA of the ITAA 1936 will not apply to the rulees choice to claim a scrip-for-scrip roll-over under subdivision 124-M of the ITAA 1997.

• Whether the Applicants correctly determined their eligibility for the CGT roll-over under subdivision 122-B of the ITAA 1997.

• Whether the Applicants will in fact be eligible for rollover relief under subdivision 124-M of the ITAA 1997.

• Whether the Applicants have correctly determined the market values of the business for the purposes of applying subdivisions 122-B and 124-M of the ITAA 1997.

• Whether the Applicants have correctly determined and applied the cost base rules for the purposes of applying subdivisions 122-B and 124-M of the ITAA 1997.

• Whether the proposed 'script for script' transactions could form part of a wider scheme for the purposes of subsection 177A(1) of the ITAA 1936 to which Part IVA of the ITAA 1936 could apply.