Edited version of private advice

Authorisation Number: 1051655921395

Date of advice: 17 April 2020

Ruling

Subject: Capital gains tax roll-over relief

Question 1

Will the requirements in section 124-780 of the Income Tax Assessment Act 1997 (ITAA 1997) be satisfied such that the Taxpayer will jointly be eligible with the ultimate holding company to choose capital gains tax roll-over relief under Subdivision 124-M of the ITAA 1997 to disregard any capital gain arising to the Taxpayer upon the proposed transfer of shares in the Company B to Company A?

Answer

Yes

Question 2

Will the requirements in section 124-780 of the ITAA 1997 be satisfied such that the Taxpayer will jointly be eligible with the ultimate holding company to choose capital gains tax roll-over relief under Subdivision 124-M of the ITAA 1997 to disregard any capital gain arising to the Taxpayer upon the proposed transfer of shares in Company D to Company C?

Answer

Yes

Question 3

Will the Commissioner make a determination under section 177F of the ITAA 1936 to cancel the tax benefits otherwise obtained by the Taxpayer under subsection 124-785(1) of the ITAA 1997, in relation to the disposal of his shares to either Company A or Company C?

Answer

No

This ruling applies for the following period:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

The ultimate holding entity

The ultimate holding entity was incorporated in XXXX and currently holds shares in a number of entities within the group.

It will hold shares in Sub Holding Co.

Company A and Company C

Company A and Company C will be established and incorporated in foreign countries and will be wholly owned subsidiaries within the group.

Company A will be a holding company that will manage the investments in their subsidiary companies. The company will not carry on any business activity in Australia, nor will it be managed and controlled from Australia. The company will appoint a director, who will be a non-resident of Australia for tax purposes, and the company will be managed and controlled from a foreign country.

The Taxpayer

The Taxpayer is currently a director of several entities within the group.

The Taxpayer is the sole shareholder of Company B and Company D.

The Taxpayer will resign as a director of Company B and Company D after the transfer of shares. Company B's directors will be replaced with different directors who will undertake the management and control of Company B after the restructure. Company D (which is not an Australian resident for taxation purposes) will have other additional non-resident directors who will be appointed in the future.

For the purpose of section 124-783 of the ITAA 1997, the Taxpayer will be a significant stakeholder for the arrangement (as that term is defined and understood in the context of Subdivision 124-M of the ITAA 1997).

Transfer of shares

In preparation for the various asset and share transfers to take place foreign entities will be established, including Company A and Company C.

Following the incorporation of the new entities, certain business assets and activities will be transferred, and liabilities assumed. It is then proposed that any necessary share transfers take place.

In relation to the transfer of the shares in Company B the following steps will occur:

a)    The Taxpayer disposes of his ordinary shares in the Company B to Company A pursuant to a legal agreement. The parties will include the Taxpayer, Company A, Company B and the ultimate holding entity.

b)    The ultimate holding entity will issue replacement ordinary shares to the Taxpayer. The number of shares issued to the Taxpayer will be based on the relative market values of Company B and the ultimate holding entity's economic group.

c)    No further legal agreement or further issuance of shares to the Taxpayer will occur following the replacement of ordinary shares.

The number of shares that are to be issued to the Taxpayer as consideration for the transfer of the shares in Company B and Company D will be based on the proportionate market value of the shares in Company B and Company D, to the overall market value of the ultimate holding entity's group. The only consideration received by the Taxpayer will be replacement ordinary shares in the ultimate holding entity. The Taxpayer will not receive any cash or cash equivalents as consideration for the transfer of his shares in Company B and Company D.

Assumptions:

The market value of the replacement shares in the ultimate holding entity issued to the

Taxpayer as consideration for the transfer of his shares in Company B and Company D will be substantially the same as the market value of the shares in each respective entity.

There are no unrealised gains in respect of the assets that include in the Balance Sheet of both Company B and Company D as at 31 December XXXX.

Any valuations of entities or businesses will be undertaken in accordance with the ATO's 'Market valuation for tax purposes' guidelines.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 subsection 177C(1)

Income Tax Assessment Act 1936 subsection 177C(2)

Income Tax Assessment Act 1936 subparagraph 177C(2)(a)(i)

Income Tax Assessment Act 1936 subparagraph 177C(2)(a)(ii)

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1997 Division 122

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1997 section 124-780

Income Tax Assessment Act 1997 subsection 124-780(2)

Income Tax Assessment Act 1997 subsection 124-780(3)

Income Tax Assessment Act 1997 subsection 124-780(5)

Income Tax Assessment Act 1997 subsection 124-780(7)

Income Tax Assessment Act 1997 section 124-783

Income Tax Assessment Act 1997 subsection 124-785(1)

Income Tax Assessment Act 1997 Division 615

Income Tax Assessment Act 1997 subsection 975-505(1)

Reasons for decision

Question 1

Detailed reasoning

Subdivision 124-M of the ITAA 1997 provides a shareholder with scrip for scrip roll-over, which allows the shareholder to disregard a capital gain from the disposal of shares in one entity in exchange for shares in another entity.

Section 124-780 of the ITAA 1997 contains a number of conditions for, and exceptions to, the eligibility of a shareholder to choose scrip for scrip roll-over. The main conditions and exceptions that are relevant in this case are:

·         Shares are exchanged for shares in another company;

·         The exchange occurs as part of a single arrangement;

·         Conditions for arrangement are satisfied;

·         Conditions for roll-over are satisfied;

·         Further conditions are applicable; and

·         Exceptions to obtaining scrip for scrip roll-over are not applicable.

Only partial roll-over will be available if, in addition to shares, the capital proceeds include something (ineligible proceeds) other than replacement shares.

In this case the Taxpayer (the original interest holder) will dispose of all of his shares (the entity's original interest) in Company B (the original entity) to Company A by way of scrip-for-scrip roll exchange. The Taxpayer will exchange his shares in Company B for shares in the ultimate holding entity (the holder's replacement interest) which is the ultimate holding company of Company A.

The exchange will occur under a Share Purchase and Subscription Deed ("SPSD"), or a similar legal agreement. There will be no further issuance of shares to the taxpayer other than those contemplated under the SPSD. Consequently, the proposed exchange will occur under a single arrangement.

Under the proposed arrangement, Company A will acquire 100% of the voting shares in Company B on completion of the arrangement. The offer has been made to the Taxpayer who is the sole shareholder and is the only owner of voting shares of Company B who will participate. Therefore the requirements under subsection 124-780(2) of the ITAA 1997 have been satisfied.

Conditions for roll-over are satisfied

The arrangement must also satisfy the conditions for roll-over in subsection 124-780(3) of the ITAA 1997. These conditions are as follows:

1.    Shares are acquired after 20 September 1985

2.    The Shareholder would otherwise make a capital gain apart from the roll-over

3.    The replacement interest is in the acquiring entity (or the ultimate holding company of the wholly-owned group which includes the acquiring entity)

4.    The Shareholder and the ultimate holding entity (if applicable) will choose to obtain a roll-over and the shareholder will inform the replacement entity of the cost base.

5.    No member within a group will issue equity (other than replacement interests) or owe new debt under the arrangement to an entity not in the group and in relation to the replacement interest.

The above conditions are satisfied because:

1.    The Taxpayer acquired the shares after 20 September 1985.

2.    Apart from the roll-over, CGT Event A1 will happen to the Taxpayer when he disposes of his shares in Company B.

3.    The holding entity is the ultimate holding company of Company A who will acquire 100% of the shares in Company B. Company A will be a 100% subsidiary of ultimate holding company within the meaning of subsection 975-505(1) of the ITAA 1997. The holding entity is an ultimate holding company as defined in subsection 124-780(7) of the ITAA 1997.

4.    The Taxpayer is a significant stakeholder for the transaction for the purpose of section 124-783 of the ITAA 1997. Both the Taxpayer and the holding entity choose to obtain the scrip for scrip roll-over and the Taxpayer will advise the holding entity of his cost base of the shares in Company B. Given that the Taxpayer is a significant stakeholder, roll over would only be available on the basis that the ultimate holding entity agrees to accept a transfer of the original cost base of the interests in Company B.

5.    No other consideration will be provided for the transfer of shares in Company B other than the replacement shares in the ultimate holding entity.

The market value of the shares issued to the Taxpayer as consideration for the transfer will be at least substantially the same as the market value of his shares in Company B. Further, the replacement shares in the ultimate holding entity will carry the same rights and obligations as the shares he held in Company B. Therefore, the conditions in subsection 124-780(5) are satisfied.

Exceptions to obtaining scrip for scrip roll-over are not applicable

Section 124-795 of the ITAA 1997 sets out the circumstances where scrip for scrip roll-over under Subdivision 124-M of the ITAA 1997 is not available if:

1. just before the disposal, the original interest holder is a foreign resident unless, just after the acquisition of the replacement interest, the replacement interest is taxable Australian property,
2. any capital gain the original interest holder might make from their replacement interest would be disregarded (except for a rollover).
3. the original interest holder and the acquiring entity are members of the same wholly-owned group just before the original interest holder stops owning their original interest and the acquiring entity is a foreign resident,
4. a roll-over can be chosen under Division 122 or Division 615 of the ITAA 1997, and
5. the replacement entity makes a choice against roll-over and the replacement entity or the original entity notifies the original interest holder in writing of the choice before exchange.

None of the above exceptions will apply to the Taxpayer.

Question 2

Detailed reasoning

Subdivision 124-M of the ITAA 1997 provides a shareholder with scrip for scrip roll-over, which allows the shareholder to disregard a capital gain from the disposal of shares in one entity in exchange for shares in another entity.

Section 124-780 of the ITAA 1997 contains a number of conditions for, and exceptions to, the eligibility of a shareholder to choose scrip for scrip roll-over. The main conditions and exceptions that are relevant in this case are:

·         Shares are exchanged for shares in another company;

·         The exchange occurs as part of a single arrangement;

·         Conditions for arrangement are satisfied;

·         Conditions for roll-over are satisfied;

·         Further conditions are applicable; and

·         Exceptions to obtaining scrip for scrip roll-over are not applicable.

Only partial roll-over will be available if, in addition to shares, the capital proceeds include something (ineligible proceeds) other than replacement shares.

In this case the Taxpayer (the original interest holder) will dispose of all of his shares (the entity's original interest) in Company D (the original entity) to Company C by way of scrip-for-scrip roll exchange. The Taxpayer will exchange his shares in Company D for shares in the ultimate holding entity (the holder's replacement interest) which is the ultimate holding company of Company C.

The exchange will occur under a Share Purchase and Subscription Deed ("SPSD"), or a similar legal agreement. There will be no further issuance of shares to the taxpayer other than those contemplated under the SPSD. Consequently, the proposed exchange will occur under a single arrangement.

Under the proposed arrangement, Company C will acquire 100% of the voting shares in Company D on completion of the arrangement. The offer has been made to the Taxpayer who is the sole shareholder and is the only owner of voting shares of Company D who will participate. Therefore the requirements under subsection 124-780(2) of the ITAA 1997 have been satisfied.

Conditions for roll-over are satisfied

The arrangement must also satisfy the conditions for roll-over in subsection 124-780(3) of the ITAA 1997. These conditions are as follows:

1. Shares are acquired after 20 September 1985

2.    The Shareholder would otherwise make a capital gain apart from the roll-over

3.    The replacement interest is in the acquiring entity (or the ultimate holding company of the wholly-owned group which includes the acquiring entity)

4.    The Shareholder and the ultimate holding entity (if applicable) will choose to obtain a roll-over and the shareholder will inform the replacement entity of the cost base.

5.    No member within a group will issue equity (other than replacement interests) or owe new debt under the arrangement to an entity not in the group and in relation to the replacement interest.

The above conditions are satisfied because:

1.      The Taxpayer acquired the shares after 20 September 1985.

2.      Apart from the roll-over, CGT Event A1 will happen to the Taxpayer when he disposes of his shares in Company D.

3.      The holding entity is the ultimate holding company of Company B who will acquire 100% of the shares in Company D. Company A will be a 100% subsidiary of ultimate holding company within the meaning of subsection 975-505(1) of the ITAA 1997. The holding entity is an ultimate holding company as defined in subsection 124-780(7) of the ITAA 1997.

4.      The Taxpayer is a significant stakeholder for the transaction for the purpose of section 124-783 of the ITAA 1997. Both the Taxpayer and the holding entity choose to obtain the scrip for scrip roll-over and the Taxpayer will advise the holding entity of his cost base of the shares in Company D. Given that the Taxpayer is a significant stakeholder, roll over would only be available on the basis that the ultimate holding entity agrees to accept a transfer of the original cost base of the interests in Company D.

5.      No other consideration will be provided for the transfer of shares in Company D other than the replacement shares in the ultimate holding entity.

The market value of the shares issued to the Taxpayer as consideration for the transfer will be at least substantially the same as the market value of his shares Company D. Further, the replacement shares in the ultimate holding entity will carry the same rights and obligations as the shares he held in Company D. Therefore, the conditions in subsection 124-780(5) are satisfied.

Exceptions to obtaining scrip for scrip roll-over are not applicable

Section 124-795 of the ITAA 1997 sets out the circumstances where scrip for scrip roll-over under Subdivision 124-M of the ITAA 1997 is not available if:

1. just before the disposal, the original interest holder is a foreign resident unless, just after the acquisition of the replacement interest, the replacement interest is taxable Australian property,
2. any capital gain the original interest holder might make from their replacement interest would be disregarded (except for a rollover).
3. the original interest holder and the acquiring entity are members of the same wholly-owned group just before the original interest holder stops owning their original interest and the acquiring entity is a foreign resident,
4. a roll-over can be chosen under Division 122 or Division 615 of the ITAA 1997, and
5. the replacement entity makes a choice against roll-over and the replacement entity or the original entity notifies the original interest holder in writing of the choice before exchange.

None of the above exceptions will apply to the Taxpayer.

Question 3

Detailed reasoning

Part IVA of the ITAA 1936 allows the Commissioner to make a determination to cancel a tax benefit where such a benefit has been obtained by a taxpayer under a scheme that (objectively determined) was entered into for the dominant purpose of obtaining a tax benefit.

Broadly, Part IVA of the ITAA 1936 applies to an arrangement where the following elements exist:

a.    there is a scheme as defined in subsection 177A(1) of the ITAA 1936,

b.    there is a tax benefit as defined in subsection 177C(1) of the ITAA 1936 obtained by a taxpayer in connection with the scheme,

c.     having regard to the eight matters listed in subsection 177D(2) of the ITAA 1936 it would be concluded that a person who entered into or carried out the scheme did so for the dominant purpose of enabling the taxpayer to obtain a tax benefit in connection with the scheme, and

d.    the Commissioner makes a determination under section 177F of the ITAA 1936 to cancel the relevant tax benefit.

In determining whether a tax benefit exists for the purposes of Part IVA of the ITAA 1936, subparagraph 177C(2)(a)(i) of the ITAA 1936 provides a specific exclusion for tax benefits obtained as a consequence of the making of an agreement, choice, declaration, election, notification or option which is expressly provided for in either the ITAA 1936 or ITAA 1997. This exclusion would cover roll-over elections made under Subdivision 124-M of the ITAA 1997.

There is a carve-out from the exclusion in subparagraph 177C(2)(a)(i) of the ITAA 1936. If a scheme is structured in this way for the dominant purpose of creating circumstances whereby the relevant choice or election is able to be made, such an arrangement would not be excluded from a tax benefit from which Part IVA of the ITAA 1936 would apply (subparagraph 177C(2)(a)(ii) of the ITAA 1936).

In relation to the proposed facts and circumstances, the carve-out from subsection 177C(2) of the ITAA 1936 in subparagraph 177C(2)(a)(ii) of the ITAA 1936 should not operate and therefore Part IVA will not apply to cancel the tax benefit obtained by the Taxpayer.