Edited version of private advice

Authorisation Number: 1051976256119

Date of advice: 26 April 2022

Ruling

Subject: Active foreign business asset

Question

Is 'Cash at ATM' owned by ForeignCo excluded from being an active foreign business asset of ForeignCo pursuant to paragraphs 768-540(1)(d) and 768-540(2)(f) of the Income Tax Assessment Act 1997 (ITAA 1997) for the purposes of calculating the active foreign business asset percentage of ForeignCo in relation to Company A under Subdivision 768-G of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company A is part of a group of entities that carries on the business of providing payment and technology solutions (including Automatic Teller Machines (ATMs)) across a wide range of industries.

Outside Australia, Company A has a 51% equity share in ForeignCo, an Indian incorporated subsidiary of Company A. Voting rights held by Company A in Foreign Co reflect its shareholding.

The shares held by Company A in ForeignCo are not 'eligible finance shares' or 'widely distributed finance shares' as defined in section 327 and section 327A of the Income Tax Assessment Act 1936 (ITAA 1936) respectively.

ForeignCo is an independent (non-bank) ATM operator in India. Substantially all of the revenue derived by ForeignCo is from interchange fees earned on ATM transactions, as determined by the Reserve Bank of India (RBI).

Under current regulations, ForeignCo is allowed to offer co-branded debit cards with banks, display advertisements on its machines and provide lead generation platforms (for products like insurance, mutual funds and other products). In addition, ForeignCo may offer bill payment services and cash deposit services on ATMs to its customers in due course, as permitted by the RBI.

ForeignCo relies on the RBI and scheduled banks to provide ForeignCo with the cash required to operate the ATMs.

The banks provide a working capital facility which is secured against the cash in the ATMs. Under the RBI regulations, ForeignCo is required to own the cash that it inserts into the ATMs. Accordingly, the cash in the ATMs (referred to as 'Cash at ATM' in the notes to ForeignCo's audited financial statements) is recognised on the balance sheet of ForeignCo as cash.

Under the working capital agreement with banks, ForeignCo is not allowed to use the 'Cash at ATM' for any purposes other than stocking the ATMs.

The transactions between ForeignCo's customer's banks and the ATMs are processed through National Payments Corporation of India (NPCI) gateways using the National Finance Switch. Accordingly, ForeignCo does not need approvals or arrangements with individual banks to enter ATM transactions with its customers.

ForeignCo customers withdraw the cash from the ATMs, which is debited from their bank accounts by their bank and settled to ForeignCo through the interbank settlement mechanism of NPCI.

The working capital for the ForeignCo business is primarily the cash in the ATMs, which is available for dispensing to customers and NPCI receivables.

ForeignCo has become a public company and is preparing an Initial Public Offering (IPO) to list on the Indian Stock Exchanges.

As part of the IPO, Company A has offered to sell part of its shareholding in ForeignCo. Company A intends to initially divest up to 10% of its shareholding in ForeignCo within the first 18 months and will derive a capital gain from that divestment.

The active foreign business asset percentage of ForeignCo, in relation to Company A, at the time of the divestment will be worked out using the market value method under section 768-520 of the ITAA 1997.

Company A is not an Australian financial institution (AFI) within the meaning of Part X of the ITAA 1936 and ForeignCo is not an 'AFI subsidiary' within the meaning of Part X of the ITAA 1936.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part X

Income Tax Assessment Act 1936 section 326

Income Tax Assessment Act 1936 section 327

Income Tax Assessment Act 1936 section 327A

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 Subdivision 768-G

Income Tax Assessment Act 1997 subsection 768-505(1)

Income Tax Assessment Act 1997 paragraph 768-505(1)(a)

Income Tax Assessment Act 1997 paragraph 768-505(1)(b)

Income Tax Assessment Act 1997 paragraph 768-505(1)(c)

Income Tax Assessment Act 1997 subsection 768-505(2)

Income Tax Assessment Act 1997 subsection 768-515(1)

Income Tax Assessment Act 1997 subsection 768-520(1)

Income Tax Assessment Act 1997 subparagraph 768-540(1)(b)(i)

Income Tax Assessment Act 1997 paragraph 768-540(1)(c)

Income Tax Assessment Act 1997 paragraph 768-540(1)(d)

Income Tax Assessment Act 1997 subsection 768-540(2)

Income Tax Assessment Act 1997 paragraph 768-540(2)(f)

Income Tax Assessment Act 1997 subsection 768-540(3)

Income Tax Assessment Act 1997 paragraph 768-540(3)(a)

Income Tax Assessment Act 1997 subsection 768-545(1)

Income Tax Assessment Act 1997 paragraph 768-545(1)(a)

Income Tax Assessment Act 1997 subsection 768-545(2)

Income Tax Assessment Act 1997 subsection 768-545(3)

Income Tax Assessment Act 1997 subsection 768-545(4)

Income Tax Assessment Act 1997 paragraph 768-550(1)(a)

Reasons for decision

Summary

The 'Cash at ATM' recognised as a current asset of ForeignCo in its financial statements constitutes 'cash' and is excluded from being an active foreign business asset of ForeignCo pursuant to paragraphs 768-540(1)(d) and 768-540(2)(f) of the ITAA 1997[1].

Detailed reasoning

Subdivision 768-G

Under Subdivision 768-G, a capital gain or capital loss made by an Australian resident company (referred to as the 'holding company') on the disposal of a share in a foreign company (referred to as the 'foreign disposal company') is reduced pursuant to subsection 768-505(1) where:

(a)  the holding company held a direct voting percentage of 10% or more in the foreign disposal company throughout a 12 month period that:

(i)    began no earlier than 24 months before the time of the CGT event; and

(ii)   ended no later than that time; and

(b)  the share is not:

(i)    an eligible finance share (within the meaning of Part X of the Income Tax Assessment Act 1936); or

(ii)   a widely distributed finance share (within the meaning of that Part); and

(c)   the CGT event is CGT event A1, B1, C2, E1, E2, G3, J1, K4, K6, K10 or K11.

The capital gain or loss is reduced by the 'active foreign business asset percentage' of the foreign disposal company in relation to the holding company at the time of the disposal of the share (subsection 768-505(2)). Broadly, the active foreign business asset percentage is a percentage that reflects the degree to which the assets of the foreign disposal company are used in an active business.

Where the holding company has made a choice under subsection 768-515(1) to use the 'market value method', the active foreign business asset percentage of a foreign company in relation to the holding company, at the time of the disposal of the share, is worked out under subsection 768-520(1) using the following method statement:

Method statement

Step 1. Work out the market value at that time of all assets included in the total assets of the foreign company at that time.

Step 2. Work out the market value (see subsection (2)) at that time of all active foreign business assets of the foreign company at that time.

Step 3. Divide the result of step 2 by the result of step 1.

Step 4. Express the result of step 3 as a percentage, and round that percentage to the nearest whole percentage point (rounding a number ending in.5 upwards).

Step 5. The active foreign business asset percentage is:

(a) if the result of step 4 is less than 10% - zero; or

(b) if the result of step 4 is 10% or more, but less than 90% - that result; or

(c) if the result of step 4 is 90% or more - 100%.

For the purpose of step 1 of the method statement, subsection 768-545(1) states that an asset is an asset included in the total assets of the foreign company, at a particular time, if:

a.    the asset is a CGT asset at that time;

b.    the foreign company owns the asset at that time; and

c.     where the foreign company is not an AFI subsidiary whose sole or principal business is financial intermediary business, the asset is not (with reference to subsections 768-545(2) to (4)) a foreign company derivative asset.

For the purpose of step 2 of the method statement, an 'active foreign business asset' is defined in

subsection 768-540(1) to mean an asset, at a particular time, of a foreign company if:

(a)  the asset is an asset included in the total assets of the company; and

(b)  the asset satisfies any of these conditions:

(i)    the asset is used, or held ready for use, by the company in the course of carrying on a business;

(ii)   the asset is goodwill;

(iii)  the asset is a share; and

(c)   the asset is not any of the following:

(i)    taxable Australian property;

(ii)   (ii) a membership interest in a company that is an Australian resident;

(iii)  (iii) a membership interest in a resident trust for CGT purposes;

(iv)  (iv) an option or right to acquire a membership interest mentioned in subparagraph (ii) or (iii); and

(d)  the asset is not covered by subsection (2); and

...

For the purposes of paragraph 768-540(1)(d), an asset is covered by subsection 768-540(2) if it is:

...

(f) cash or cash equivalent; or

...

Paragraph 768-540(2)(f) does not apply if, at the relevant time, the foreign company is an AFI subsidiary whose sole or principal business is financial intermediary business (paragraph 768-540(3)(a)).

Application to your circumstances

Based on the relevant facts and circumstances set out in this ruling, each of the requirements at paragraphs 768-505(1)(a) to (c) will be satisfied in respect of the proposed disposal of shares in ForeignCo (the foreign disposal company) by Company A (the holding company). That is:

•         Company A will have held a direct voting percentage (per paragraph 768-550(1)(a)) of at least 10% in ForeignCo throughout the 12 month period specified in paragraph 768-505(1)(a));

•         the disposed shares in ForeignCo will not be eligible finance shares or widely distributed finance shares, as defined; and

•         a CGT event A1 under section 104-10 will happen to Company A in respect of the disposal.

By satisfying those requirements, Company A will be able to reduce the capital gain (or capital loss) it makes from the disposal by the active foreign business asset percentage of ForeignCo in relation to Company A at that time (pursuant to subsection 768-505(2)).

For the purpose of step 1 of the method statement to the market value method under subsection 768-520(1), being the method by which Company A will choose to work out the active foreign business asset percentage of ForeignCo at the time of the disposal, the 'Cash at ATM' will be an asset included in the total assets of ForeignCo as:

•         the 'Cash at ATM' (a foreign currency) will be a CGT asset pursuant to section 108-5 at that time;

•         ForeignCo will have owned the 'Cash at ATM' at that time (as required by Indian ATM operators under RBI regulations); and

•         the 'cash at ATM' is not a foreign company derivative asset.

For the purpose of identifying whether the 'Cash at ATM', at the time of the disposal, will be an active foreign business asset of ForeignCo (as required under step 2 of the method statement to the market value method under subsection 768-520(1)), it is noted that:

•         the 'Cash at ATM' will be an asset included in the total assets of ForeignCo (due to its satisfaction of the requirements under subsection 768-545(1)), thereby satisfying paragraph 768-540(1)(a);

•         the 'Cash at ATM' is used, or held ready for use, by ForeignCo in the course of carrying on a business, thereby satisfying subparagraph 768-540(1)(b)(i); and

•         the 'Cash at ATM' is not any of the assets mentioned in paragraph 768-540(1)(c), thereby satisfying that paragraph.

Whilst the active foreign business assets of a foreign company generally constitute assets used by the company in the course of carrying on a business, pursuant to paragraphs 768-540(1)(c) and (d) certain tainted assets and certain CGT assets with a necessary connection with Australia are excluded from being active foreign business assets of a foreign company.

One of the excluded tainted assets is 'cash or cash equivalent' (under paragraph 768-540(2)(f)). Paragraph 1.127 of the Explanatory Memorandum to the New International Tax Arrangements (Participation Exemption and Other Measures) Bill 2004 acknowledges that cash and cash equivalents are not defined in the ITAA 1936 and ITAA 1997 and notes that "[i]t is intended that they will adopt their ordinary accounting meanings for the purposes of this measure."

AASB 107[2] defines 'cash' as comprising "cash on hand and demand deposits" and defines 'cash equivalents' to mean "short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value".

The cash owned by ForeignCo and stocked in the ATMs ForeignCo operates, referred to as 'Cash at ATM' and recognised as cash (a current asset) in ForeignCo's balance sheet, falls within the scope of the accounting definition of cash and therefore constitutes a tainted asset excluded from being an active foreign business asset of ForeignCo pursuant to paragraphs 768-540(1)(d) and 768-540(2)(f).

The modifications under subsection 768-540(3) to the way in which some of the active foreign business asset exclusions in subsection 768-540(2) apply in relation to a foreign company that is an AFI subsidiary operating as a financial intermediary are not applicable to foreign companies (like ForeignCo) that are not an AFI subsidiary.

It is not open to the Commissioner to include the 'Cash at ATM' as an active foreign business asset of ForeignCo based on the exception under paragraph 768-540(3)(a) which applies specifically to foreign companies that are an AFI subsidiary (within the meaning given by section 326 of the ITAA 1936), nor is it open to the Commissioner to treat 'Cash at ATM' as something other than cash, on the basis of the manner in which the cash is used by ForeignCo in the course of carrying on its business and/or any similarities that can be drawn between ForeignCo and an AFI subsidiary.

[1] All legislative references are to the ITAA 1997, unless otherwise specified.

[2] Statement of Cash Flows.