Edited version of private advice

Authorisation Number: 1051884818783

Date of advice: 19 August 2021

Ruling

Subject: Corporate restructure - distributions of shares and retained profits

Question 1

Will the Shareholders be eligible to choose to obtain a roll-over under subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) on the proposed transfer of their ordinary shares in Company A to each Shareholder's new company in exchange for the issue of ordinary shares in each Shareholders new company?

Answer

Yes.

Question 2

Are amounts of retained profits transferred from Company A to the new companies assessable as dividends under section 44 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 3

Are amounts of retained profits transferred from Company A to the new companies' frankable distributions under section 202-30 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 202X

Relevant facts and circumstances

Company A is a private company which was incorporated in 19XX.

All Shareholders and officeholders are residents of Australia for tax purposes.

There are X equal Shareholders and officeholders who are all over 60 years of age.

In order to allow the Shareholders to go their separate ways, it is proposed that new companies will be formed, each wholly owned by the Shareholders.

Each individual's shareholding in Company A will be transferred to their respective new company.

Assets and liabilities of Company A to be split equally between the new companies.

Retained profits and associated franking account to also be split evenly between the new companies.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 122-15,

Income Tax Assessment Act 1997 section 122-20

Income Tax Assessment Act 1997 section 122-25,

Income Tax Assessment Act 1997 section 122-35,

Income Tax Assessment Act 1936 section 6(1)

Income Tax Assessment Act 1936 section 44,

Income Tax Assessment Act 1997 section 202-30,

Income Tax Assessment Act 1997 section 202-40,

Income Tax Assessment Act 1997 section 202-45,

Reasons for decision

Question 1

Will the Shareholders be eligible to choose to obtain a roll-over under subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) on the proposed transfer of their ordinary shares in Company A to each Shareholder's new company in exchange for the issue of ordinary shares in each Shareholders new company?

Summary

Roll-over relief will be available under Subdivision 122-A of the ITAA 1997 where the Shareholders transfer shares owed personally to a company wholly owned by each Shareholder.

Detailed reasoning

Generally, Subdivision 122-A of the ITAA 1997 allows for the "roll-over" of a capital gain or loss where a taxpayer disposes of a CGT asset to a company in which, just after disposal, the taxpayer owns all the shares.

In order for an individual to obtain roll-over relief under Subdivision 122-A of the ITAA 1997, the CGT event which triggers the capital gain or loss must be one listed in the table in section 122-15 of the ITAA 1997. In the present case, the transfer of the shares held in each Shareholder's name to their own wholly owned company will trigger CGT event A1 (Trigger event), a CGT event listed in the table in section 122-15 and therefore this requirement is satisfied.

In addition, the circumstances of the transfers must also satisfy the conditions listed in sections 122-20 to 122-35 of the ITAA 1997.

Subsection 122-20(1) of ITAA 1997 requires that the consideration received for the Trigger event must either be shares in the wholly owned company or in addition to shares in the wholly owned company, the company undertaking to discharge any liabilities in respect of the asset. As consideration for the shares in Company A, each new company will issue each Shareholder with all the ordinary shares in that new company. Each Shareholder will wholly own their own new company.

Subsection 122-20(2) of the ITAA 1997 requires that the shares received in the wholly owned company, as a result of the Trigger event, must not be redeemable shares. The shares issued by each new company to the Shareholders as consideration will be non-redeemable shares.

Subsection 122-20(3) of the ITAA 1997 requires that the market value of the shares received as consideration must be substantially the same as the market value of the assets disposed, less any liabilities the company undertakes to discharge in respect of the asset.

The consideration received by the Shareholders from each of their new companies for the transfer of shares in Company A would be the shares in their new company. Prior to the transfer each new company holds no other assets and has no liabilities, therefore, the market value of the shares in each new company after the transfer will be substantially the same as the market value of shares in Company A transferred by each Shareholder.

Subsection 122-25(1) of the ITAA 1997 requires that all the shares in the wholly owned company must be owned by the individual, immediately after the Trigger event. Each Shareholder will be the sole shareholder of each new company, and so will own 100% of the shares in the company just after the time of the transfer.

Subsection 122-25(2) of the ITAA 1997 specifies that the assets being transferred must not be an asset listed in the table in subsection 122-25(2). Further, the asset being disposed of to the wholly owned company must not be a 'precluded asset' a term given the meaning in subsection 122-25(3). None of these are relevant to Company A.

Subsection 122-25(5) of the ITAA1997 disallows the rollover for companies whose ordinary and statutory income is exempt from income tax because it is an exempt entity for the income year of the trigger event. None of the companies are exempt entities, and therefore not disallowed under this provision.

Paragraph 122-25(6)(a) of the ITAA 1997 is satisfied if the Shareholders and their new companies are all Australian residents at the time of the trigger event. The new companies will be incorporated in Australia. The shareholders and their new companies are/will be Australian residents at the time of the CGT event. There are no circumstances that would result in these entities becoming non-residents for tax purposes.

The further conditions listed in section 122-35 of the ITAA 1997, which deal with the circumstances where a company undertakes to discharge one or more liabilities in respect of the CGT asset, is not relevant for this ruling as the shares in Company A are unencumbered.

Accordingly, the transfer of the shares in Company A from each Shareholder to a wholly owned company, in circumstances described in the facts, will enable each Shareholder to roll-over any capital gain or loss as specified in subdivision 122-A of the ITAA 1997 should they so choose.

Question 2

Are amounts of retained profits transferred from Company A to the new companies assessable as dividends under section 44 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Summary

The amounts of retained profits transferred to each new company are assessable dividends under section 44 of the 1936.

Detailed reasoning

Dividend

A dividend includes any distribution made by a company to any of its shareholders, whether in money or other property, and any amount credited by a company to any of its shareholders as shareholders. However, a dividend does not include moneys paid or credited, or property distributed, by a company to shareholders where the amount of the money or the value of the property is debited against an amount standing to the credit of the company's share capital account (subsection 6(1) of the ITAA 1936).

Assessable income

Subsection 44(1) provides that the assessable income of a shareholder of a company (whether resident or non-resident) includes:

•                 if the shareholder is a resident, dividends paid to the shareholder by the company out of profits derived by it from any source

•                 if the shareholder is a non-resident, dividends paid to the shareholder by the company to the extent to which they are paid out of profits derived by it from sources in Australia.

It is clear the amounts of retained profits paid to the new companies, being the new shareholders in Company A, are assessable dividends as they are distributions made by Company A to its shareholders out of profits it derived and are not capital amounts.

Question 3

Are amounts of retained profits transferred from Company A to the three new companies' frankable distributions under section 202-30 of the ITAA 1997?

Summary

The amounts of retained profits transferred to each new company are frankable distributions under section 202-30 of the ITAA 1997.

Detailed reasoning

Section 202-30 of the ITAA 1997 states:

Distributions and non-share dividends are frankable unless it is specified that they are unfrankable.

Subsection 202-40(2) of the ITAA 1997 states:

A non-share dividend is a frankable distribution, to the extent that it is not unfrankable under section 202-45.

Section 202-45 of the ITAA 1997 provides a list of distributions that are unfrankable. In relation to this list:

•                 paragraph (a) has been repealed

•                 paragraph (b) has been repealed

•                 the retained profits distribution is not related to a buy-back of a share per paragraph (c)

•                 the retained profits distribution is not in respect of a non-equity share per paragraph (d)

•                 the retained profits distribution is not sourced directly or indirectly from Company A's share capital account per paragraph (e)

•                 the retained profits distribution is not an unfrankable distribution under sections 215-10 or 215-15 per paragraph (f)

•                 the retained profits distribution is not a dividend in relation to Division 7A (private company distributions), section 109 (excessive payment) or 47A (CFC distribution benefits) of the ITAA 1936 per paragraph (g)

•                 the retained profits distribution is not taken to be an unfranked dividend by virtue of the application of section 45 of the ITAA 1936 or a determination of the Commissioner under section 45C of the ITAA 1936 per paragraph (h)

•                 the retained profits distribution is not a demerger dividend per paragraph (i), and

•                 the retained profits distribution is not impacted by section 152-125 (payments to CGT concession stakeholders) or 220-105 (distributions by a New Zealand franking company) of the ITAA 1997 per paragraph (j).

As such, none of the items in the list in section 202-45 of the ITAA 1997 apply to make the retained profit distributions unfrankable.

Accordingly, such distributions made by Company A to the new company shareholders will be frankable distributions under the provisions of sections 202-30 and 202-40 of the ITAA 1997.