Edited version of private advice

Authorisation Number: 1051889182051

Date of advice: 20 August 2021

Ruling

Subject: Consolidated group and change in beneficial ownership of shares

Question

Is the applicant entitled to be registered as the shareholder of a company within the meaning of subparagraph 703-33 (1)(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) on XX XXXXX 2020 when the Share Sale and Purchase Agreement (the Agreement) was executed?

Answer

No

This ruling applies for the following period:

1 July 2020 to 30 June 2021

The scheme commences on:

1 July 2020

Relevant facts and circumstances

1.     The entity is an Australian private company.

2.     The entity has elected to form an income tax consolidated group.

3.     It entered into an agreement to acquire 100% of the shares in another company and its wholly owned subsidiaries.

4.     The Agreement was subject to and would not proceed unless certain conditions have been satisfied or waived.

5.     Prior to the Agreement date the taxpayer and the Company were not associates of each other; nor was there any common ownership; nor was there any ownership interest between either entity.

Reasons for decision

Division 703 of the ITAA 1997 contains rules governing the formation and membership of consolidated groups.

Section 703-30 of the ITAA 1997 sets out the circumstances in which an entity is a wholly-owned subsidiary of another entity as follows:

(1)             One entity (the subsidiary entity) is a wholly-owned subsidiary of another entity (the holding entity) if all the membership interests in the subsidiary entity are beneficially owned by:

(a)             the holding entity; or

(b)             one or more wholly-owned subsidiaries of the holding entity; or

(c)             the holding entity and one or more wholly-owned subsidiaries of the holding entity.

(2)             An entity (other than the subsidiary entity) is a wholly-owned subsidiary of the holding entity if, and only if:

(a)             it is a wholly-owned subsidiary of the holding entity; or

(b)             it is a wholly-owned subsidiary of a wholly-owned subsidiary of the holding entity;

Section 703-33 of the ITAA 1997 sets out the conditions that need to be met for the 'timing rule' to apply as follows:

(1)             This section applies if:

(a)             under a contract:

(i)               a person (the seller) stops being entitled to be registered as the holder of a share in a company at a time (the transfer time); and

(ii)             another person (the buyer) becomes entitled to be registered as the holder of the share in the company at the transfer time; and

(b)             as a result of the contract, the seller stops being the beneficial owner of the share, and the buyer becomes the beneficial owner of the share; and

(c)             the seller and the buyer dealt with each other at arm's length in relation to the contract; and

(d)             the seller and the buyer were not associates of one another at any time during the period:

(2)             For the purposes of subsection 703-30(1):

(a)             the seller is taken to have stopped being the beneficial owner of the share at the transfer time; and

(b)             the buyer is taken to have become the beneficial owner of the share at the transfer time.

That is, under the consolidation rules, a company becomes a member of a consolidated group when all its shares are beneficially owned, directly or indirectly, by the head company.

Section 703-33 provides certainty about the time at which a company joins or leaves a consolidated group because on ordinary principle, there can be disagreement or uncertainty between parties on when beneficial ownership is transferred.

A change in beneficial ownership of the shares in the company as a consequence of an arm's length contract between non-associated parties will be taken to have occurred at the time the vendor ceased to be entitled, and the purchaser became entitled to be registered as holder of the shares (i.e. the transfer time).

'Entitlement to be registered' is discussed in the Explanatory Memorandum to the New Business Tax System (Consolidation and Other Measures) Act 2003 (The Explanatory Memorandum) at paragraph 12.20 and refers to the ownership rights that give rise to the entitlement of a buyer of shares in a company to be registered as holder of those shares in the company's register of members. Paragraph 12.21 goes on to say:

The concept has been used in the timing rule to ensure that a consolidated group is not required to bring the income of a target company into the group merely because, for example, it has signed a contract to purchase the shares in the company. Rather, that requirement commences when the vendor and the purchaser have done everything required under the contract to transfer ownership to the purchaser.

Tax Determination TD 2006/74 also relevantly states at paragraph 8:

The time at which beneficial ownership of all the membership interests commences to exist, or, where section 703-33 applies, the time at which the buyer becomes entitled to be registered as the holder of the shares, will depend on the facts and circumstances of each case. Relevant factors may include whether settlement has occurred, whether the seller and the buyer have done everything required under the contract to transfer ownership to the buyer and whether any relevant provisions in the company's constitution have been satisfied.

It is uncontroversial that as a result of the contract the taxpayer will at some point becomes the beneficial owner of the shares. Further, the parties were not associates during the relevant period and they dealt with each other at arm's length in relation to the contract.

Accordingly, section 703-33 applies and beneficial ownership will pass at the 'transfer time'. That is the time at which the vendor ceased to be entitled, and the purchaser became entitled to be registered as holder of the shares;

In relation to transfer of shares, the Corporations Act 2001 (CA) provides that a company must only register a transfer of securities if a proper instrument of transfer has been delivered to the company. This is so despite anything in the constitution. The relevant sections state:

Subsection 1071A of the Corporations Act 2001 (CA) provides:

(i)               This Subdivision applies to the following securities:

(a)             shares in a company;

(b)             .........

(c)             .........

Subsection 1071B of CA provides:

(1)             a company must only register a transfer of securities if a proper instrument of transfer has been delivered to the company. This is so despite:

(a)             anything in its constitution; or

(b)             ....

(2)             An instrument of transfer is not a proper instrument of transfer for the purposes of subsection 2 if it does not show the details, specified in the regulations, in relation to the company concerned.

(emphasis added)

The Encyclopaedic Australian Legal Dictionary defines 'transfer' as 'The passing of a legal right from one person to another so as to vest that right in the other.'

Coles Myer Limited v Commissioner of State Revenue (VIC) 98 ATC 4537 at 4546 states:

Although the word 'transfer' is not a term of art and is a word of wide connotation, to my way of thinking it is the passing of rights to another, so as to vest them in that other person, which is essential to a transfer, properly understood...

The commentaries go on to explain that a transfer of shares occurs when ownership of shares passes from one shareholder to another. However, a sale of shares is similar to a sale of land in that in addition to a contract of sale, further steps are necessary to complete the transaction. That is, it is not complete until the shares are transferred and the name of the transferee entered in the register of members. The company then recognises the ownership of the transferee. However, as regards the transferee and transferor, property passes at the time the transferor hands over the signed transfer and share certificate.

The essence of a transfer of shares is therefore what transpires at completion. At completion, the share certificate is provided to the buyer in consideration for the payment of the sales price. These in turn are necessary particulars on the signed instrument of transfer.

The effect of subsection 1071B of the CA therefore becomes that a company is prohibited from registering a transfer (with the effect that a shareholder is ineligible because of statute to be registered) until such time as completion has occurred and a proper instrument of transfer has been delivered to the company.

This aligns with paragraph 21.21 of the Explanatory Memorandum which provides as follows:

12.21 The concept has been used in the timing rule to ensure that a consolidated group is not required to bring the income of a target company into the group merely because, for example, it has signed a contract to purchase the shares in the company. Rather, that requirement commences when the vendor and the purchaser have done everything required under the contract to transfer ownership to the purchaser.

As a contract for sale of shares inter alia always provides for particular matters which must occur at completion to have been fully performed in order for a transfer to have occurred, the vendor and purchaser will not have done everything required under the contract to transfer ownership until such time as completion has occurred.

That aligns with the circumstances that are evident here such as:

The Agreement for the acquisition of shares in the Company was not an unconditional contract of sale. A clause in the Agreement states that completion of the sale and purchase of the shares under this Agreement is subject to and will not proceed unless the conditions have been satisfied or waived on or prior to the end date.

Although the Agreement between the taxpayer and the shareholders of the Company was executed a particular date a Schedule in the Agreement states that completion is conditional upon and will not proceed unless prior to the completion date the conditions in the Schedule was met.

Following completion, in addition to the Corporations Act requirements there may be other matters that must be attended to before the share transfer is eligible for registration.

This is what is contemplated at paras 12.22 and 12.23 of the Explanatory Memorandum which reads as follows:

Things that do not prevent entitlement to be registered

12.22 Under this rule a member of a consolidated group will be entitled to be registered as the owner of shares in a purchased company notwithstanding that it has not, for example, paid the relevant stamp duty, or obtained any approval of the transfer that may be required from the directors of the target company.

12.23 So, for example, a member of a consolidated group could not claim that it is not 'entitled to be registered' (thus avoiding the company becoming a member of the group and the consequent obligations) for the purpose of section703-33 by reason only of its failure to pay State stamp duty on the transfer of the shares. A purchaser who fails to take the steps necessary to take advantage of its entitlement to become registered on the company's register of members cannot argue that it is not so entitled.

What is contemplated in paras 12.22 and 12.23 are not matters which may prevent completion. Rather, they are matters that may delay registration upon completion. Prior to completion, and the payment of the sale price, nothing has been purchased.

In the circumstances here, completion had not occurred on a particular date (meaning a transfer of shares could not have occurred at that date and so the testing in subparagraph 703-33 (1)(a)(ii) was not satisfied.

Conclusion

It is the Commissioner's view that for the purposes of paragraph 703-33(1)(a), of the ITAA 1997 'transfer time' did not occur on xx xxxxxxxx 2020.

•                 Settlement had not occurred on that date.

•                 The Taxpayer as the buyer had not done everything required under the Agreement to transfer ownership.

•                 The Company had not given the taxpayer the share certificates and share transfers in registerable form.

That is, the Company had not stopped being entitled to be registered as the holder of the shares and the taxpayer had not become entitled to be registered as the holder of the shares.

Therefore, the taxpayer is not entitled to be registered as the shareholder of the Company within the meaning of subparagraph 703-33(1)(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) on the particular date.

Relevant legislative provisions

Section 703-30 of the Income Tax Assessment Act 1997

Section 703-33 of the Income Tax Assessment Act 1997