Edited version of private advice

Authorisation Number: 1051746384891

Date of advice: 24 September 2020

Ruling

Subject: Proposed business restructure

Question 1

Will the Shareholders satisfy the requirements in Division 615 of the Income Tax Assessment Act 1997 (ITAA 1997) to be eligible to obtain roll-over relief in relation to the proposed transfer of their ordinary shares in Company X to Company Y in exchange for the issue of ordinary shares in Company Y?

Answer

Yes

Question 2

If the answer to the above question is 'Yes', will Company Y be eligible to make a choice in accordance with subsection 703-50(1) of the ITAA 1997 that a consolidatable group (comprising of Company X and Company Y) is taken to be consolidated, subject to subsection 703-15(1) of the ITAA 1997?

Answer

Yes

Question 3

Will a transfer of any CGT assets from Company X to Company Y following Company Y's choice to consolidate in accordance with subsection 703-50(1) of the ITAA 1997 be disregarded under the single entity rule in section 701-1 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Income tax year ending 30 June 2021

Relevant facts and circumstances

Company X is an Australian proprietary company limited by shares. Company X has ordinary shares on offer, each carrying the same rights to capital, voting and dividends. There are no redeemable preference shares on issue in Company X.

Each Shareholder individually owns 50% of the shares issued in Company X. The directors of Company X are the Shareholders.

Company X is not part of a consolidated group. Company X is not a prescribed dual resident and has its taxable income taxed at a corporate rate.

Company Y was recently incorporated and is an Australian proprietary company limited by shares. Company Y has ordinary shares on offer which are owned equally by the Shareholders. The directors of Company Y are the Shareholders.

Company Y is not a prescribed dual resident and will have its taxable income taxed at a corporate rate.

Company Y has no assets other than its subscribed capital of $2.00.

The Shareholders are Australian residents for tax purposes.

Proposed Restructure

The Shareholders are the only shareholders and only directors of multiple companies and they wish to simplify their affairs to the extent they can in a consolidated group.

For strategic and asset protection purposes, the Shareholders propose to restructure the business and separate the real estate assets from the trading business.

It is proposed that Company Y will be interposed between Company X and the Shareholders as follows:

·         Company Y will acquire 100% of the issued shares in Company X from the Shareholders.

·         The Shareholders will simultaneously exchange their respective shares in Company X for the same number of shares of the same class in Company Y (and nothing else).

·         The shares Company Y will issue to the Shareholders will carry the same rights to capital, voting and dividends as those currently held in Company X.

·         Each Shareholder will have the same proportionate interest in Company Y as they did in Company X and their replacement shares in Company Y will have the same market value as their shares in Company X immediately prior to the restructure.

·         Company Y will not issue any redeemable shares.

Within two months after its acquisition of the shares in Company X, Company Y will, for the purposes of section 615-30 of the ITAA 1997, choose that section 615-65 of the ITAA 1997 applies to it.

Immediately after the acquisition of the shares in Company X, Company Y will choose to consolidate with Company X and form a consolidated group, with Company Y as the head company.

After consolidating the group, it is proposed that Company X transfer 2 properties to Company Y. There is no intention that Company Y will sell these properties following the transfer.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 615

Income Tax Assessment Act 1997 subsection 615-5(1)

Income Tax Assessment Act 1997 paragraph 615-5(1)(a)

Income Tax Assessment Act 1997 paragraph 615-5(1)(b)

Income Tax Assessment Act 1997 paragraph 615-5(1)(c)

Income Tax Assessment Act 1997 Subdivision 615-B

Income Tax Assessment Act 1997 section 615-15

Income Tax Assessment Act 1997 section 615-20

Income Tax Assessment Act 1997 subsection 615-20(1)

Income Tax Assessment Act 1997 subsection 615-20(2)

Income Tax Assessment Act 1997 subsection 615-20(3)

Income Tax Assessment Act 1997 section 615-25

Income Tax Assessment Act 1997 section 615-30

Income Tax Assessment Act 1997 section 615-40

Income Tax Assessment Act 1997 section 615-65

Income Tax Assessment Act 1997 section 701-1

Income Tax Assessment Act 1997 subsection 703-10(1)

Income Tax Assessment Act 1997 subsection 703-15(1)

Income Tax Assessment Act 1997 subsection 703-15(2)

Income Tax Assessment Act 1997 section 703-20

Income Tax Assessment Act 1997 section 703-45

Income Tax Assessment Act 1997 subsection 703-50(1)

Income Tax Assessment Act 1997 section 703-58

Income Tax Assessment Act 1997 section 960-130

Reasons for decision

Question 1

Summary

The interposition of Company Y between Company X and the Shareholders will satisfy the conditions required to obtain a roll-over under Division 615 of the ITAA 1997[1].

Detailed reasoning

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.

Subsection 615-5(1) states that you can choose to obtain the roll-over if:

(a)  you are a *member of a company or a unit trust (the original entity); and

(b)  you and at least one other entity (the exchanging members) own all the *shares or units in it; and

(c)   under a *scheme for reorganising its affairs, the exchanging members *dispose of all their shares or units in it to a company (the interposed company) in exchange for shares in the interposed company (and nothing else); and

(d)  the requirements in Subdivision 615-B are satisfied.

The relevant requirements under Subdivision 615-B are spread across sections 615-15 to 615-30. They provide as follows:

SECTION 615-15 Interposed company must own all the original interests

The interposed company must own all the *shares or units in the original entity immediately after the time (the completion time ) all the exchanging members have had their shares or units in the original entity disposed of, redeemed or cancelled under the *scheme.

SECTION 615-20 Requirements relating to your interests in the original entity

615-20(1) Immediately after the completion time, each exchanging member must own:

(a) a whole number of *shares in the interposed company; and

(b) 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 or units in the original entity that were:

(i) owned by the member; and

(ii) disposed of, redeemed or cancelled under the *scheme.

615-20(2) The following ratios must be equal:

(a) the ratio of:

(i) the *market value of each exchanging member ' s *shares in the interposed company; to

(ii) the market value of the shares in the interposed company issued to all the exchanging members (worked out immediately after the completion time);

(b) the ratio of:

(i) the market value of that member ' s shares or units in the original entity that were disposed of, redeemed or cancelled under the *scheme; to

(ii) the market value of all the shares or units in the original entity that were disposed of, redeemed or cancelled under the scheme (worked out immediately before the first disposal, redemption or cancellation).

615-20(3) Either:

(a) you are an Australian resident at the time your *shares or units in the original entity are disposed of, redeemed or cancelled under the *scheme; or

...

SECTION 615-25 Requirements relating to the interposed company

615-25(1) The *shares issued in the interposed company must not be *redeemable shares.

615-25(2) Each exchanging member who is issued *shares in the interposed company must own the shares from the time they are issued until at least the completion time.

615-25(3) Immediately after the completion time:

(a) the exchanging members must own all the *shares in the interposed company; or

...

SECTION 615-30 Interposed company must make a particular choice

615-30(1) Unless subsection (2) applies, the interposed company must choose that section 615-65 applies.

...

615-30(3) A choice under subsection (1) or (2) must be made:

(a) within 2 months after the completion time, if the choice is under subsection (1); or

...

The Shareholders are members of Company X (the original entity) pursuant to section 960-130, and together (as the exchanging members) own all the shares in Company X, thereby satisfying the requirements in paragraphs 615-5(1)(a) and (b).

Under the proposed restructure (being a scheme for reorganising the affairs of Company X), the Shareholders will transfer (dispose of) all their shares in Company X to Company Y (the interposed company) in exchange for Company Y shares (and nothing else), thereby satisfying the requirement in paragraph 615-5(1)(c).

Company Y will own all the shares in Company X immediately after the Shareholders dispose of their shares in Company X (the completion time), thereby satisfying the requirement in section 615-15.

Immediately after the completion time, each of the Shareholders will own a whole number of shares in Company Y and a percentage of shares in Company Y that is equal to the percentage of the shares in Company X they originally owned and disposed of under the proposed restructure (i.e. 50%), thereby satisfying the requirement in subsection 615-20(1).

All shares in Company X are ordinary shares which have the same rights. Company Y will acquire all the shares in Company X by issuing each Shareholder one share in itself for each share they have in Company X. Each share issued by Company Y will be an ordinary share, carrying the same rights as those originally held by the Shareholders in Company X. It follows that the proportionate market value of the interest of each Shareholder in Company Y immediately after the completion time will be the same as the proportionate market value of the prior interest that was held by the Shareholder in Company X immediately before the first disposal to Company Y. As continuity of market value will be preserved, the requirements in subsection 615-20(2) will be satisfied.

As the Shareholders are Australian residents (and will be at the time their shares in Company X will be disposed of under the proposed restructure), the requirement in subsection 615-20(3) will be satisfied.

Each of the requirements relating to the interposed company under section 615-25 will be satisfied as:

·         the shares issued in Company Y will not be redeemable shares;

·         each Shareholder will own the shares in Company Y issued to them from the time they are issued until at least the completion time; and

·         immediately after the completion time, the Shareholders will own all the shares in Company Y.

Within two months after its acquisition of the shares in Company X, Company Y will choose that section 615-65 applies to it, thereby satisfying the requirement in section 615-30.

As each of the requirements under subsection 615-5(1) will be satisfied, the Shareholders will be able to choose to obtain roll-over relief pursuant to section 615-40 in relation to the proposed transfer of their ordinary shares in Company X.

Question 2

Summary

Company Y will be able to make a choice under subsection 703-50(1) that a consolidatable group, comprising of Company X and Company Y, is taken to be consolidated.

Detailed reasoning

Subsection 703-50(1) states that a company may make a choice in writing that a consolidatable group (as defined in subsection 703-10(1)) is taken to be consolidated on and after a day that is specified in the choice and is after 30 June 2002, if the company was the head company of the group on the day specified.

Under subsection 703-10(1), a consolidatable group consists of a single head company and all the subsidiary members of the group.

Subsection 703-15(2) lists the requirements for an entity to be a head company or subsidiary member of a consolidated group or consolidatable group.

Under subsection 703-15(2), an entity is a head company if all of the requirements in item 1 of the table in that subsection are met. The entity must:

·         be a company that has all or some of its taxable income (if any) taxed at a rate equal to the general corporate tax rate (but not one excluded under section 703-20);

·         be an Australian resident, but not a prescribed dual resident; and

·         not be a wholly-owned subsidiary of another entity (that meets the above two requirements) or, if it is, it must not be a subsidiary member of a consolidated group or consolidatable group.

Under subsection 703-15(2), an entity that is a company is a subsidiary member of a consolidated or consolidatable group if all of the requirements in item 2 of the table in that subsection are met. The entity must:

·         be a company that has all or some of its taxable income (if any) taxed at a rate equal to the general corporate tax rate (but not one excluded under section 703-20);

·         be an Australian resident, but not a prescribed dual resident; and

·         be a wholly-owned subsidiary of the head company of the group or, if there is an interposed entity between them, then the requirements in section 703-45 must be met.

Following the proposed restructure:

·         Company Y will be a company that has its taxable income taxed at a corporate tax rate (and not be an entity of a kind excluded under section 703-20); an Australian resident (and not a prescribed dual resident); and will not be not be a wholly-owned subsidiary of another entity; and

·         Company X will be a company that has its taxable income taxed at a corporate tax rate (and not be an entity of a kind excluded under section 703-20); an Australian resident (and not a prescribed dual resident); and a wholly-owned subsidiary of Company Y.

Following the proposed restructure, Company Y will therefore satisfy the requirements to be a head company and Company X will therefore satisfy the requirements to be subsidiary member of a consolidatable group.

Following the proposed restructure Company Y will consequently be able to make a choice under subsection 703-50(1) in writing (and in the approved form pursuant to section 703-58) to form a consolidated group comprising Company Y (as head company) and Company X (as subsidiary member).

Question 3

Summary

The transfer of CGT assets from Company X to Company Y following Company Y's choice to consolidate will be disregarded under the single entity rule under section 701-1.

Detailed reasoning

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 sets out the Commissioner's view on what the single entity rule (SER) in section 701-1 is and how it applies to members of a consolidated group. Relevantly, it explains:

3. Section 701-1 is a key provision of the consolidation regime. It is the means by which the members of a consolidated group are treated as a single entity (being the head company) for income tax purposes.

...

Consequences of the SER

7. For income tax purposes the SER deems subsidiary members to be parts of the head company rather than separate entities during the period that they are members of the consolidated group.

8. As a consequence, the SER has the effect that:

(a) the actions and transactions of a subsidiary member are treated as having been undertaken by the head company;

(b) the assets a subsidiary member of the group owns are taken to be owned by the head company (with the exception of intra-group assets) while the subsidiary remains a member of the consolidated group;

(c) assets where the rights and obligations are between members of a consolidated group (intra-group assets) are not recognised for income tax purposes during the period they are held within the group whether or not the asset, as a matter of law, was created before or during the period of consolidation (see also paragraph 11 and paragraphs 26-28); and

(d) dealings that are solely between members of the same consolidated group (intra-group dealings) will not result in ordinary or statutory income or a deduction to the group's head company.

9. 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.

From and including the day on which the choice to consolidate is made, the single entity rule in section 701-1 will effectively allow for assets held by Company X (the subsidiary member) to be transferred to Company Y (the head company) without income tax consequences.

[1] All references are to the ITAA 1997.