Edited version of private advice

Authorisation Number: 1051942651062

Date of advice: 31 January 2022

Ruling

Subject: Division 615 restructure CGT rollover relief

Question

Are you eligible for Capital Gains Tax roll-over relief under Division 615 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to your disposal of shares in Foreign Company A and Foreign Company B in exchange for shares in Foreign Holding Company during the proposed restructure?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 June 20XX

Relevant facts and circumstances

You are an Australian tax resident. You are not a tax resident of any other country.

Company A is a proprietary limited company incorporated and registered in Australia and is an Australian tax resident. You are the sole director of Company A.

You and Company A each separately own ordinary shares in two foreign resident companies for their own benefit, being Foreign Company A and Foreign Company B.

The ordinary shares in these companies:

(a) are held by both you and Company A on capital account;

(b) are not eligible finance shares, nor widely distributed finance shares; and

(c) carry the right to exercise any of the voting power in the company, and there is no arrangement in force to affect that right.

Foreign Company A is a private limited company incorporated overseas in 2020 and is a tax resident of another country. The company is not a tax resident of any other country.

(a) The company is estimated to have a market value of approximately $XX

(b) The directors of the company each live and reside outside Australia.

(c) The central management and control of the company is in another country.

(d) Company A owns XX% of the shares in Foreign Company A. There are Y other shareholders in Foreign Company A, none of whom are resident of Australia

Foreign Company B is a private limited company incorporated in a European country in 2020

and is a tax resident that country. The company is not a tax resident of any other country.

(a) The company is estimated to have a market value of approximately $XX.

(b) The directors of the company each live and reside outside Australia.

(c) The central management and control of the company is in the European country.

(d) You own YY% of the shares in Foreign Company B. There are Y other shareholders in Foreign Company B, none of whom are resident of Australia

Neither Foreign Company A nor Foreign Company B own any shares in any subsidiary companies, nor any real property situated in Australia, and accordingly, their shares are not taxable Australian property.

A series of transactions are proposed to give effect to the restructure in the ownership in both Foreign Company A and Foreign Company B, with the effect that a new foreign holding company (Foreign Holding Company) will be interposed between the existing shareholders and both Foreign Company A and Foreign Company B. As part of the interposition, the shares issued by Foreign Holding Company will be ordinary shares that are not redeemable shares.

The shareholders are seeking to undertake a restructure of the ownership of Foreign Company A and Foreign Company B for the sole purpose of improving the business structure, allowing for future expansion and growth, and mitigating risk with respect to the ownership of assets.

Prior to the restructure, minority shareholders will be bought out by the majority shareholders and you will buy out Company A's shares in Foreign Company A so that your ownership in Foreign Company A will mirror Foreign Company B. As part of a single scheme of arrangement, a new Holding Company will be incorporated (Foreign Holding Company), which will then acquire the entire issued share capital (ordinary shares) of both Foreign Company A and Foreign Company B from the existing shareholders, and as consideration, will issue ordinary shares in itself to those same existing shareholders in the same proportion as their shareholding in Foreign Company A and Foreign Company B.

Assumptions

You and the other shareholders in the original companies (Foreign Company A and Foreign Company B) will continue to own shares in the interposed company from the time they are issued until at least completion time.

The new interposed holding company (Foreign Holding Company) will make the choice for section 615-65 of the ITAA 1997 to apply within 2 months of the completion time. You will obtain evidence such choice has been made.

You will elect to apply the rollover contained within Division 615 by the date you lodge your 20XX-YY tax return, and this will be evidenced by the way you lodge your return.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 112-20

Income Tax Assessment Act 1997 section 615-5

Income Tax Assessment Act 1997 section 615-15

Income Tax Assessment Act 1997 section 615-20

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

Reasons for decision

Roll-over under Division 615 of the ITAA 1997 enables a member of a company or a trust to disregard a capital gain or capital loss from a share or a unit that is either disposed of, or redeemed or cancelled, as part of a reorganisation of the affairs of the entity, where the member becomes the owner of new shares in another company in exchange.

Subdivision 615-5 of the ITAA 1997 states that you can choose to obtain the rollover if:

•           you are a member of a company (the original entity)

•           you and at least one other entity (the exchanging members) own all of the shares in it

•           under the scheme for reorganising its affairs the exchanging members dispose of all their shares to an interposed company in exchange for shares in the interposed company (and nothing else); and

•           the requirements of Subdivision 615-B are satisfied.

In this case, at the time of the restructure you are a member of the original companies, you and six other entities own all the shares in those companies, and you will be disposing of all your shares in those companies to an interposed company (Foreign Holding Company) in exchange for shares in that interposed company, in the same proportion as your existing shareholding in the original companies.

Further requirements are imposed by Subdivision 615-B of the ITAA 1997. The relevant requirements in this case are:

• the interposed company must own all the original interests immediately after the 'completion time' (the time all the exchanging members have had their shares disposed of under the scheme) (section 615-15 of the ITAA 1997)
• immediately after completion time, each exchanging member must own:
  • a whole number of shares in the interposed company; and
  • a percentage of the shares in the interposed entity that were issued to all of the exchanging members that is equal to the percentage of the shares in the original entity that were owned by the member and disposed of under the scheme (subsection 615-20(1) of the ITAA 1997)
• the following ratios must be equal:
  • the market value of each exchanging member's shares in the interposed company to the market value of the shares in the interposed company issued to all exchanging members (worked out immediately after the completion time); and
  • 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 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). (subsection 615-20(2) of the ITAA 1997)
• you are an Australian resident at the time your original interests were disposed of (subsection 615-20(3) of the ITAA 1997)
• the shares issued in the interposed entity must not be redeemable shares (subsection 615-25(1) of the ITAA 1997)
• each exchanging member who is issued shares in the interposed company must own the shares from the time they are issued until at least completion time (subsection 615-25(2) of the ITAA 1997),
• immediately after completion time the exchanging members must own all of the shares in the interposed company (subsection 615-25(3) of the ITAA 1997); and
• the interposed company must make the choice that section 615-65 of the ITAA 1997 applies within 2 months of completion time (section 615-30 of the ITAA 1997).

Taking the above assumptions into account, the requirements of Subdivision 615-B of the ITAA 1997 will be met because:

•         under the proposed restructure the interposed company (Foreign Holding Company) will become the owner of 100% of the shares in both of the original companies (Foreign Company A and Foreign Company B).

•         immediately after the restructure you and the other exchanging members will own a whole number of shares in the interposed company and your ownership percentage of the interposed company will equal your ownership interest in the original companies.

•         we consider that the relevant market ratios will be met

• you are an Australian resident

•         there are no redeemable shares being issued in the interposed company

•         assuming you and the other shareholders will continue to own the shares in the interposed company (2 San Holdings) until at least completion time, you will all immediately own them after completion

•         also assuming you will have evidence that the interposed company made the choice that section 615-65 of the ITAA 1997 applied and it did so within 2 months of completion time.

Accordingly, rollover relief will be available under Division 615 of the ITAA 1997 in relation to the disposal of your shares in Foreign Company A and Foreign Company B.