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Authorisation Number: 1051293744707

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Ruling

Subject: Proposed Initial Public Offering

Question 1

Will the proposed Initial Public Offering (IPO) of shares in Company A give rise to CGT event J1 in relation to the membership interests of a subsidiary member of the Company A income tax consolidated group that were acquired pursuant to CGT roll-over under subdivision 126-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following periods:

1 January 2017 to 31 December 2017

The scheme commences on:

When the proposed IPO happens.

Relevant facts and circumstances

Company A is an Australian incorporated and tax resident company. Company A is ultimately wholly owned by ForeignCo, a foreign incorporated and foreign tax resident company listed on an overseas Stock Exchange.

Company A is the head company of the Company A income tax consolidated group.

Company B is not currently a member of the Company A income tax consolidated group.

Company B is an Australian incorporated and tax resident company directly owned by a foreign incorporated and tax resident company. Company B is ultimately wholly owned by ForeignCo.

Company B passes the Principal Asset Test as outlined in section 855-30 of the Income Tax Assessment Act 1997 (ITAA 1997). Company B’s assets are principally land, buildings and depreciable plant.

Transaction One

Company A proposes to acquire 100% of the membership interests in Company B for market value (Transaction One).

Upon completion of Transaction One, Company B became a member of the Company A income tax consolidated group.

Transaction Two

Company A is considering undertaking an Initial Public Offering (IPO) on the Australian Securities Exchange (ASX) after Transaction One (Transaction Two).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-175

Reasons for decision

For CGT event J1 to occur the conditions specified in section 104-175 must be satisfied.

These conditions (broadly) are that a CGT asset must have been transferred, pursuant to subdivision 126-B, between two members of the same wholly owned group (as defined in section 975-500) and the recipient of the rollover (and (current) owner of the rollover asset) must stop being a 100% subsidiary (as defined in section 975-505) of the company that was the ultimate holding company of the group at the time of the rollover.

Where these conditions are met CGT event J1 will apply to deem the recipient to have disposed of the rollover asset at the time (the break-up time) it stopped being a 100% subsidiary for an amount equal to the market value of the rollover asset at the break-up time.

Ignoring the effect of Part 3-90 and the section 701-1 single entity rule (SER);

● Company A is the recipient of a subdivision 126-B rollover asset comprising all the membership interests (shares) in Company B.

● under subsection 104-175(2) the ‘break-up time’ will be the time of the IPO when Company A as the recipient company will no longer be a 100% subsidiary of ForeignCo and ceases to be a member of the same wholly owned group as Company B the originator.

● under subsection 104-175(4) the time of a potential CGT event J1 will be at the implementation of Transaction Two.

● under subsection 104-175(5) Company A would make a capital gain if the market value of the shares in Company B Australia at the implementation of Transaction Two is more than their cost base.

Single entity rule

Section 701-1 the single entity rule (SER) provides that on joining a consolidated (or MEC) group as a subsidiary member the entity is taken (for the income tax (core) purposes set out in subsections 701-1(2) and (3)) to be a part of the head company rather than a separate entity for these purposes.

The ATO view of the SER as set in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 is that on joining a consolidated (or MEC) group as a subsidiary member the entity ceases to be recognised or treated as a separate taxpayer for section 4-15 How to work out your taxable income and section 36-10 How to calculate a tax loss for an income year purposes as the head company of the group is treated as the only recognised taxpayer for these purposes.

This view of the SER is based on a consideration of the words in section 701-1 in the context of Part 3-90 as a whole (having regard to its policy and purpose) and is in accordance with the statements made at paragraphs 2.12 to 2.29 of the Explanatory Memorandum to New Business Tax System (Consolidation) Bill (No 1) 2002 as to its intended operation and effect.

Paragraph 2.9 of the Explanatory Memorandum also notes that when an entity becomes a subsidiary member of a consolidated group the membership interests in the entity held by the group are ignored and the cost for tax purposes of the assets [of the entity] which become those of the head company is set in accordance with the cost setting rules.

This paragraph is referring to the effect of the Division 705 entry asset cost setting rules whereby the amount paid by the group for the membership interests in the entity is added to its (accounting) liabilities and the total allocated to the assets brought into the group by the entity to give these assets a new tax cost for the head company’s income tax purposes. The entity and its membership interests are ignored (or not recognised) by the head company for income tax (core) purposes whilst it remains a subsidiary member of the consolidated group. If the entity ceases to qualify as a subsidiary member then the rules in Division 711 will apply to work out a (new) tax cost for its membership interests (for the head company’s tax purposes) by adding up the tax cost of all the (underlying) assets held less the amount of all accounting liabilities owed by the entity (at the leaving time).

Accordingly the effect of the SER (in combination with Division 705) is that Company B, on joining the Company A consolidated group as a subsidiary member, ceases to be recognised as a separate taxpayer for income tax (core) purposes and the membership interests in Company B as held by Company A also cease to be recognised for the head company’s tax purposes.

As the proposed IPO will have no effect on the existence of the consolidated group or Company B’s status as a subsidiary member, this means the roll-over asset referred to in paragraph 104-175(1)(a), subsection 104-175(2) and subsection 175(5) being all the membership interests in Company B will not be recognised by Company A for income tax purposes at the break-up time.

Conclusion

Assuming that the conditions for roll-over relief under Subdivision 126-B will be satisfied, at the implementation of Transaction Two the conditions for CGT J1 under subsection 104-175(1) cannot be satisfied at the break-up time as due to the SER the rollover asset (all the membership interests in Company B the subsidiary member) is not recognised by Company A for income tax purposes at this time.