Edited version of your written advice

Authorisation Number: 1013058801632

Date of advice: 26 July 2016

Ruling

Subject: Income Tax

Question 1

Will the Company shareholders be entitled to choose to apply the roll-over in section 615-5 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the exchange of shares in the Company for shares in Newco 1?

Answer

Yes

Question 2

Will the single entity rule in section 701-1 of the ITAA 1997 apply to the transfer of the Land from the Company to Newco 2 such that the transfer will not be treated for income tax purposes as a disposal of the Land by the Company?

Answer

Yes

This ruling applies for the following periods:

01 July 2016 to 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances:

The Company

All shareholders of the Company are ordinary shareholders.

The Company has a mixture of Australian resident shareholders and foreign resident shareholders for income tax purposes.

The foreign resident shareholding in the Company will be taxable Australian property both immediately before the completion time and immediately after the completion time in terms of the Newco 1 shares.

The shares held by the foreign resident shareholders in the Company and the shares in Newco 1 will be an indirect Taxable Australian Real Property (TARP) interest.

The membership interest held by the foreign resident shareholders in the Company and in Newco 1 immediately before the completion time passes the non-portfolio interest test.

The interest held by the foreign resident shareholders in the Company and in Newco 1 immediately before the completion time passes the principal asset test.

The market value of the Company's TARP assets exceeds the market value of its non-TARP assets.

Current Assets Owned by the Company

The Company is the owner of the Land and the Company carries on a business and is carried on in a building situated on the Land.

Proposed Corporate Restructure of the Company

Newco 1 is to be incorporated during the 20XX calendar year.

Newco 1 will initially be a wholly owned subsidiary of the Company (Stage 1).

After the completion of Stage 1, the Company will make an election to form a consolidated group with the Company being the head company.

It is proposed that Newco 1 will acquire 100% of the shares held by the exchanging members in the Company in exchange for issuing shares in Newco 1 in the same proportionate shareholdings as the exchanging members currently hold in the Company.

The receipt of the shares in Newco 1 will be the only consideration received by the exchanging Members for the disposal of their shares in the Company to Newco 1 (Stage 2).

After the completion of stage 2, Newco 1 will make an election pursuant to subsection 615-30(2) of the ITAA 1997 to continue the consolidated group with Newco 1 as the new head company and the Company will then be a wholly owned subsidiary of Newco 1.

After the completion of stage 2, it is proposed to cause Newco 2 to be incorporated. Newco 2 will be a wholly owned subsidiary of Newco 1 (Stage 3).

After the completion of stage 3, Newco 1 will give the Commissioner notice that Newco 2 has become a member of the consolidated group.

Proposed transfer of the Land

Following the completion of Stage 3, the Company proposes to transfer the Land to Newco 2 subject to a commercial lease between the Company, as the lessee, and Newco 2, as the lessor (Stage 4).

Following the transfer of the Land from the Company to Newco 2, the Company will continue to operate the business from the building situated on the land and will pay commercial rent to Newco 2 pursuant to the lease.

It is proposed to carry out the corporate restructure and the transfer of the land, as set out in Stages 1-4 for commercial reasons.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 Division 615

Income Tax Assessment Act 1997 section 615-1

Income Tax Assessment Act 1997 subsection 615-5(1)

Income Tax Assessment Act 1997 paragraph 615-5(1)(a)

Income Tax Assessment Act 1997 paragraph 615-5(1)(b)

Income Tax Assessment Act 1997 paragraph 615-5(1)(c)

Income Tax Assessment Act 1997 Subdivision 615-B

Income Tax Assessment Act 1997 section 615-15

Income Tax Assessment Act 1997 subsection 615-20(1)

Income Tax Assessment Act 1997 subsection 615-20(2)

Income Tax Assessment Act 1997 subsection 615-20(3)

Income Tax Assessment Act 1997 section 615-25

Income Tax Assessment Act 1997 subsection 615-25(1)

Income Tax Assessment Act 1997 subsection 615-25(2)

Income Tax Assessment Act 1997 subsection 615-25(3)

Income Tax Assessment Act 1997 paragraph 615-25(3)(a)

Income Tax Assessment Act 1997 section 615-30

Income Tax Assessment Act 1997 subsection 615-30(2)

Income Tax Assessment Act 1997 subsection 701-(1)

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Question 1

Summary

The Company shareholders can choose roll-over relief under section 615-5 of the ITAA 1997 for disposing of their ordinary shares in the Company in exchange for ordinary shares in Newco 1.

Detailed reasoning

Section 615-1 of the ITAA 1997 states:

You can choose for transactions under a scheme to restructure a company's or unit trust's business to be tax neutral, if under the scheme:

(a) You cease to own shares in the company or units in the unit trust; and

(b) In exchange, you become the owner of new shares in another company.

Subsection 615-5(1) of the ITAA 1997 states that you can choose to obtain the roll-over if:

(a) you are a member of a company (the original entity), and

(b) you and at least one other entity (the exchanging members) own all of the shares in it, and

(c) under the scheme for reorganising its affairs the exchanging members dispose of all their shares to an interposed company in exchange for shares in the interposed company (and nothing else), and

(d) the requirements of Subdivision 615-B are satisfied.

Subsection 995-1(1) of the ITAA 1997 states that a 'member', in relation to an entity, has the meaning given by section 960-130 of the ITAA 1997. Section 960-130 states, that where an entity is a company, a stockholder is a member of the company.

All the exchanging members are ordinary shareholders of the Company (the original entity), and they own all the shares in the Company, and therefore the conditions in paragraphs 615-5(1)(a) and (b) of the ITAA 1997 are satisfied.

Paragraph 615-5(1)(c) of the ITAA 1997 requires that, under a scheme for reorganizing its affairs, the exchanging members dispose of all their shares in the original company to another company (the interposed company) in exchange for shares in the interposed company (and nothing else).

It is proposed that the exchanging members transfer all their Company shares to Newco 1 in exchange for Newco 1 shares (and nothing else). It is proposed that Newco 1 will acquire 100% of the shares held by the shareholders in the Company in exchange for issuing shares in Newco 1 in the same proportionate shareholdings as those previously owned by the exchanging members. Therefore, the requirement in paragraph 615-5(1)(c) of the ITAA 1997 is satisfied.

Further requirements are imposed by Subdivision 615-B of the ITAA 1997. They are:

• the interposed company must own all the original interests (section 615-15 of the ITAA 1997);

• there are special requirements relating to your interests in the original entity (subsections 615-20(1),(2) and (3) of the ITAA 1997)

• there are special requirement relating to the interposed company (section 615-25 of the ITAA 1997), and

• the interposed company must make a particular choice (section 615-30 of the ITAA 1997 does not apply in this case).

Section 615-15 of the ITAA 1997 states that the interposed company must own all of the shares in the original entity immediately after the time (the completion time) all the exchanging members have had their shares in the original entity disposed of, redeemed or cancelled under the scheme.

This requirement is satisfied because Newco 1 owns all the shares in the Company immediately after the exchanging members disposed of the shares in the Company.

Subsection 615-20(1) of the ITAA 1997 requires that just after the completion time, each exchanging member must own:

• a whole number of shares in the interposed company; and

• a percentage of the shares in the interposed company that were issued to all the exchanging members that is equal to the percentage of the shares in the original company (that were disposed of to the interposed company) that the member owned.

These requirements are also satisfied because each original Company shareholder owns a number of shares in Newco 1 equal to the percentage of shares they originally held in the Company.

Subsection 615-20(2) of the ITAA 1997 requires that the ratio of the market value of each exchanging member's shares in the interposed company to the market value of the shares in the interposed company issued to all the exchanging members (worked out just after the completion time) is equal to the ratio of the market value of that 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 of to the interposed company (worked out just before the first disposal).

This condition will be satisfied in this case. Newco 1 will be a newly incorporated entity and Newco 1 will issue new shares to each of the exchanging members equal to the number of shares that each of the exchanging members held immediately before the completion time. As the number of shares remains the same before and after the completion time and the assets of the consolidated group remain unchanged, the ratio of the market values remains unchanged.

Based on the facts in this case, subsection 615-20(3) of the ITAA 1997 is also satisfied.

Section 615-25 of the ITAA 1997 imposes requirements specifically relating to the interposed company. Subsection 615-25(1) states that shares in the interposed company must not be redeemable shares. The shares issued in Newco 1 were not redeemable shares. Therefore this condition is satisfied.

Subsection 615-25(2) of the ITAA 1997 requires that each exchanging member who is issued shares in the interposed company must own the shares from the time they are issued to the completion time. This condition is satisfied as each of the shareholders, being the exchanging members who will be issued Newco 1 shares will have held those shares from the time they were issued until at least the completion time.

Additionally, subsection 615-25(3) of the ITAA 1997 requires that just after the completion time:

(a) the exchanging members must own all the shares in the interposed company; or

(b) entities other than those members must own no more than 5 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.

Paragraph 615-25(3)(a) of the ITAA 1997 is satisfied in this case. Immediately after the completion time, the only members of Newco 1 will be the exchanging members.

Furthermore, subsection 615-30(2) of the ITAA 1997 applies in this case as Newco 1 will make the choice, within 28 days, that the consolidated group will continue at and after the completion time with Newco 1 as its head company and the Company as a wholly owned subsidiary group member.

Conclusion

The Company shareholders can choose roll-over relief under section 615-5 of the ITAA 1997.

Question 2

Summary

The single entity rule will apply to the transfer of the Land from the Company to Newco 2. As a result, the transfer will not be treated for income tax purposes as a disposal of the Land by the Company.

Detailed reasoning

CGT Event A1

Pursuant to subsection 104-10(1) of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. The disposal of a CGT asset takes place if a change of ownership occurs from the taxpayer to another entity, whether because of some act or event or by operation of law, as per subsection 104-10(2).

Subsection 104-10(3) of the ITAA 1997 provides that if the asset is disposed of under a contract, the time of CGT event A1 is when the taxpayer enters into the contract. However, if there is no contract for the disposal of the asset, CGT event A1 happens when the change of ownership of the asset occurs.

Single entity rule

Subsection 701-1(1) of the ITAA 1997 broadly provides that, for income tax purposes, subsidiary members of a consolidated group are taken to be parts of the head company of the group, rather than separate entities. This is known as the single entity rule (SER).

Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997, provides the following explanation of the income tax consequences of the SER:

7. For income tax purposes the SER deems subsidiary members to be parts of the, head company rather than separate entities during the period that they are members of the consolidated group.

8. As a consequence, the SER has the effect that:

(a) the actions and transactions of a subsidiary member are treated as having been undertaken by the head company;

(b) the assets a subsidiary member of the group owns are taken to be owned by the head company (with the exception of intra-group assets) while the subsidiary remains a member of the consolidated group;

(c) assets where the rights and obligations are between members of a consolidated group (intra-group assets) are not recognised for income tax purposes during the period they are held within the group whether or not the asset, as a matter of law, was created before or during the period of consolidation (see also paragraph 11 and paragraphs 26-28); and

(d) dealings that are solely between members of the same consolidated group (intra-group dealings) will not result in ordinary or statutory income or a deduction to the group's head company.

9. An example of an intra-group dealing is the transfer of a capital gains tax (CGT) asset from one group member to another. This transfer is not treated for income tax purposes as a disposal or acquisition in the hands of the head company. Although the legal transfer of the CGT asset between the subsidiary members occurs at general law, it has no income tax consequences as the group's head company is taken to be the owner of the asset both before and after the transfer.

The transfer of the Land from the Company to Newco 2 is considered to be a deal between members of the same consolidated group (an intra-group dealing). As such, section 701-1 of the ITAA 1997 will operate to ensure that the intra-group transfer of the Land will not be treated for income tax purposes as a disposal and accordingly CGT Event A1 under section 104-10 of the ITAA 1997 will not be triggered.