Edited version of your written advice

Authorisation Number: 1051184721310

Date of advice: 27 January 2017

Ruling

Subject: Transfer of registration from a co-operative to proprietary limited company

Question 1

Following the conversion of the Co-operative (Co-op) from an incorporated co-operative under the Co-operatives National Law (CNL) to a proprietary limited company under the Corporations Act 2001 (Corporations Act), will the Co-op be considered the same entity for all purposes under the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Pursuant to Section 104-10 of the ITAA 1997, will capital gains tax (CGT) event A1 occur in respect of the Co-op's assets as a result of its registration under the Corporations Act?

Answer

No

Question 3

Following the conversion of the Co-op from an incorporated co-operative under the CNL to a proprietary limited company under the Corporations Act, will the pre-CGT assets owned by the Co-op prior to the conversion retain their pre-CGT status under Section 149-10 of the ITAA 1997?

Answer

Yes

Question 4

Will the issue of ordinary shares in New Co to Coy A give rise to CGT event D1 under Section 104-35 of the ITAA 1997?

Answer

No

Question 5

Will the issue of ordinary shares in New Co to Coy A result in a change in majority underlying ownership of that company for the purposes of the continuity of ownership test in Section 165-12 of the ITAA 1997?

Answer

Yes

Question 6

If the issue of ordinary shares in New Co to Coy A causes a failure of the continuity of ownership test under Section 165-12 of the ITAA 1997, will New Co be required to satisfy the same business test in Section 165-13 of the ITAA 1997?

Answer

Yes

Question 7

After the conversion, will the issue of ordinary shares in New Co to Coy A cause a change under Division 149 of the ITAA 1997 such that any pre-CGT assets of the Co-op stop being pre-CGT assets at that time?

Answer

Yes

This ruling applies for the following period:

Financial year 20XX

The scheme commences on:

Financial year 20XX

Relevant facts and circumstances

1. The Co-op is registered as a co-operative under the Co-operatives (Adoption of National Law) Act 2012 and is subject to the Co-operatives National Law (CNL). The CNL is an appendix to Co-operatives (Adoption of National Law) Act 2012.

2. The Co-op is treated as a corporation pursuant to its incorporation under the CNL.

3. The Co-op is a trading co-operative and represents a number of enterprises and members. 100% of its shares are held by members. All members are Australian residents.

4. The major activities of the Co-op are provision of services to its members.

5. The capital of the Co-op consists of shares held by individuals, companies and trusts.

6. The Co-op has carry forward tax losses which satisfy the continuity of ownership test (COT)

7. The Co-op has franking credits.

8. The scheme will be implemented in accordance with the relevant deed between the Co-op and Coy A.

9. The scheme involves the conversion of the Co-op registered under the CNL to a proprietary limited company (New Co) under the Corporations Act, the issue of ordinary shares to existing members and the issue of ordinary shares in New Co to Coy A

10. On conversion, each existing member of the Co-op will be issued with shares in New Co equal in number to the value of shares held by them in the Co-op.

11. New Co will be registered as a proprietary company under the Corporations Act.

12. Shares in New Co will be a single class of ordinary shares with one vote for each share the member holds.

Relevant legislative provisions

Income Tax Assessment Act 1936 former subsection 160ZZS

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-35

Income Tax Assessment Act 1997 subsection 104-35(1)

Income Tax Assessment Act 1997 paragraph 104-35(5)(c)

Income Tax Assessment Act 1997 section 149-10

Income Tax Assessment Act 1997 section 149-15

Income Tax Assessment Act 1997 section 149-30

Income Tax Assessment Act 1997 subsection 149-30(1)

Income Tax Assessment Act 1997 Section 165-12

Income Tax Assessment Act 1997 subsection 165-12(2)

Income Tax Assessment Act 1997 subsection 165-12(3)

Income Tax Assessment Act 1997 subsection 165-12(4)

Income Tax Assessment Act 1997 subsection 165-12(5)

Income Tax Assessment Act 1997 subsection 165-12(6)

Income Tax Assessment Act 1997 section 165-13

Income Tax Assessment Act 1997 section 165-210

Income Tax Assessment Act 1997 subsection 165-210(1)

Income Tax Assessment Act 1997 section 960-100

Income Tax Assessment Act 1997 paragraph 960-100(1)(b)

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997, unless otherwise specified.

Question 1

Following the conversion of the Co-op from an incorporated co-operative under the CNL to a proprietary limited company under the Corporations Act, the Co-op will be considered the same 'entity' for all purposes under the ITAA1997 as defined in section 960-100.

ATO Interpretative Decision 2004/798 Income Tax: change from a co-operative to a company considers whether, under the previous co-operatives legislative scheme, a co-operative continues to be the same entity after it transfers its registration to a company.

A 'company' is defined in section 995-1 as a body corporate or any other unincorporated association or body of persons.

Section 995-1 defines an 'entity' to have the meaning in section 960-100, and includes a body corporate.

The term 'body corporate' is therefore used to define both a 'company' in section 995-1 and an 'entity' in section 960-100.

The former Co-operative Act defined a co-operative as a body corporate.

ATO ID 2004/798 concludes that a co-operative under the (former) Co-operative Act is defined as an 'entity' and also a company. It also concludes that after registration as a company under the Corporations Act it will continue to be a 'body corporate', a 'company' and 'entity, that is, it retains its identity and continues to be the same legal entity.

However, the current CNL, as adopted under section 4 of the Co-operatives (Adoption of National Law) Act 2012 does not use the term 'body corporate' in relation to a co-operative. Instead, a co-operative incorporated under the CNL is considered to be a 'corporation' according to the note in the definition in section 4 of the CNL which states that a co-operative is a corporation within this definition.

In order for the reasoning in ATO ID 2004/798 to apply in this instance, it must be established that the Co-op incorporated under the CNL is also a 'body corporate'.

The Term 'body corporate' is not defined in the income tax law, and therefore its ordinary meaning will apply. The Macquarie Dictionary defines a body corporate as 'a person, association or group of persons legally incorporated in a corporation'. As the Co-op is a 'corporation' under the CNL, it therefore is also a 'body corporate' under the ordinary meaning of 'body corporate'.

For the purposes of the ITAA 1997, the Co-op falls within the definition of a body corporate and is an entity as defined in paragraph 960-100(1)(b).

The provisions in the CNL and the Corporations Act both provide for the continuation of a co-operative as the same entity following its registration as a company. The act of registration under a different Act will not create a 'new legal entity'.

Subsection 409(1) of the CNL states:

When a co-operative transfers to a new body, the corporation constituted by the new body is taken to be the same entity as the corporation constituted by the co-operative.

Subsection 601BM(1) of the Corporations Act states:

Registration under this part does not:

(a) create a new legal entity; or

(b) affect the body's existing property, rights or obligations (except as against the members of the body in their capacity as members); or

(c) render defective any legal proceedings by or against the body or its members.

Accordingly, after the Co-op registers under the Corporations Act, notwithstanding its transfer of incorporation to a separate Act, the Co-op will preserve its identity and continue to be the same legal entity.

In addition, the assets, rights and liabilities of the Co-op vest in and are preserved when the Co-op is registered under the Corporations Act 'without the need for any conveyance, transfer, assignment or assurance' (subsection 413(2) of the CNL). This indicates that the identity of the Co-op is preserved and continues with the same assets, rights and liabilities, albeit as a company by registration under the Corporations Act.

Therefore, the Commissioner considers that the Co-op will be the same 'entity' for the purposes of sections 960-100 and 995-1 after the conversion.

Question 2

Pursuant to Section 104-10, capital gains tax (CGT) event A1 will not occur in respect of the Co-op's assets as a result of its registration under the Corporations Act.

Section 104-10 states that CGT event A1 arises when there is a disposal of a CGT asset, and there is a change in ownership of a taxpayer's CGT assets.

As concluded in Question 1, the Co-op remains the same 'entity' for the purposes of the ITAA 1997 as it is a 'body corporate' within the meaning of that term prior to and subsequent to its transfer of registration under the Corporations Act.

As a consequence, for CGT purposes, there is no transfer of assets, and therefore no change in ownership of the assets, between the Co-op and the Company.

Accordingly, there is no disposal in respect of the assets of the Co-op as a result of the conversion, and therefore CGT event A1 will not happen to its CGT assets. As such no capital gain or loss will arise as a result of the conversion.

Question 3

Following the conversion of the Co-op from an incorporated co-operative under the CNL to a proprietary limited company under the Corporations Act, the pre-CGT assets owned by the Co-op prior to the conversion will retain their pre-CGT status under Section 149-10.

Section 149-10 states:

A CGT asset that an entity owns is a pre-CGT asset if, and only if:

(a) the entity last acquired the asset before 20 September 1985; and

(b) the entity was not, immediately before the start of the 1998-99 income year, taken under:

(i) former subsection 160ZZS(1) of the Income Tax Assessment Act 1936; or

(ii) Subdivision C of Division 20 of Part IIIA of that Act;

to have acquired the asset on or after 20 September 1985; and

(c) the asset has not stopped being a pre-CGT asset of the entity because of this Division.'

Under section 149-30 a CGT asset acquired before 20 September 1985 stops being a pre-CGT asset when the majority underlying interests in the asset is no longer held by the ultimate owners who held the majority underlying interests immediately before 20 September 1985.

'Majority underlying interests' is defined in section 149-15 as more than 50% of:

(a) the beneficial interests that *ultimate owners hold (whether directly or indirectly) in the asset; and

(b) the beneficial interests that *ultimate owners hold (whether directly or indirectly) in any income that may be derived from the asset.

The expression 'beneficial interests' as used in the definition of 'majority underlying interests' is not defined. Assistance is provided in Taxation Ruling IT 2340 where the terms 'underlying interest' and 'majority underlying interest' and former section 160ZZS of the ITAA 1936 are discussed.

IT 2340 states in paragraph 2:

The terms "underlying interest" and "majority underlying interests", on the basis of which the provision operates, have the same meanings as they have in Subdivision G of Division 3 of Part III of the Act - which deals with the income tax treatment of interest in relation to "negatively geared" investments in rental property. In both cases (and like provisions of the Act concerned with the measurement of ownership interests) underlying interests in relation to the assets concerned mean beneficial interests held by natural persons, whether directly or through one or more interposed companies, partnerships or trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be "looked through" in order to determine whether there has been a change in the effective interests of natural persons in the assets.

For the purposes of section 149-15 in determining the majority underlying interest in a company the 'ultimate owners' of shares can hold the shares either directly or indirectly. An 'ultimate owner' indirectly has a beneficial interest if he, she or it would receive for his, her or its own benefit a distribution of capital or a dividend or distribution of income (subsections 4 and 5 of section 149-15).

On conversion, each existing member of the Co-op will be issued with shares in New Co equal in number to the value of shares held by them in the Co-op, and thus the majority underlying interests in the assets of the Co-op will be the same before and after conversion.

The Commissioner is satisfied that as a result of the conversion of the Co-op to a company that the majority underlying interests in the shares prior to the conversion will be the same as the majority underlying interests in the shares after the conversion. Therefore the pre-CGT assets would not stop being pre-CGT assets under section 149-30.

Question 4

The issue of ordinary shares in New Co to Coy A will not give rise to CGT event D1 under section 104-35.

CGT Event D1 happens if the taxpayer creates a contractual right or other legal or equitable right in another entity (subsection 104-35(1)). The issue of shares is such a right, however, paragraph 104-35(5)(c) provides an exception where a company issues or allots shares in the company.

As New Co will issue ordinary shares in itself to Coy A, paragraph 104-35(5)(c) ensures that CGT Event D1 does not happen.

Question 5

The issue of ordinary shares in New Co to Coy A will result in a change in majority underlying ownership of that company for the purposes of the continuity of ownership test (COT) in section 165-12.

Under 165-10 a company cannot deduct a tax loss unless it meets the conditions in section 165-12 which requires the company to maintain the same owners known as the COT or it meets the condition in section 165-13 which requires the company to satisfy the same business test (SBT).

The COT broadly consists of three conditions under subsections 165-12(2), 165-12(3) and 165-12(4). This states that that there must be persons who, at all times during the ownership test period had:

● More than 50% of the voting power in the company

● Rights to more than 50% of the company's dividends; and

● Rights to more than 50% of the company's capital distributions.

The 'ownership test period' is the period from the start of the income year in which the loss was incurred to the end of the income year.

The Co-op has tax losses prior to the conversion. As discussed in question 1, New Co will be considered the same entity as the Co-op. The test period will be from the start of the income year the loss was incurred by the Co-op to the end of the income year.

The three conditions under subsections 165-12(2) to (4) are applied either as a 'primary test' or as an 'alternative test'.

In this case as one or more companies beneficially own shares in the Co-op, the alternative test will apply.

Following the conversion of the Co-op to a proprietary company, New Co will issue shares to Coy A. This will result in a change of the underlying majority ownership of New Co as it will give Coy A more than 50% of the voting power, rights to dividends and rights to capital distribution during the 'test period' and thus fail the primary test in paragraphs 165-12(2) to (4). At this time, New Co will no longer satisfy the COT.

Question 6

If the issue of ordinary shares in New Co to Coy A causes a failure of the continuity of ownership test under section 165-12, New Co will be required to satisfy the same business test in section 165-13.

Where a company fails the COT under section 165-12, section 165-13 provides that it will be required to pass the SBT contained under section 165-210 before it can deduct tax losses.

Following the issue of shares to Coy A, New Co will no longer satisfy the COT. Therefore any tax losses will only be deductible if New Co satisfies the conditions under the SBT in section 165-210.

Subsection 165-210(1) states a company satisfies the same business test if throughout the same business test period it carries on the same business as it carried on immediately before the test time.

The SBT thus requires a comparison between the activities of New Co during the income year for which it seeks to deduct the tax losses, with its activities immediately before the test time as determined in accordance with subsection 165-13(2).

Question 7

After the conversion, the issue of ordinary shares in New Co to Coy A will cause a change under Division 149 such that any pre-CGT assets of the Co-op stop being pre-CGT assets at that time.

Division 149 contains provisions which govern when an asset of an entity stops being a pre-CGT asset and is treated as having been acquired after that date.

Section 149-10 provides that an asset is a pre-CGT asset if it was last acquired before 20 September 1985 and no income tax provision has operated to treat it as having been acquired after that date.

Under subsection 149-30(1), an asset of a non-public entity stops being a pre-CGT asset when majority underlying interests in the asset were not held by the same ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985

As discussed at question 5, following the issue of shares to Coy A, the majority underlying ownership interests of New Co will no longer be held by the same owners. Therefore all the pre-CGT assets of New Co will stop being pre-CGT assets at the time that the new shares are issue to Coy A.