Edited version of your written advice

Authorisation Number: 1051329802558

Date of advice: 23 January 2018

Ruling

Subject: Capital gains tax - Division 615 rollover

Question

If a new Country Y holding company (Company 1) is interposed between the current shareholders and Company 2 under a proposed share restructure, can roll-over relief be applied under the provisions of Division 615 of the Income Tax Assessment Act 1997 (ITAA 1997) for the Australian resident exchanging members?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company 2 is an Australian resident company.

Company 2 is a standalone company (i.e. not a part of any tax consolidated group).

There are XX members in Company 2, consisting of both Australian and foreign residents.

The Australian residents are not subject to the taxation of financial arrangements rules in Division 230 of the ITAA 1997 in relation to gains and losses on their company shares.

The only class of shares held in the Company are ordinary shares, all of which carry the same rights.

There are interest bearing convertible notes held in the company, which have the option to convert to ordinary shares.

The convertible notes represent debt to the company, are not shares in the capital of the company, and will not be converted to shares as part of the proposed restructure.

The restructure of the company will be conducted in two stages

Stage 1: Company 1 was incorporated in Country y in the 20XX income year This Company was intended to ultimately act as the new holding company of Company 2 and its wholly owned subsidiaries.

Company 1 has one nominal ordinary share on issue to an Australian resident, who is also a shareholder of Company 2.

Company 1 will not carry out any operations or undertake any activities other than those in respect to the proposed restructure.

Further, Company 1 will not issue, or agree to issue, any securities other than those proposed under this restructure.

Stage 2: The original share in Company 1 will be bought back for nominal consideration and cancelled.

As part of the proposed restructure, Company 1 will issue to all current shareholders of Company 2 ordinary shares in itself to bring their proportional ownership ratios the same as that originally held by them in Company 2.

In exchange, the current shareholders will dispose of their existing shares in Company 2 to Company 1.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 615

Income Tax Assessment Act 1997 section 615-5

Income Tax Assessment Act 1997 section 615-15

Income Tax Assessment Act 1997 section 615-20

Income Tax Assessment Act 1997 section 615-25

Income Tax Assessment Act 1997 section 960-130

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

Reasons for decision

Division 615 states that you can choose for transactions under a scheme to restructure a company’s business to be tax neutral if, under the scheme you cease to own shares in the company and in exchange you become the owner of new shares in another company.

Subdivision 615-5 of the ITAA 1997 states that you can choose to obtain the rollover if:

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

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

● 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

● the requirements of Subdivision 615-B are satisfied

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

In this case, as all members are ordinary stockholders in Company 2, the requirement in subsection 615-5(1)(a) is satisfied.

Subsection 615-5(1)(b) requires more than one entity to own all the shares in the company referred to in subsection 615-5(1)(a). Section 995-1 defines share in a company as a share in the capital of the company, and includes stock. There are XX members in Company 2, whom collectively own 100% of the ordinary shares.

Therefore, the requirement in subsection 615-5(1)(b) is satisfied. There are no other instruments which provides an ownership interest in Company 2.

Subsection 615-5(1)(c) of the ITAA 1997 requires that, under a scheme for reorganising 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).

In this case, under the proposed restructure, there is a scheme for reorganising the affairs of Company 2 whereby all current shareholders will be issued ordinary shares in XXX Group to bring their proportional ownership ratios the same as that originally held by them in Company 2.

In exchange, the current shareholders will dispose of all their ordinary shareholding in Company 2 to Company 1. The convertible notes, which represent debt to Company 2, remain in Company 2 and are not converted to shares, and no new convertible notes are issued from Company 1 to the shareholders.

Therefore, the requirement in subsection 615-5(1)(c) is satisfied because all shares in Company 2 are disposed to Company 1in exchange for shares in Company 1, and nothing else.

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 – not addressed in this ruling)

Section 615-15 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 Company 1, as the interposed company, will own all the shares in Company 2, as the original entity, immediately after the exchanging members dispose all their shares in Company 2.

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.

This condition is satisfied as each original interest owner in the original entity is an exchanging member who will own a whole number of shares in the interposed company, and the percentage of shares that will be held in the interposed company will equal the percentage of shares they originally held in the original entity.

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 requirement is satisfied because each exchanging member will own ordinary shares in the interposed company, in the same proportions as originally held in the original entity. Further, each new share issued from the interposed company will be ordinary shares, which carry the same rights as those originally held in the original entity. As such, it follows that the ratio of each exchanging members’ proportionate market values of their interests held in the interposed company will be the same as the ratio of their proportionate market values of their shares held in the original entity, just before the disposal to Company 1.

Subsection 615-20(3)(a) of the ITAA 1997 also imposes certain additional requirements for exchanging members who are foreign residents at the time of the disposal.

In this case, there are also foreign resident exchanging members who will also be exchanging their shares in Company 2 to Company 1 as part of the proposed restructure, although this application will only consider the availability of rollover relief to the Australian resident exchanging members.

As such, this requirement does not apply with respect to the Australian resident exchanging members.

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.

As all the new shares in the interposed company will be ordinary shares which are not redeemable, this requirement 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.

You have submitted that this condition will be satisfied.

Subsection 615-25(3) requires alternatively that just after the completion time:

● the exchanging members must own all the shares in the interposed company; or

● 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.

The first requirement will be satisfied as the exchanging members will own all the shares in the interposed company immediately after the completion time, as part of the proposed restructure. Therefore, this requirement will be satisfied.

Therefore, the proposed transaction satisfies the conditions found in Division 615 of the ITAA 1997 for roll-over relief. The interposed entity (in this case the new holding company) must make the choice for the roll-over to apply.

Further issues for you to consider

Under the repealed Subdivisions 124-G and 124-H of the ITAA 1997 a company had 28 days, or such further time as the Commissioner of Taxation allowed, to make the choice for a corporate business restructure and two months for a restructure of a trust into a company.

As a result of the introduction of Division 615 of the ITAA 1997, the new company will always have two months (or such further time as the Commissioner may allow) to choose for the rollover to apply, unless the restructure involves the replacement of the head company of a consolidated group.

Does Part IVA, or any other anti-avoidance provision, apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter ‘part iva general’ in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.