Edited version of private advice

Authorisation Number: 1052166049627

Date of advice: 19 November 2024

Ruling

Subject: CGT - disposal of assets

Question

Is the Individual entitled to obtain roll-over relief under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) if they dispose of their shares in Company A to Company Z?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.            The Individual is an Australian resident taxpayer.

2.            Company Z was incorporated in Australia under the Corporations Act 2001 (Corporations Act) on XX/XX/XXXX and is an Australian resident taxpayer.

3.            The Individual is Company Z's sole director and shareholder since its incorporation.

4.            It is proposed that Company Z will be the Individual's investment vehicle to undertake an investment strategy devised by an advisory entity.

5.            The Company is an Australian private company, with share capital of $X, representing $XX per ordinary share.

6.            The Company was incorporated in Australia under the Corporations Act on XX/XX/XXXX.

7.            Prior to the death of the Individual's Spouse, the following individuals each held an equal number of shares on issue in the Company:

•                     the Individual

•                     the Individual's Spouse

•                     the Individual C, and

•                     the Individual D.

8.            The Individual and the Individual's Spouse were both issued X ordinary shares in the Company on XX/XX/XXXX. Individual C and Individual D were each issued a quarter of the number of ordinary shares on the Company's incorporation.

9.            The Individual's Spouse passed away on XX/XX/XXXX and their shares in the Company was transferred to the Individual in their capacity as the executor of deceased spouse's estate and will pass to them as a beneficiary of the deceased estate prior to half of the shares in the Company being transferred to Company Z.

10.            The Individual holds 50% of the shares in the Company and Individual C and Individual D each hold 25% of the share in the Company (collectively referred to as the Shareholders).

11.            Each of the Shareholders holds their respective share in the Company on capital account.

12.            None of the shares issued by the Company are deemed for capital gains tax (CGT) purposes to have been issued before 20 September 1985 and each share has a CGT cost base of $X.[1]

13.            The Company:

(a)          has retained earnings of approximately $XX held in cash and has a franking account balance sufficient to fully frank dividends paid out of these retained earnings

(b)          is currently involved in investment operations. It is not proposed that it will be carrying on an active business immediately before the share buy-back

(c)          has not disposed of an active business or assets used in an active business in recent years. Nor is it disposing of any other type of assets.

Decision to separate interests

14.            The Shareholders have no written or verbal shareholder agreement in place.

15.            Decisions such as the payment of dividends have effectively required unanimous agreement between the Shareholders, with the Shareholders each conferring with their respective advisers in relation to each decision.

16.            There have been instances where unanimous agreement has not been reached and, therefore, no action has been able to be undertaken in relation to the particular matter. The impracticality of this control structure was a key driver for the eventual decision of having the Company buy-back the Individual's shares allowing Individual C and Individual D together to control the Company.

17.            Due to each of the Shareholders holding their shares in the Company personally, it was not readily apparent as to how they could manage this separation of interests in the Company without being subject to a significant income taxation liability.

18.            The Shareholders' desired outcome is to separate their interests in the Company whist maintaining their share of the retained earnings in a company registered under the Corporations Act. Particularly, the Individual intends to transfer their shares in the Company to another Company (Company Z) that they are the sole director and shareholder.

19.            The disposal by the Individual of their shares in the Company to CompanyZ, followed by the buy-back of these shares by the Company, was determined to be the best way to achieve the desired outcomes of the Shareholders.

20.            The Individual states the Shareholders believe this will minimise the:

(a)          overall administrative burden on the Shareholders, as only the Individual would need to incorporate a new company under the Corporations Act. Whereas if the Company has been wound-up then Individual C and Individual D would have to also incorporate a new company or companies under the Corporations Act to hold their share or shares of the Company's value.

(b)          cash-flow burden on the Company, as it would only need to fund a buy-out of the Individual's shares, and not the shares of Individual's sibling-in-law and the Individual's sibling-in-law's partner.

21.            Additionally, the Individual's exit from the Company by a direct transfer of their shares in the Company to the Company Z, means the cash does not flow to them (as would happen if they directly participated in the buy-back) but to the newly incorporated entity.

22.            It is not intended the other Shareholders (Individual C and Individual D) will be subject to a buy-back or a transfer of their shares.

The proposed transaction (Proposed Transaction)

23.            The Shareholders propose to undertake the following steps to affect the exit of common control:

(a)          the Individual will dispose of all of their shares in the Company to Company Z.

(b)          Company Z will issue XXX ordinary shares in Company Z in exchange for the Individual's shares in the Company.

(c)          the Company will then buy back all of its shares from Company Z (the Buy-Back).

24.            For accounting purposes, Company Z will issue its shares for a nominal value to the Individual and result in an accretion to Company Z's Share capital account of $X. The shares in the Company will be taken to have been acquired for $X by Company Z.

25.            The Individual holds ordinary shares in the Company which equal 50% of the ordinary shares on issue.

26.            The Individual would like to remove their accumulated share of the value in the Company and the shareholders of the Company have determined that this will be done via a buy-back.

27.            All shareholders hold their interests in the Company on capital account

28.            Only the Individual will participate in the buy-back.

29.            Before participating in the buy-back the Individual intends to dispose of their shares to the newly incorporated entity (Company Z), in exchange for ordinary shares in Company Z.

30.            Company Z is a resident of Australia as defined in section 6 of the Income Tax Assessment Act 1936 (ITAA 1936).

31.            Company Z intends to hold the shares in the Company on capital account.

32.            Company Z proposes to be an investment vehicle for the Individual to undertake investments in a variety of assets.

33.            the Individual is the sole shareholder of Company Z and will remain the sole shareholder after the transfer of the shares in the Company is completed.

34.            In addition, the transaction between the Individual and Company Z will be conducted at market value and the Individual will only receive consideration in the form of ordinary shares in Company Z.

35.            After Company Z has acquired the shares in the Company it will participate in the buy-back.

Assumptions

36.            The interposition of Company Z and/or the buy-back will not be conducted as part of a broader scheme.

37.            All transactions will be undertaken for market value consideration and for the purposes of subsection

38.            122-30(3) of the ITAA 1997, the market value of the shares in Company Z that the Individual will receive for the trigger event will be substantially the same as the market value of shares in the Company that the Individual will dispose to Company Z.

39.            For the purposes of subsection 122-30(3) of the ITAA 1997 there are no liabilities attached to the shares in the Company which would impact the market value of the shares in the Company

40.            The Company's share capital account is untainted.

41.            In respect of item 1 of the table in subsection 122-25(2) of the ITAA 1997, the shares in the Company:

(a)          are not a collectable as defined in section 108-10 of the ITAA 1997

(b)          are not a personal use asset as defined in section 108-20 of the ITAA 1997

(c)          are not a decoration awarded for valour or brave conduct

(d)          are not a precluded asset as defined in subsection 122-25(3) of the ITAA 1997

(e)          will not become trading stock, as defined in section 70-10 of the ITAA 1997, of Company Z just after the disposal Company Z, or

(f)          will not become a registered emissions unit as defined by section 420-10 of the ITAA 1997 held by Company Z just after the disposal to Company Z.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 6

Income Tax Assessment Act 1936 subsection 6(2)

Income Tax Assessment Act 1936 section 124ZO

Income Tax Assessment Act 1936 section 124ZQ

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 section 70-10

Income Tax Assessment Act 1997 subsection 70-10(1)

Income Tax Assessment Act 1997 section 108-10

Income Tax Assessment Act 1997 subsection 108-10(2)

Income Tax Assessment Act 1997 subsection 108-10(3)

Income Tax Assessment Act 1997 section 108-20

Income Tax Assessment Act 1997 paragraph 108-20(2)(a)

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 paragraph 122-20(1)(a)

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

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

Income Tax Assessment Act 1997 paragraph 122-20(3)(a)

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 subsection 122-25(6)

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

Income Tax Assessment Act 1997 subsection 122-25(7)

Income Tax Assessment Act 1997 subsection 122-30(3)

Income Tax Assessment Act 1997 section 122-35

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

Income Tax Assessment Act 1997 section 420-10

Income Tax Assessment Act 1997 subsection 995-1

Reasons for decision

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

Question

Is the Individual entitled to obtain roll-over relief under Subdivision 122-A if they dispose of their shares in the Company to Company Z?

Summary

The Individual can choose to obtain roll-over relief under Subdivision 122-A in respect of the disposal of their shares in the Company to Company Z.

Detailed reasoning

1.             Section 122-15 states:

If you are an individual or a trustee, you can choose to obtain a roll-over if one of the *CGT events (the trigger event) specified in this table happens involving you and a company in the circumstances set out in sections 122-20 to 122-35.

Table 1: Relevant CGT events

2.             The Individual intends to dispose of their shares in the Company to Company Z in exchange for shares in Company Z.

3.             The disposal of shares in a company is an A1 event as listed in the table and, if the conditions in sections 122-20 to 122-35 are satisfied, the Individual will be able to choose to obtain roll-over relief.

Section 122-20 - What you receive for the trigger event

4.             Subsection 122-20(1) provides:

The consideration you receive for the trigger event happening must be only:

(a)      *shares in the company; or

(b)      for a *disposal of a *CGT asset, or all the assets of a business, to the company (a disposal case) - shares in the company and the company undertaking to discharge one or more liabilities in respect of the asset or assets of the *business (as appropriate).

Note: There are rules for working out what are the liabilities in respect of an asset: see section 122-37.

5.             In return for the Individual's shares in the Company, the Individual will only receive ordinary shares in Company Z, so paragraph 122-20(1)(a) will be satisfied.

6.             Subsection 122-20(2) provides:

The *shares cannot be *redeemable shares.

7.             The term 'redeemable shares' is defined in subsection 995-1(1):

redeemable shares means:

(a)      *shares that are liable to be redeemed; or

(b)      shares that, at the option of the company that issued them, are liable to be redeemed.

8.             The shares being issued by Company Z to the Individual will be ordinary shares in Company Z and will not be 'redeemable shares' as that term is defined in subsection 995-1(1).

9.             Subsections 122-20(3) states:

The *market value of the *shares you receive for the trigger event happening must be substantially the same as:

(a)      for a disposal case - the market value of the asset or assets you disposed of, less any liabilities the company undertakes to discharge in respect of the asset or assets (as appropriate); or

(b)      for another trigger event (a creation case) - the market value of the CGT asset created in the company (the created asset).

10.          The Individual will dispose of their shares in the Company to Company Z, which is a disposal case under paragraph 122-20(3)(a).

11.          In respect of paragraph 122-20(3)(a), subsection 122-30(4) states:

In working out if the requirement in paragraph (3)(a) is satisfied, if the *market value of the *shares is different to what it would otherwise be only because of the possibility of liabilities attaching to the asset or assets, disregard the difference.

12.          As there are no liabilities attached to the shares in the Company, subsection 122-20(4) has no application.

13.          In respect of the market value of the shares the Individual receives from Company Z in exchange for their shares in the Company, the market value of those shares will be substantially the same[2] as the market value of the shares in the Company.

14.          As such, the requirement in subsection 122-20(3) will be satisfied.

15.          All the relevant requirements of section 122-20 will thus be satisfied in respect of the Individual's disposal of their shares in the Company to Company Z.[3]

Section 122-25 - Other requirements to be satisfied

16.          Subsection 122-25(1) provides:

You must own all the *shares in the company just after the time of the trigger event.

Note: You must own the shares in the same capacity as you owned or created the assets that the company now owns.

17.          The Individual, as founding shareholder of Company Z, will own all the shares in Company Z prior to the disposal of their shares in the Company to Company Z.

18.          Company Z will issue new shares to the Individual in exchange for the shares in the Company that they will dispose to Company Z.

19.          As such, the Individual will own all the shares in Company Z just after they dispose of their shares in the Company to Company Z.

20.          The Individual will also own the shares in Company Z in the same capacity, i.e. as an individual, as they owned the shares in the Company.

21.          Thus, the requirement in subsection 122-25(1) will be satisfied.

22.          Subsection 122-25(2) provides that roll-over cannot be obtained for the disposal CGT assets by an individual to a company, such as collectibles, personal use assets, a decoration award for valour or brave conduct, a precluded asset, an asset that becomes trading stock or an asset that becomes a registered emissions unit.

23.          The Individual is disposing of their shares in the Company to Company Z. As such, Item 1 of the table in subsection 122-25(2) is the relevant item in respect of this disposal. The Company shares the Individual is disposing to Company Z are not a CGT asset of a type described in item 1 of the table and Company Z will hold the Company shares on capital account and therefore the shares will not become trading stock in the hands of Company Z.

24.          Therefore, all the relevant subsections of section 122-25 will be satisfied in respect of the Individual's disposal of their shares in the Company to Company Z.

Section 122-35 - What if the company undertakes to discharge a liability (disposal case)

25.          Company Z is not undertaking to discharge a liability of the Individual as part of the disposal of the shares in the Company to Company Z, and therefore this section has no application.

Conclusion

26.          As the requirements of sections 122-15, 122-20 and 122-25 are satisfied, the Individual may choose to obtain roll-over relief under Subdivision 122-A on the transfer of the shares in the Company to Company Z in exchange for shares in Company Z. If the Individual does choose to obtain roll-over relief, they can disregard the capital gain realised on the disposal of those shares in accordance with subsection 122-40(1).

[1] Pursuant to item 1 of the table in subsection 128-15(4) this includes the cost base of the Company shares that will pass to the Individual as a beneficiary of the deceased spouse's estate.

[2] As per the assumption to this ruling.

[3] Note: as per ATO Interpretative Decision ATO ID 2004/94 Income Tax Capital gains tax: Subdivision 122-A rollover: no consideration received, if the Individual decides to dispose of their shares in the Company to Company Z for no consideration, then section 122-20 will not need to be applied in respect of the disposal.