Edited version of your written advice

Authorisation Number: 1013043725492

Date of advice: 5 July 2016

Ruling

Subject: Group restructure

Question 1

Will the dividends paid to XYZ be non-assessable non-exempt income under section 768-5 of the Income Tax Assessment Act 1997 (“ITAA 1997”)?

Answer

Yes.

Question 2

Will any capital gain or loss arising to Y and N upon the transfer of the shares in Z and T be disregarded under section 855-10 of ITAA 1997?

Answer

Yes.

Question 3

Will the proposed transaction result in any income being attributed from Y and N under the Controlled Foreign Company provisions contained in Part X of the Income Tax Assessment Act 1936?

Answer

No

This ruling applies for the following periods:

End date: 30 June 20YY

Relevant facts and circumstances

● X is an Australian resident head company of a tax consolidated group.

● Last year, X successfully completed the acquisition of Y, a resident company of country A, with operating subsidiaries in Australia and country A, by acquiring 100% of its share capital.

● Y directly owns 100% of the share capital in Australian company Z, and indirectly via N 100% of the share capital of T, and country A companies, M and N.

● To date no dividends have been paid from Y to X.

● M and N have been carrying on business in country A (a listed country) at all times, and the companies have prepared and maintained accounts in accordance with commercially accepted accounting principles.

● A restructure is proposed to take place in 20YY so that after the restructure the Australian subsidiaries that are currently held directly and indirectly by Y will be transferred to a newly incorporated Australian resident company XYZ, through an in specie distribution. The transfers of shares of Z and T will be conducted at book values.

● All the Australian entities will then form a tax consolidated group with X as the head company (X consolidated group).

● The transfer of shares in Z and T will not be subject to country A tax.

● Z and T do not hold any direct or indirect real property interests situated in Australia.

Assumption

The gains that will accrue to Y and N in respect of the disposal of their shares in Z and T will be greater than 5% of the gross turnover of Y and N.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 126-B

Income Tax Assessment Act 1997 Section 768-5

Income Tax Assessment Act 1997 Section 855-10

Income Tax Assessment Act 1936 Section 317

Income Tax Assessment Act 1936 Subsection 366(1)

Income Tax Assessment Act 1936 Section 369

Income Tax Assessment Act 1936 Subsection 385(2)

Income Tax Assessment Act 1936 Section 419

Income Tax Assessment Act 1936 Section 432

Income Tax Assessment Act 1936 Section 433

Reasons for decision

Question 1

Detailed reasoning

Subsection 768-5(1) of the ITAA 1997 states:

A foreign equity distribution is not assessable income, and is not *exempt income, of the entity to which it is made if:

(a) the entity is an Australian resident and a * corporate tax entity; and

(b) at the time the distribution is made, the entity satisfies the participation test in section 768-15 in relation to the company that made the distribution; and

(c) the entity:

(i) does not receive the distribution in the capacity of a trustee; or

(ii) receives the distribution in the capacity of a trustee of a * corporate unit trust or * public trading trust.

The participation test referred to in paragraph (b) of subsection 768-5(1) is explained in section 768-15 of the ITAA 1997 which states:

An entity satisfies the participation test in this section in relation to another entity at a time if, at that time, the sum of the following is at least 10%:

(a) the * direct participation interest the entity would have in the other entity if rights on winding-up were disregarded;

(b) the * indirect participation interest the entity would have in the other entity if:

(i) rights on winding-up were disregarded; and

(ii) section 960-185 only applied to intermediate entities that are not * corporate tax entities.”

As a result of the proposed restructure, Y and N will pay XYZ a dividend represented by the shares that the country A companies, Y and N hold in the two Australian subsidiaries Z and T.

As a result of the restructure, XYZ will own 100% of the shares in Y and N, and under the company constitutions of Y and N, XYZ will have 100% of the rights to vote, dividends and capital of Y and N. So, the participation test will be satisfied, and thus the dividend income received by X as head company from Y and N, should be non-assessable non-exempt income under subsection 768-5(1).

Question 2

Detailed reasoning

Subsection 855-10(1) of the ITAA 1997 states:

Disregard a * capital gain or * capital loss from a * CGT event if:

(a) you are a foreign resident, or the trustee of a * foreign trust for CGT purposes, just before the CGT event happens; and

(b) the CGT event happens in relation to a * CGT asset that is not * taxable Australian property.

The table under section 855-15 of the ITAA 1997 outlines 5 categories/items of “taxable Australian property” as follows:

1. Taxable Australian real property (item 1);

2. A CGT asset that is an indirect Australian real property interest and is not covered by item 5 (item 2);

3. A CGT asset that you have used at any time in carrying on a business through if you are a resident in a country that has entered into an international tax agreement with Australia containing a permanent establishment article--a permanent establishment (within the meaning of the relevant international tax agreement) in Australia; or otherwise--a permanent establishment in Australia (item 3);

4. An option or right to acquire a CGT asset covered by item 1, 2 or 3 of this table (item 4); and

5. A CGT asset that is covered by subsection 104-165(3) (choosing to disregard a gain or loss on ceasing to be an Australian resident) (item 5).

Items 1 to 5 under subsection 855-10(1) of the ITAA 1997 do not apply Y nor Z because:

● Y and N are residents of country A and do not conduct business in Australia through a permanent establishment.

● The relevant assets being disposed of are shares the Australian subsidiaries which do not hold any direct or indirect real property interests situated in Australia.

● Shares in the Australian companies are not assets that have been used in carrying on a business in Australia through a permanent establishment.

Therefore, any capital gain or loss arising to Y and N from the transfer of shares in Z and T to XYZ should be disregarded under Division 855.

Question 3

Detailed reasoning

After the proposed restructure, Y and N will be CFCs of the attributable taxpayer, XYZ in accordance to section 366(1) of the ITAA 1936,

The transfer of shares in Z and T to XYZ would ordinarily result in assessable income being attributed to the X consolidated group from Y as the active income test will not be satisfied by Y and N according to the active income test in subsection 432(1) of the ITAA 1936.

However, section 419 of the ITAA 1936 will apply (through the operation of subdivision 126-B of ITAA 1997) to disregard any capital gain or loss arising from the transfer of shares, therefore reducing any amounts attributable to the X tax consolidated group.