Edited version of private advice

Authorisation Number: 1051919702674

Date of advice: 27 January 2022

Ruling

Subject: CGT - rollovers

Question 1

Will the taxpayer be eligible to choose to obtain a roll-over under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the transfer of her shares in company X to company Y and company Z?

Answer

Yes.

Question 2

Will the taxpayer disregard a capital gain (or capital loss) made in relation to the transfer of her shares in company X to company Z pursuant to subsection 122-40(1) of the ITAA 1997?

Answer

Yes.

Question 3

Will the taxpayer be deemed to have acquired her shares in company Y before

20 September 1985 pursuant to subsection 122-40(3) of the ITAA 1997?

Answer

Yes.

Question 4

Pursuant to subsection 122-40(2) of the ITAA 1997, will the first element of the cost base of each of the shares in company Z issued to the taxpayer in exchange for her post-CGT shares in company X be equal to the aggregate cost base of the post-CGT shares in company X transferred to company Z, divided by the number of company Z shares issued to the taxpayer?

Answer

Yes.

Question 5

Will the proposed scheme described in this ruling constitute a scheme to which either section 177D or section 177E of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies?

Answer

No.

Question 6

If, subsequent to the proposed scheme covered by this ruling, the taxpayer transfers further post-CGT shares in company X to company Z (in exchange for further shares in company Z and where all other material facts and circumstances set out in this ruling remain unchanged), would the answers to Questions 1, 2, 4 and 5 of this ruling remain the same?

Answer

Yes.

Question 7

Will company Y be deemed to have acquired its shares in company X before 20 September 1985 pursuant to subsection 122-70(3) of the ITAA 1997?

Answer

Yes.

Question 8

Will the first element of the cost base of each of the post-CGT shares in company X transferred to company Z, in the hands of company Z, equal the cost base of those shares at the time of their transfer, pursuant to subsection 122-70(2) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Income years ending 30 June 20XX to 30 June 20XX

Relevant facts and circumstances

Company Y was incorporated in the year ending 30 June 20XX with XX ordinary shares on issue.

Company Z was also incorporated in the year ending 30 June 20XX with XX ordinary shares on issue.

Company Y and company Z are dormant companies, and have not issued any additional shares. The assets of each comprise of $100 cash and they have no liabilities.

The taxpayer is the sole director and shareholder of both company Y and company Z.

Company X is an Australian Public Company and is listed on the Australian Securities Exchange.

As at the date of this ruling, the taxpayer owned XX of the XX shares issued in company X. Of those shares, a total of XX shares were acquired by the taxpayer before 20 September 1985 (pre-CGT shares). The remaining XX shares were acquired by the taxpayer after 20 September 1985 (post-CGT shares).

Company X has a history of paying dividends to its shareholders and is expected to do so in the future.

The taxpayer has no intention of disposing her shares in company X other than as proposed in this ruling.

The taxpayer holds her shares in company X on capital account, rather than as trading stock.

The taxpayer has held her shares in company X (both pre-CGT and post-CGT shares) since their initial issue. No CGT roll-over has been applied to any of these shares previously.

The taxpayer would like to establish a holding company structure from which the taxpayer could make further investments in unrelated entities and businesses, funded by dividends received and possibly loans. The taxpayer intends to restructure in accordance with the following steps:

•         The taxpayer will transfer all her pre-CGT shares held in company X to company Y for the issue of ordinary non-redeemable shares in company Y. The shares issued to the taxpayer in company Y will have substantially the same market value as the pre-CGT shares in company X transferred by the taxpayer. The number of shares issued to the taxpayer in company Y will be an arbitrary amount which will effectively dilute the relative importance of the existing XX shares on issue.

•         The taxpayer will transfer a percentage of her post-CGT shares in company X (around 30-50%) to company Z for the issue of ordinary non-redeemable shares in company Z. The shares issued to the taxpayer in company Z will have substantially the same market value as the post-CGT shares in company X transferred by the taxpayer. The number of shares issued to the taxpayer in company Z will be an arbitrary amount which will effectively dilute the relative importance of the existing XX shares on issue.

•         Subject to the satisfaction of each of the relevant conditions under Subdivision 122-A of the ITAA 1997, the taxpayer will choose to obtain a roll-over under section 122-40 of the ITAA 1997 in respect of the disposal of her pre-CGT shares in company X to company Y and the disposal of her post-CGT shares in company X to company Z.

The taxpayer will retain a portion of her post-CGT shares in company X in order to provide her with sufficient dividend income to fund the taxpayer's lifestyle and to make personal investments outside of the holding company structure. Retaining a portion of post-CGT shares in company X will also give the taxpayer more flexibility in the event that the taxpayer wants to sell some of those shares to a third party, outside of her holding company structure.

As at the date of this ruling, the taxpayer has no intention of selling her shares in company Y or company Z.

The taxpayer may transfer more post-CGT shares in company X to company Z for further shares in company Z in the future to further enhance and bolster the assets of company Z (although no such subsequent transfer to company Z is planned as at the date of this ruling).

The taxpayer's shares in company X are not precluded assets pursuant to subsection 122-25(3) of the ITAA 1997, an asset that becomes trading stock of company Y or company Z just after the transfer, or any of the other specified assets listed in subsection 122-25(2) of the ITAA 1997.

Company Y and company Z are not exempt entities and have no exempt income.

The taxpayer, company Y and company Z are all Australian residents for tax purposes.

The taxpayer expects a number of advantages to be realised as a result of using a holding company structure, as opposed to the taxpayer conducting an investment business in her own right. These include:

•         The corporate structure provides a more commercially acceptable acquisition vehicle with formalised bookkeeping and housekeeping processes, thereby adding formality, accountability, transparency, and governance rigour to the investment business, and invariably creating a better business model.

•         It would limit the commercial liabilities to the assets within the structure (rather than to the taxpayer's wider assets). The lower asset pool in the holding company structure limits the assets that are put at risk and serves as a liability mitigation strategy.

•         The corporate vehicle creates greater accountability for the dividends received from company X to be used for designated investment purposes. The additional checks and balances inherent in the holding company structure helps keep the funds stream focused and dedicated to the particular investment objectives which have been identified, rather than have funds go into the taxpayer's general-purpose account which is also used to fund her personal living expenses.

•         As the investment business grows, additional employees and service providers may be required to run/support the business, and the holding company structure will better facilitate those future employees and service providers in a more regulated and organised manner.

If the taxpayer was to transfer her company X shares to one holding company only, her shares in that holding company would be a mixture of pre-CGT and post-CGT shares; the holding company's shares in company X would be a mixture of pre-CGT and post-CGT shares; and its capital profits reserve, if it were to sell its shares in company X in the future, would be a mixture of pre-CGT and post-CGT profits. Generally, the reason that the taxpayer intends to set up two holding companies instead of one is that it ensures the pre-CGT and post-CGT shares in company X can be clearly demarcated, and the pre-CGT status of the company X shares can be preserved without complications. Specifically, the taxpayer has noted that:

•         It avoids bookkeeping complications of maintaining both pre-CGT and post-CGT shares in one holding company, allowing for easier ongoing identification and accounting of the pre-CGT shares (i.e. record keeping and CGT registers would need to be more elaborate and more sophisticated to record the shares).

•         It provides more flexibility and less complications in the event of a wind up of the holding company (for e.g. if all of the taxpayer's company X shares were transferred to one holding company and that holding company sold its shares in company X in the future, its capital profits reserve would be a mixture of pre-CGT and post-CGT profits).

•         It avoids the need to obtain costly share valuations if both pre-CGT and post-CGT shares are held by one holding company.

•         Having two holding companies would make the ongoing identification of, and accounting for, the pre-CGT shares much easier, and there is no commercial downside in using two holding companies.

Note: This ruling does not consider the potential application of Part IVA of the ITAA 1936 to a scheme comprised of any steps, events or transactions which are not referred to in in the relevant facts and circumstances section of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 section 177E

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 Subdivision 122-A

Income Tax Assessment Act 1997 section 122-15

Income Tax Assessment Act 1997 section 122-20

Income Tax Assessment Act 1997 subsection 122-20(1)

Income Tax Assessment Act 1997 subsection 122-20(2)

Income Tax Assessment Act 1997 subsection 122-20(3)

Income Tax Assessment Act 1997 subsection 122-20(4)

Income Tax Assessment Act 1997 section 122-25

Income Tax Assessment Act 1997 subsection 122-25(1)

Income Tax Assessment Act 1997 subsection 122-25(2)

Income Tax Assessment Act 1997 subsection 122-25(3)

Income Tax Assessment Act 1997 subsection 122-25(4)

Income Tax Assessment Act 1997 subsection 122-25(5)

Income Tax Assessment Act 1997 paragraph 122-25(6)(a)

Income Tax Assessment Act 1997 section 122-35

Income Tax Assessment Act 1997 section 122-40

Income Tax Assessment Act 1997 subsection 122-40(1)

Income Tax Assessment Act 1997 subsection 122-40(2)

Income Tax Assessment Act 1997 paragraph 122-40(2)(a)

Income Tax Assessment Act 1997 paragraph 122-40(2)(b)

Income Tax Assessment Act 1997 subsection 122-40(3)

Income Tax Assessment Act 1997 subsection 122-70(2)

Income Tax Assessment Act 1997 paragraph 122-70(2)(a)

Income Tax Assessment Act 1997 paragraph 122-70(2)(b)

Income Tax Assessment Act 1997 subsection 122-70(3)

Reasons for decision

All subsequent legislative references are to the ITAA 1997 unless otherwise indicated.

Question 1

Section 122-15 provides that an individual can choose to obtain a roll-over if a specified CGT event (including CGT event A1) occurs involving the individual and a company in the circumstances set out in sections 122-20 to 122-35.

Where there is a disposal of a CGT asset to a company by an individual (CGT event A1), subsection 122-20(1) requires that the consideration received by the individual for the CGT event must only be shares in the company, or shares in the company and the company undertaking to discharge liabilities in respect of the asset or assets.[1]

The shares received by the individual cannot be redeemable (subsection 122-20(2)), and the market value of the shares received from the disposal of the CGT asset must be substantially the same as the market value of the CGT asset disposed of (subsection 122-20(3)).

Section 122-25 requires that:

•         the individual must own all the shares in the company just after the disposal of the CGT asset (subsection 122-25(1));

•         the CGT asset disposed of cannot be an excluded CGT asset under subsections 122-25(2) to (4). Relevantly, for the purposes of this ruling, this includes collectables, personal use assets, bravery or valour awards, trading stock of the company just after the disposal, registered emissions units, and any 'precluded asset' as defined in in subsection 122-25(3);

•         the company must not be an exempt entity (subsection 122-25(5)); and

•         relevantly, the individual and the company must both be Australian residents at the time of the disposal of the CGT asset (paragraph 122-25(6)(a)).

Under the proposed scheme, the taxpayer will transfer her pre-CGT shares in company X to company Y for no consideration other than shares in company Y. The taxpayer will also transfer a portion of her post-CGT shares in company X to company Z for no consideration other than shares in company Z.

Shares in a company are CGT assets for the purposes of section 108-5, and the transfer of shares from the taxpayer to company Y and company Z will be disposals of CGT assets which give rise to a CGT event A1 under section 104-10, thereby satisfying the requirement under section 122-15.

Each of the requirements under section 122-20 will be satisfied as:

•         the taxpayer will only receive ordinary shares from company Y in consideration for the pre-CGT company X shares, and only ordinary shares from company Z in consideration for the post-CGT company X shares;

•         the shares received by the taxpayer in company Y and company Z will not be redeemable shares; and

•         the market value of the shares received by the taxpayer in company Y and company Z (disregarding the possibility of liabilities attaching to the company X shares, per subsection 122-20(4)) will substantially be the same as the shares transferred from the taxpayer respectively, as company Y and company Z will have no assets[2] or liabilities other than the shares in company X.

Company Y and company Z are not exempt entities (for the purposes of subsection 122-25(5)), and the shares in company X are not excluded CGT assets for the purposes of subsections 122-25(2) to (4).

Following the transfer of shares, the taxpayer will be the sole shareholder in both company Y and company Z, thereby satisfying the requirement in subsection 122-25(1).

The taxpayer, company Y and company Z will all be Australian residents (for the purposes of paragraph 122-25(6)(a)).

Conclusion

If the taxpayer transfers her shares in company X to company Y and company Z as proposed, the taxpayer will be eligible to choose to obtain the roll-over in Subdivision 122-A.

Question 2

As the taxpayer will be eligible to choose to obtain a roll-over under Subdivision 122-A in relation to the transfer of her shares in company X to company Z (confirmed in question 1 of this ruling), and will choose to obtain that roll-over, the taxpayer will be able to disregard any capital gain or capital loss made from the transfer of her shares in company X to company Z pursuant to

subsection 122-40(1).

Question 3

Subsection 122-40(3) provides that shares issued by the company in exchange for pre-CGT assets transferred to the company by the transferor will be treated as if they were acquired by the transferor before 20 September 1985.

As:

•         the taxpayer will be eligible to choose to obtain a roll-over under Subdivision 122-A in relation to the transfer of her shares in company X to company Y (confirmed in question 1 of this ruling), and will choose to obtain that roll-over; and

•         the shares in company Y will be issued in exchange for pre-CGT shares in company X transferred to company Y by the taxpayer.

the taxpayer will be taken to have acquired her shares in company Y before 20 September 1985 pursuant to subsection 122-40(3).

Question 4

As the taxpayer will be eligible to choose to obtain a roll-over under Subdivision 122-A in relation to the transfer of her shares in company X to company Z (confirmed in question 1 of this ruling), and will choose to obtain that roll-over, the first element of the cost base of each of the taxpayer's shares in company Z will be worked out pursuant to paragraph 122-40(2)(a), being the aggregate cost base of the company X shares transferred to company Z by the taxpayer at the time of the transfer, divided by the number of shares issued to the taxpayer by company Z in exchange.

The first element of each of company Z share's reduced cost base will be worked out similarly (paragraph 122-40(2)(b)).

Question 5

Section 177D of the ITAA 1936

Section 177D of the ITAA 1936 provides that Part IVA of the ITAA 1936 applies to a scheme, or any part of a scheme, entered into or carried out by a person for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme. If Part IVA of the ITAA 1936 applies to a scheme, the Commissioner can make a determination under section 177F of the ITAA 1936 to cancel the tax benefit obtained under the scheme.

A conclusion about a relevant person's purpose is the conclusion of a reasonable person based on all the facts and evidence that are relevant to considering the matters outlined in

subsection 177D(2) of the ITAA 1936.

On the facts of the proposed scheme described in this ruling, and having consideration of the matters outlined in subsection 177D(2) of the ITAA 1936, there is insufficient tax purpose to engage the application of the general anti-avoidance provisions in Pt IVA of the ITAA 1936.

Section 177E of the ITAA 1936

Section 177E of the ITAA 1936 is an anti-avoidance provision designed to prevent tax benefits being obtained as part of a dividend stripping scheme or a scheme with substantially the same effect as a dividend stripping scheme.

Section 177E of the ITAA 1936 embraces a scheme which can be said objectively to have the dominant (although not necessarily the exclusive) purpose of avoiding tax. Assessing the purpose of the scheme is an objective test having regard to the characteristics of the scheme and the objective circumstances in which the scheme was designed and operated.

On the facts of the proposed scheme described in this ruling, there is insufficient tax purpose to engage the application of the dividend stripping provisions in section 177E of the ITAA 1936.

Question 7

As:

•         the taxpayer will be eligible to choose to obtain a roll-over under Subdivision 122-A in relation to the transfer of her shares in company X to company Y (confirmed in question 1 of this ruling), and will choose to obtain that roll-over; and

•         the company X shares transferred to company Y from the taxpayer were acquired by the taxpayer before 20 September 1985.

Company Y will be taken to have acquired the company X shares before that day, pursuant to subsection 122-70(3).

Question 8

As the taxpayer will be eligible to choose to obtain a roll-over under Subdivision 122-A in relation to the transfer of her shares in company X to company Z (confirmed in question 1 of this ruling), and will choose to obtain that roll-over, the first element of the cost base (in the hands of company Z) of each of the company X shares transferred to company Z by the taxpayer will equal the cost base of those shares at the time of her transfer pursuant to paragraph 122-70(2)(a).

The first element of each of company X share's reduced cost base (in the hands of company Z) will equal their reduced cost base at the time of their transfer (paragraph 122-70(2)(b)).

[1] Section 122-35 relates to the discharge of a liability in respect of the disposed asset and is not relevant to the facts and circumstances in this ruling.

[2] Except for $100 cash.