Edited version of private advice

Authorisation Number: 1052144763795

Date of advice: 21 July 2023

Ruling

Subject: Rollovers and business restructures

Question

Will the Shareholders be taken to have chosen to obtain the roll-over relief under Division 615 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the proposed transfer of their shares in Company A?

Answer

Yes

This ruling applies for the following period

1 April 2023 to 31 March 2024

The scheme commenced on:

1 April 2023

Relevant facts and circumstances

Background

Company A

1.    Company A conducts a business.

2.    Company A is an Australian resident for tax purposes and the head company of an income tax consolidated group.

3.    Company A holds 100% of the issued shares in Company B which is a member of Company A's consolidated group.

4.    Company B owns an asset that is used in Company A's business.

The Shareholders in Company A

5.    The Shareholders in Company A are Australian residents for tax purposes.

Company C

6.    Company C is a newly incorporated company that currently has one redeemable preference share on issue that is held by an Individual.

The Proposed Restructure

7.    The Shareholders and Company C propose to undertake a restructure (the Proposed Restructure) which will involve the following steps:

(a)          the Shareholders will transfer 100% of their shares in Company A to Company C; and

(b)          in exchange, Company C will issue ordinary shares in Company C to the Shareholders on a one for one basis.

8.    The redeemable preference share held by the Individual in Company C will be redeemed as part of the Proposed Restructure.

9.    Company A actively conducts a business that has significant risk. Accordingly, the Applicant has advised that the Proposed Restructure is being undertaken for broader asset protection purposes and to allow the head company of the consolidated group to be a non-trading entity.

10.  Following the Proposed Restructure, Company C will not conduct a business and will only hold shares in subsidiaries.

11.  The Proposed Restructure is expected to occur in the period from 1 April 2023 to 31 March 2024.

12.  Within 28 days after the completion time, Company C will make the choice, under subsection 615-30(2) of the ITAA 1997, that the consolidated group will continue in existence with Company C as the head company of the tax consolidated group immediately after the completion time.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 615

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

Reasons for decision

Question 1

Summary

1.    The Shareholders will be taken to have chosen to obtain the roll-over relief under Division 615 of the ITAA 1997 in relation to the proposed exchange of their shares in Company A for shares in Company C.

Detailed reasoning

2.    Broadly, Division 615 of the ITAA 1997 applies where shareholders, as part of an eligible business restructure, exchange shares in a company (or units in a trust) for shares in another company. The effect of Division 615 is to provide 'roll-over relief' so that the consequences which would normally flow from the disposal and acquisition under the CGT provisions are modified.

3.    Subsection 615-5(1) of the ITAA 1997 states that you can choose to obtain a roll-over if:

(a)  you are a member of a company or a unit trust (the original entity); and

(b)  you and at least one other entity (the exchanging members) own all the shares or units in it; and

(c)   under a scheme for reorganising its affairs, the exchanging members dispose of all their shares or units in it to a company (the interposed company) in exchange for shares in the interposed company (and nothing else); and

(d)  the requirements in Subdivision 615-B are satisfied.

4.    In this case, each Shareholder is a 'member' of Company A (the original entity), and together (as the exchanging members) own all the shares in Company A, thereby satisfying the requirements in paragraphs 615-5(1)(a) and 615-5(1)(b) of the ITAA 1997.

5.    Under the Proposed Restructure (being a scheme for reorganising the affairs of Company A), the Shareholders will transfer (dispose of) all their shares in Company A to Company C (the interposed company) in exchange for shares in Company C (and nothing else), thereby satisfying the requirements in paragraph 615-5(1)(c) of the ITAA 1997.

Subdivision 615-B of the ITAA 1997

6.    Further requirements are imposed by Subdivision 615-B of the ITAA 1997. They are:

•                     the interposed company must own all the original interests (section 615-15)

•                     requirements relating to the interests in the original entity (subsection 615-20(1), subsection 615-20(2) and subsection 615-20(3));

•                     a special requirement relating to the interposed company (section 615-25); and

•                     the interposed company must make a particular choice under section 615-30.

Interposed company must own all the original interests

7.    Section 615-15 of the ITAA 1997 states that the interposed company must own all the shares or units in the original entity immediately after the time (the completion time) all the exchanging members have had their shares or units in the original entity disposed of, redeemed or cancelled under the scheme.

8.    Under the Proposed Restructure, Company C will own all the shares in Company A immediately after the Shareholders dispose of their shares in Company A (the completion time), thereby satisfying the requirements in section 615-15 of the ITAA 1997.

Requirements relating to the interests in the original entity

9.    Subsection 615-20(1) of the ITAA 1997 requires that, just after the 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 company that were issued to all the exchanging members that is equal to the percentage of the shares or units in the original entity (that were owned by the member and disposed of, redeemed or cancelled under the scheme).

10.  In this case, immediately after the completion time, each of the Shareholders will own a whole number of shares in Company C and a percentage of shares in Company C that is equal to the percentage of the shares in Company A that they originally owned and disposed of under the Proposed Restructure, thereby satisfying the requirements in subsection 615-20(1) of the ITAA 1997.

11.  Subsection 615-20(2) of the ITAA 1997 relevantly requires that the following ratios must be equal:

(a)          the ratio of 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 the exchanging members (worked out immediately after the completion time); and

(b)          the ratio of the market value of that member's shares in the original entity that were disposed of under the scheme to the market value of all the shares or units in the original company that were disposed of under the scheme (worked out immediately before the first disposal).

12.  Under the Proposed Restructure, the market value ratio of each Shareholder's shares in Company C immediately after the completion time will equal the market value ratio they held of the Company A shares immediately before the first disposal, because at the relevant test times:

•                     the Shareholders are the only shareholders of each company;

•                     each Shareholder will hold the same proportion of the total shares in both companies;

•                     the Company A shares held by the Shareholders that are transferred under the scheme all have the same rights; and

•                     the Company C shares issued to each of the Shareholders will all have the same rights.

Accordingly, the requirements of subsection 615-20(2) of the ITAA 1997 will be satisfied.

13.  In considering the requirements in subsection 615-20(1) and 615-20(2) of the ITAA 1997, it is also relevant to note that, in the current circumstances, the redeemable preference share on issue in Company C will not form part of the consideration received by the Shareholders and will be redeemed as part of the Proposed Restructure i.e., prior to the completion time. This feature of the Proposed Restructure will therefore not adversely affect the satisfaction of these requirements.

14.  Subsection 615-20(3) of the ITAA 1997, in part, requires that you are an Australian resident at the time your shares in the original entity are disposed of, redeemed or cancelled under the scheme.

15.  In this case, the Shareholders are Australian residents, and will be at the time their shares in Company A will be disposed of under the Proposed Restructure, therefore the requirement in subsection 615-20(3) of the ITAA 1997 will be satisfied.

Requirements relating to the interposed company

16.  Subsection 615-25(1) of the ITAA 1997 states that shares in the interposed company must not be redeemable shares. The shares issued in Company C will not be redeemable shares. Therefore, this condition will be satisfied.

17.  Subsection 615-25(2) of the ITAA 1997 of the ITAA 1997 requires that each exchanging member who is issued shares in the interposed company must own the shares from the time they are issued to the completion time. This condition is also satisfied as each Shareholder will own the shares in Company C issued to them from the time they are issued until at least the completion time.

18.  Subsection 615-25(3) of the ITAA 1997 requires that, just after the completion time:

(a)          the exchanging members must own all the shares in the interposed company; or

(b)          entities other than those members must own no more than 5 shares in the interposed company and the market value of those shares expressed as a percentage of the market value of all the shares in the interposed company must be such that it is reasonable to treat the exchanging members as owning all the shares.

19.  In this case, paragraph 615-25(3)(a) of the ITAA 1997 is satisfied because, immediately after the completion time, the Shareholders will collectively own all the shares in Company C.

Interposed company must make a particular choice

20.  Subsection 615-30(1) of the ITAA 1997 provides that, unless subsection 615-30(2) applies, the interposed company must choose that section 615-65 applies.

21.  Subsection 615-30(2) of the ITAA 1997 states that the interposed company must choose that a consolidated group continues in existence at and after the completion time with the interposed company as its head company, if:

(a)          immediately before the completion time, the consolidated group consisted of the original entity as head company and one or more other members (the other group members); and

(b)          immediately after the completion time, the interposed company is the head company of a consolidatable group consisting only of itself and the other group members.

22.  In this case, immediately before the completion time, Company A is the head entity of a tax consolidated group. Under the Proposed Restructure, Company C will make the choice under subsection 615-30(2) of the ITAA 1997, that the consolidated group continues in existence with Company C as the head company of the tax consolidated group immediately after the completion time. As a result, the conditions in section 615-30 will be satisfied.

Conclusion

23.  As the requirements in subsection 615-5(1) of the ITAA 1997 will be satisfied, the Shareholders will be eligible for roll-over relief in relation to the disposal of their shares in Company A under the Proposed Restructure.

24.  In accordance with subsection 615-5(2) of the ITAA 1997, the Shareholders will be taken to have chosen to obtain the roll-over given that under the Proposed Restructure:

(a)          immediately before the completion time, Company A is the head company of a consolidated group, and

(b)          immediately after the completion time, Company C is the head company of the consolidated group.

CGT consequences of the rollover

25.  The CGT consequences of the Division 615 of the ITAA 1997 rollover for the Shareholders are generally highlighted in the note to section 615-40 and will be as follows:

(a)  any capital gain or capital loss that arises from the disposal of the shares in Company A under the Proposed Restructure will be disregarded; and

(b)  the cost bases of the new shares issued by Company C will be calculated by reference to the cost bases of the shares in Company C.