Edited version of your written advice

Authorisation Number: 1051305045140

Date of advice: 10 November 2017

Ruling

Subject: Reorganisation

Question 1

From, in respect of, in relation to or in connection with, the Redeemable Preference Shares (RPS) which were the subject of the transactions described in Step 2:

(a) Will Step 1 result in ordinary or statutory income pursuant to sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for HeadCo?

Answer

No.

(b) If yes to question (a), will any of the income be non-assessable non-exempt income pursuant to section 6-23 of the ITAA 1997 for HeadCo?

Answer

Not applicable.

(c) If yes to question (a), will any of the income be Conduit Foreign Income pursuant to Subdivision 802-A of the ITAA 1997 for HeadCo?

Answer

Not applicable.

(d) Will Step 1 result in allowable deductions pursuant to sections 8-1 or 8-5 of the ITAA 1997 for HeadCo?

Answer

No.

(e) If yes to question (d), will any tax loss calculated in accordance with section 36-10 of the ITAA 1997 be deductible for HeadCo pursuant to section 8-5 of the ITAA 1997?

Answer

Not applicable.

(f) Will Step 1 result in a capital loss pursuant to Part 3-1 of the ITAA 1997 for HeadCo?

Answer

No.

(g) Will Step 2 result in ordinary or statutory income pursuant to sections 6-5 or 6-10 of the ITAA 1997 for HeadCo?

Answer

No.

(h) If yes to question (g), will any of the income be non-assessable non-exempt income pursuant to section 6-23 of the ITAA 1997 for HeadCo?

Answer

Not applicable.

(i) If yes to question (g), will any of the income be Conduit Foreign Income pursuant to Subdivision 802-A of the ITAA 1997 for HeadCo?

Answer

Not applicable.

(j) Will Step 2 result in allowable deductions pursuant to sections 8-1 or 8-5 of the ITAA 1997 for HeadCo?

Answer

No.

(k) If yes to question (j), will any tax loss calculated in accordance with section 36-10 of the ITAA 1997 be deductible to HeadCo pursuant to section 8-5 of the ITAA 1997?

Answer

Not applicable.

(l) Will Step 2 result in a capital loss pursuant to Part 3-1 of the ITAA 1997 for HeadCo?

Answer

No.

(m) If yes to any of questions (b) to (f) and (h) to (l) inclusive, will the Commissioner make a determination under section 177F of the Income Tax Assessment Act 1936 (ITAA 1936) to cancel a tax benefit of a kind referred to in subsection 177C(1) of the ITAA 1936 obtained, or that would but for subsection 177F(1) of the ITAA 1936 be obtained, by HeadCo as a result of undertaking Steps 1 and/or 2?

Answer

Not applicable.

This ruling applies for the following periods:

Year ended 31 December 2016.

The scheme commences on:

Year ended 31 December 2016.

Relevant facts and circumstances

HeadCo is the head company of HeadCo consolidated group. HeadCo undertook a reorganisation.

The reorganisation had a number of steps which included as follows:

Step 1

SubCo1, a subsidiary member of HeadCo, acquired all of the issued shares in ABC Co from XYCo at market value of the shares.

Step 2

SubCo2, also a subsidiary member of HeadCo, distributed Redeemable Preference Shares (RPS) to other subsidiary members of the HeadCo consolidated group.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 subsection 177C(1)

Income Tax Assessment Act 1936 section 177CB

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1936 subsection 177F(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 6-23

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 8-5

Income Tax Assessment Act 1997 section 36-10

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 subsection 100-20(1)

Income Tax Assessment Act 1997 section 100-35

Income Tax Assessment Act 1997 Subdivision 802-A

Reasons for decision

All legislative references are to the ITAA 1997 unless indicated otherwise.

Question 1

From, in respect of, in relation to or in connection with, the RPS which were the subject of the transactions described in Step 2:

(a) Will Step 1 result in ordinary or statutory income pursuant to sections 6-5 or 6-10 for HeadCo?

Summary

No amount of income, gain or profit was derived, made or realised from, in respect of, in relation to or in connection with, the RPS as a consequence of Step 1. The RPS remained in place and were completely unchanged.

Detailed reasoning

Section 6-5 provides that your assessable income, as an Australian resident for taxation purposes, includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources whether in or out of Australia. Section 6-10 also includes in your assessable income amounts of statutory income.

Step 1 transaction did not affect any of the RPS in any way that results in the derivation, making or realisation of any income, gain or profit for HeadCo pertaining to these instruments. Accordingly, Step 1 will not result in ordinary or statutory income pursuant to sections 6-5 or 6-10 for HeadCo, from, in respect of, in relation to or in connection with, the RPS.

This ruling does not consider the tax cost setting requirements of Part 3-90 or any of their consequential implications.

(b) If yes to question (a), will any of the income be non-assessable non-exempt income pursuant to section 6-23 for HeadCo?

Section 6-23 provides that an amount of ordinary or statutory income is non-assessable non-exempt income if a provision of the ITAA 1997 or another Commonwealth law states that it is not assessable income and not exempt income.

Because Step 1 transaction will not result in ordinary or statutory income pursuant to sections 6-5 or 6-10 for HeadCo, from, in respect of, in relation to or in connection with, the RPS, the application of section 6-23 to HeadCo does not have to be considered.

(c) If yes to question (a), will any of the income be Conduit Foreign Income pursuant to Subdivision 802-A for HeadCo?

Subdivision 802-A sets out the method of working out your Conduit Foreign Income (CFI). Your CFI includes the following amounts:

(i) The ordinary or statutory income you derive, providing further that certain conditions, assumptions and adjustments are satisfied or made (subsections 802-30(1) and (2))

(ii) An unfranked part of a frankable distribution you receive directly from another Australian corporate tax entity, or indirectly through a trust or partnership, to the extent it is declared to be CFI (paragraphs 802-30(3)(a) and (3)(b)); and

(iii) A foreign equity distribution you receive directly from a foreign resident company, or indirectly through a trust or partnership, that is not assessable, not exempt income pursuant to section 768-5 (paragraph 802-30(3)(c))

The application of Subdivision 802-A to HeadCo does not have to be considered because Step 1 transaction will not result in any of the following for HeadCo, from, in respect of, in relation to or in connection with, the RPS:

(i) Ordinary or statutory income pursuant to sections 6-5 or 6-10;

(ii) Frankable distributions received from another Australian corporate tax entity; or

(iii) Foreign equity distributions received from a relevant foreign resident company that are covered by section 768-5.

(d) Will Step 1 result in allowable deductions pursuant to sections 8-1 or 8-5 for HeadCo?

Summary

No amount of expenditure, loss or outgoing was incurred, made or realised from, in respect of, in relation to or in connection with, the RPS as a consequence of Step 1. The RPS remained in place and were completely unchanged.

Detailed reasoning

Section 8-1 states that you can deduct from your assessable income any loss or outgoing to the extent that it is:

(a) incurred in gaining or producing your assessable income; or

(b) necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Section 8-5 further provides that you can deduct from your assessable income an amount that a provision of the ITAA 1997 (outside Division 8) allows you to deduct.

Step 1 transaction did not affect any of the RPS in any way that results in the incurrence, making or realisation of any expenditure, loss or outgoing for HeadCo pertaining to these instruments. Accordingly, Step 1 will not result in allowable deductions pursuant to sections 8-1 or 8-5 for HeadCo, from, in respect of, in relation to or in connection with, the RPS.

This ruling does not consider the tax cost setting requirements of Part 3-90 or any of their consequential implications.

(e) If yes to question (d), will any tax loss calculated in accordance with section 36-10 be deductible for HeadCo pursuant to section 8-5?

Section 36-10 provides the methodology of calculating a tax loss for an income year. Because the transactions in Step 1 will not result in allowable deductions pursuant to sections 8-1 or 8-5 for HeadCo, from, in respect of, in relation to or in connection with, the RPS, the deductibility of a tax loss calculated in accordance with section 36-10 to HeadCo does not have to be considered.

(f) Will Step 1 result in a capital loss pursuant to Part 3-1 for HeadCo?

Summary

No capital gains tax (CGT) event happened and no capital loss was made from, in respect of, in relation to or in connection with, the RPS as a consequence of Step 1. The RPS remained in place and were completely unchanged.

Detailed reasoning

Part 3-1 provides the general rules for determining capital gains and losses. Subsection 100-20(1) provides that a capital gain or loss can only be made if a CGT event happens. For most CGT events, section 100-35 provides as follows:

● you make a capital gain if you receive (or are entitled to receive) capital amounts from the CGT event which exceed your total costs associated with that event.

● you make a capital loss if your total costs associated with the CGT event exceed the capital amounts you receive (or are entitled to receive) from the event.

Step 1 did not affect any of the RPS in any way that results in a CGT event happening for HeadCo pertaining to these instruments. Accordingly, Step 1 will not result in a capital loss pursuant to Part 3-1 for HeadCo, from, in respect of, in relation to or in connection with, the RPS.

This ruling does not consider the tax cost setting requirements of Part 3-90 or any of their consequential implications.

(g) Will Step 2 result in ordinary or statutory income pursuant to sections 6-5 or 6-10 for HeadCo?

Summary

The Step 2 transactions are disregarded under the single entity rule for the head company (HeadCo) core purposes.

Detailed reasoning

Section 6-5 provides that your assessable income, as an Australian resident for taxation purposes, includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources whether in or out of Australia. Section 6-10 also includes in your assessable income amounts of statutory income.

In considering the application of sections 6-5 and 6-10 to HeadCo, it is noted that the entities involved in the transactions in Step 2 were the head company of the HeadCo consolidated group and its subsidiary members. In this context, under the single entity rule in section 701-1, the members of a consolidated group are treated as a single entity (that is, those members are taken to be parts of the head company) for income tax purposes.

As a consequence, the single entity rule has the effect that dealings that are solely between members of the same consolidated group (intra-group dealings) will not result in ordinary or statutory income to the group’s head company (paragraph 8(d) of 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).

Accordingly, the Step 2 transactions will not result in ordinary or statutory income pursuant to sections 6-5 or 6-10 for HeadCo, from, in respect of, in relation to or in connection with, the.

(h) If yes to question (g), will any of the income be non-assessable non-exempt income pursuant to section 6-23 for HeadCo?

Section 6-23 provides that an amount of ordinary or statutory income is non-assessable non-exempt income if a provision of the ITAA 1997 or another Commonwealth law states that it is not assessable income and not exempt income.

Because the Step 2 transactions are disregarded under the single entity rule for the head company (HeadCo) core purposes, the application of section 6-23 to HeadCo does not have to be considered.

(i) If yes to question (g), will any of the income be Conduit Foreign Income pursuant to Subdivision 802-A for HeadCo?

Subdivision 802-A sets out the method of working out your Conduit Foreign Income (CFI).

Because the Step 2 transactions are disregarded under the single entity rule for the head company (HeadCo) core purposes, the application of Subdivision 802-A to HeadCo does not have to be considered.

(j) Will Step 2 result in allowable deductions pursuant to sections 8-1 or 8-5 for HeadCo?

Summary

The Step 2 transactions are disregarded under the single entity rule for the head company (HeadCo) core purposes.

Detailed reasoning

Section 8-1 states that you can deduct from your assessable income any loss or outgoing to the extent that it is:

(a) incurred in gaining or producing your assessable income; or

(b) necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Section 8-5 further provides that you can deduct from your assessable income an amount that a provision of the ITAA 1997 (outside Division 8) allows you to deduct.

The entities involved in the transactions in Step 2 were the head company of the HeadCo consolidated group and its subsidiary members. In this context, under the single entity rule in section 701-1, the members of a consolidated group are treated as a single entity (that is, those members are taken to be parts of the head company) for income tax purposes.

As a consequence, the single entity rule has the effect that dealings that are solely between members of the same consolidated group (intra-group dealings) will not result in any deduction to the group’s head company (paragraph 8(d) of 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).

Accordingly, the Step 2 transactions will not result in allowable deductions pursuant to sections 8-1 or 8-5 for HeadCo, from, in respect of, in relation to or in connection with, the RPS.

(k) If yes to question (j), will any tax loss calculated in accordance with section 36-10 of the ITAA 1997 be deductible to HeadCo pursuant to section 8-5?

Section 36-10 provides the methodology of calculating a tax loss for an income year. Because the Step 2 transactions are disregarded under the single entity rule for the head company (HeadCo) core purposes, the deductibility of a tax loss calculated in accordance with section 36-10 for HeadCo does not have to be considered.

(l) Will Step 2 result in a capital loss pursuant to Part 3-1 for HeadCo?

Summary

The Step 2 transactions are disregarded under the single entity rule for the head company (HeadCo) core purposes.

Detailed reasoning

Part 3-1 provides the general rules for determining capital gains and losses. In considering the application of Part 3-1 to HeadCo, it is noted that the entities involved in the transactions in Step 2 were the head company of the HeadCo consolidated group and its subsidiary members. In this context, under the single entity rule in section 701-1, the members of a consolidated group are treated as a single entity (that is, those members are taken to be parts of the head company) for income tax purposes.

As a consequence, the single entity rule has the effect that dealings that are solely between members of the same consolidated group (intra-group dealings) will not result in statutory income (which includes any capital gains) to the group’s head company (paragraph 8(d) of 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).

Paragraph 9 of TR 2004/11 further provides that:

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.

Accordingly, the Step 2 transactions will not result in a capital loss pursuant to Part 3-1 for HeadCo.

(m) If yes to any of questions (b) to (f) and (h) to (l) inclusive, will the Commissioner make a determination under section 177F of the ITAA 1936 to cancel a tax benefit of a kind referred to in subsection 177C(1) of the ITAA 1936 obtained, or that would but for subsection 177F(1) of the ITAA 1936 be obtained, by HeadCo as a result of undertaking Steps 1 and/or 2?

In this case because none of the answers to questions (b) to (f) and (h) to (l) inclusive are yes, there is no need to consider whether the Commissioner would make a determination under section 177F of the ITAA 1936 to cancel a tax benefit of a kind referred to in subsection 177C(1) of the ITAA 1936 obtained, or that would but for subsection 177F(1) of the ITAA 1936 be obtained, by HeadCo as a result of undertaking Steps 1 and/or 2.