Edited version of private advice

Authorisation Number: 1052205618535

Date of advice: 19 December 2023

Ruling

Subject: Scrip for scrip - consolidation

Question 1

Is the Proposed Restructure a transaction to which section 124-784A of the ITAA 1997 will apply?

Answer

No.

Question 2

Will HoldCo and the Company be eligible to form a consolidated group after completing Step 1 of the Proposed Restructure?

Answer

Yes.

Question 3

In the event that the Company shares in HoldCo are post-CGT assets as a result of Division 149 of the ITAA 1997, will the single entity rule apply to disregard any income tax consequences as a result of Step 3 of the Proposed Restructure for both companies?

Answer

Yes.

This ruling applies for the following periods:

Year ending XX XX XXXX

Year ending XX XX XXXX

The scheme commenced on:

XX XX XXXX

Relevant facts and circumstances

1.            The Shareholders hold the following shares in the Company:

Table 1 Shares in Company

2.            There is no difference in rights associated with the X class shares and X class shares.

3.            It is expected that, by the time the proposed Restructure is implemented, the assets on the balance sheet (other than the shares in HoldCo) will be minimal.

HoldCo

4.            The current ownership of HoldCo is as follows:

Table 2 Current ownership

5.            HoldCo has XX% of the issued shares in TradeCo.

6.            The assets of the Company are its shares in TradeCo, managed investments of approximately $X, shares in unlisted companies of approximately $X, cash balance of approximately $X, plant and equipment and trade receivables.

Background

7.            The Family was one of the founding families of TradeCo's business. The Family owns a X% interest in TradeCo through HoldCo. The Family's intention is for this major asset to remain in the Family and is passed on to future generations. They also wish to maintain their interest in TradeCo as one shareholding in HoldCo to ensure that the Family continues to retain certain rights in relation to TradeCo such as a right to board representation.

8.            The ultimate ownership of the Family interest in TradeCo is split X:X between the Family respectively, including the shares held by their respective family trusts. The Family wish to continue to be able to deal separately with their respective family interests in HoldCo.

9.            The TradeCo shareholding has already been passed on through generations of the Family since it was founded. As such, the current ownership structure has evolved and become unnecessarily complex as it has passed through those generations. Specifically, the Company, which has a significant shareholding in HoldCo, is a legacy entity which creates confusion for the current Family members as to its purpose in the structure. Whilst the Family have a level of understanding that the Company is a legacy of the assets owned by their late parent, they are concerned that the continued existence of this entity in their ownership structure will only serve to create greater confusion as their shares in HoldCo are passed through family generations over time. They do not consider that the Company serves any purpose in the current ownership structure and results in an unnecessary layer of administration and complexity.

10.          As such, the objective of the Family is to:

(a)          remove the Company from the ownership structure, and

(b)          preserve the current ultimate economic ownership of the shares held by the respective Family entities in HoldCo (and therefore in TradeCo), which is split equally between the respective families.

11.          To achieve the Family's objectives, the following steps are contemplated in order to remove the Company and simplify the structure.

Proposed restructure (Proposed Restructure)

12.          Step 1 - HoldCo acquires all the Company shares from the Shareholders and in exchange newly issued shares in HoldCo will be issued to the Shareholders:

(a)          the Company X Class Shareholders will receive X Class ordinary shares in HoldCo.

(b)          the Company X Class Shareholders will receive X Class ordinary shares in HoldCo.

(c)           the X Class and X Class shares will carry equal rights

(d)          the Shareholders will receive HoldCo shares in exchange for their Company shares that are substantially the same as the market value of their original Company shares and nothing else.

13.          Step 2 - HoldCo elects to form a tax consolidated group with the Company as the only subsidiary member.

14.          Step 3 - HoldCo repurchases the shares the Company holds in HoldCo, likely by way of a capital reduction and cancellation, of these shares within X months.

15.          The X Class and X Class shares in the Company carry equal voting, dividend and capital rights.

16.          The replacement X Class and X Class shares in HoldCo will carry the same kind of rights and obligations as those attached to the Company X Class and X Class shares.

17.          As part of the Proposed Restructure, the Shareholders and HoldCo will jointly choose to obtain the roll-over in Subdivision 124-M of the ITAA 1997 pursuant to the requirements of paragraph 124-780(3)(d) of the ITAA 1997.

18.          The Shareholders will inform HoldCo in writing of the cost base of their original interests in the Company worked out immediately prior to the Proposed Restructure.

19.          The current and proposed direct shareholding of HoldCo.

Table 3 Cyrrebt and Proposed Shareholding

20.          The ultimate ownership before and after the Proposed Restructure:

Table 4 Proposed restructure

Other relevant facts

21.          The Shareholders:

(a)          will be residents of Australia within the meaning of the subsection 995-1(1) of the ITAA 1997 and subsection 6(1) of the ITAA 1936 for the period of the ruling, and

(b)          hold their interests in the Company on capital account.

22.          Apart from the roll-over in Subdivision 124-M of the ITAA 1997, the Shareholders will make a capital gain from a CGT event happening in relation to the exchange of their interests in the Company for shares in HoldCo under the Proposed Restructure.

23.          The Shareholders, the Company and HoldCo will be 'associates' as defined in

24.          section 318 of the ITAA 1936 just before and just after Step 1 of the Proposed Restructure.

25.          HoldCo is not a member of a wholly owned group prior to the Proposed Restructure, as defined in section 975-500 of the ITAA 1997.

26.          HoldCo will make a choice to form a consolidated group in writing and a notice documenting this choice will be given to the Commissioner in an approved form by the time HoldCo lodges the group's first consolidated income tax return or the due date pursuant to the requirements in section 703-50 of the ITAA 1997.

27.          HoldCo and the Company:

(a)          are an Australian resident, but not a prescribed dual resident, within the meanings set out in subsection 6(1) of the ITAA 1936

(b)          have their taxable income taxed at a rate equal to the general company tax rate

(c)           are not any of the entities referred to in section 703-20 of the ITAA 1997.

28.          The Proposed Restructure is not part of a broader scheme or arrangement.

29.          The pre-CGT shares in HoldCo have not stopped being a pre-CGT asset because of Division 149 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 318

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1997 section 124-782

Income Tax Assessment Act 1997 subsection 124-782(1)

Income Tax Assessment Act 1997 subsection 124-783(3)

Income Tax Assessment Act 1997 subsection 124-783(9)

Income Tax Assessment Act 1997 section 124-784A

Income Tax Assessment Act 1997 subsection 124-784A(1)

Income Tax Assessment Act 1997 subsection 124-784A(2)

Income Tax Assessment Act 1997 section 124-784B

Income Tax Assessment Act 1997 subsection 701-1(2)

Income Tax Assessment Act 1997 subsection 701-1(3)

Income Tax Assessment Act 1997 subsection 703-5(1)

Income Tax Assessment Act 1997 subsection 703-10(1)

Income Tax Assessment Act 1997 subsection 703-15(2)

Income Tax Assessment Act 1997 section 703-20

Income Tax Assessment Act 1997 section 703-50

Income Tax Assessment Act 1997 section 975-500

Income Tax Assessment Act 1997 subsection 995-1(1)

Does Part IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

Reasons for decision

All references are to the Income Tax Assessment Act 1997 unless otherwise specified.

Question 1

Is the Proposed Restructure a transaction to which section 124-784A will apply?

Summary

Section 124-784A will not apply, as the conditions in subsection 124-784A(1) are not met.

Detailed reasoning

1.            Subsection 127-784A(1) provides that section 124-784A applies in relation to a single arrangement if:

(a)          the replacement entity for the arrangement knows, or could reasonably be expected to know:

                                                  (i)          that a roll-over under section 124-780 or 124-781 has been, or will be, obtained in relation to the arrangement; and

                                                  (ii)         that there is a common stakeholder for the arrangement (disregarding subsections 124-783(4) and (5)); and

(b)          subsection 124-784(2) is satisfied for the arrangement.

2.            If section 124-784A applies, the first element of the cost base and reduced cost base of interests in the original entity acquired under the arrangement is worked out under section 124-784B

Common stakeholder for the arrangement

3.            Subsection 124-783(3) provides that an original interest holder will be a common stakeholder for an arrangement if it had a common stake in the original entity (the company) just before the arrangement started and a common stake in the replacement entity (HoldCo) just after the arrangement was completed.

4.            An entity has a common stake in a company under subsection 124-783(9) if the entity, or the entity and the entity's associates between them have shares carrying 80% or more of the voting, dividend and capital rights of the company.

5.            The Shareholders, the Company and HoldCo will be associates as defined in section 318 of the ITAA 1936 just before and just after Step 1 of the Proposed Restructure.

6.            The Shareholders own X% of the shares in the Company just before Step 1 of the Proposed Restructure.

7.            Accordingly, the Shareholders will have an associate inclusive control of X% in the Company (the original entity) just before Step 1 of the Proposed Restructure and will be common stakeholders in the Company just before the arrangement commences.

8.            Just after the arrangement is completed the replacement entity (HoldCo) shares will be owned by the Company, and the Shareholders they will have an associate inclusive control of X% in HoldCo (the replacement entity) just after Step 1 of the Proposed Restructure and there will be common stakeholders in the HoldCo just after the arrangement is completed.

9.            Accordingly, there will be a common stakeholder for the arrangement.

10.          As HoldCo is an associate, it will be an associate of all the parties involved in the arrangement, it is reasonable to conclude that it will know that there will be a common stakeholder for the arrangement and HoldCo will jointly choose to obtain the roll-over in Subdivision 124-M, the conditions are satisfied.

Subsection 124-784A(2)

11.          Subsection 124-784A(2) is satisfied if just after the completion time, the market value of the replacement interests issued by the replacement entity (HoldCo) under the arrangement, or under an earlier arrangement for which section 124-784A applied in exchange for ordinary shares in the original entity (the Company), is more than 80% of the market value of all the interests on issue by the replacement entity (HoldCo).

12.          There are existing shareholders that continue to hold more than X% of the market value of the interests in HoldCo after the issue of the replacement interests under Step 1 of the Proposed Restructure. Accordingly, the replacement interests are not more than 80% of all interests on issue by HoldCo just after Step 1 of the Proposed Restructure and the condition in subsection 124-784(2) is not satisfied.

13.          Section 124-784A will not apply, as the conditions in subsection 124-784A(1) are not met.

Cost base of the Companies shares received by Holding Company

14.          Subsection 124-782(1) provides that the cost base of an original interest (the Company shares) acquired by an acquiring entity (HoldCo) becomes the first element of the cost base or reduced cost base of the acquiring entity if the original interest holder obtains a roll-over and they were a significant or common stakeholder for the arrangement.

15.          As there is a common stakeholder for the arrangement, section 124-782 applies to determine HoldCo's cost base for the Company shares.

Question 2

Will HoldCo and the Company be eligible to form a consolidated group after completing Step 1 of the Proposed Restructure?

Summary

As HoldCo is eligible to be the head company and the Company is eligible to be a subsidiary member of the group, they fall within the meaning of a 'consolidatable group' in subsection

703-10(1) and are therefore eligible to form a consolidated group under section 703-50.

Detailed reasoning

16.          A consolidated group comes into existence when a head company makes a choice to consolidate a consolidatable group (subsection 703-5(1)).

17.          Under subsection 703-10(1), a consolidatable group consists of a single Australian resident head company and at least one wholly owned resident subsidiary member, which may be a company.

18.          Section 703-20 prevents certain types of entities from being a head company or subsidiary member of a consolidatable or consolidated group and section 703-25.

19.          The criteria for eligibility to be a head company of a consolidated group are contained in item 1 of the table in subsection 703-15(2). To be a head company, the entity must:

(a)      be a company that has all or some of its taxable income taxed at a rate equal to the general company tax rate

(b)      be an Australian resident, but not a prescribed dual resident

(c)      not be excluded from being a member of a consolidatable or consolidated group, and

(d)      not be a wholly-owned subsidiary member of a consolidated group or a group that is eligible to consolidate.

20.          On the basis that HoldCo meets the criteria contained in item 1 of the table in subsection 703-15(2), it is eligible to be the head company.

21.          The criteria for eligibility to be a subsidiary member of a consolidated group are contained in item 2 of the table in subsection 703-15(2). To be a subsidiary member, the entity must:

(a)      be a company, trust or partnership, and must not be an entity that is excluded from being a member of a consolidated group;

(b)      have some of its taxable income taxed at a rate equal to the general company tax rate, if a company;

(c)      be an Australian resident, but not a prescribed dual resident; and

(d)      be a wholly-owned subsidiary of the head company.

22.          The definition of a 'wholly-owned subsidiary' is contained in section 703-30. A subsidiary entity is wholly owned by the head company if all the membership interests in that subsidiary are beneficially owned by the head company or its wholly-owned subsidiaries, or a combination of the head company and its wholly-owned subsidiaries.

23.          The term membership interest refers to all the interests and rights that you have in a company by virtue of which you are a member.

24.          HoldCo will own X% of the share in the Company after step 1 of the Proposed Restructure.

25.          The Company meets the criteria to be a subsidiary member as it is taxed at the company tax rate; it is not one of the excluded entities listed in section 703-20 and it is an Australian resident and all of its membership interests will be owned by HoldCo.

26.          As HoldCo is eligible to be the head company and the Company is eligible to be a subsidiary member of the group, they fall within the meaning of a 'consolidatable group' in subsection 703-10(1) and are therefore eligible to form a consolidated group under section 703-50.

Question 3

In the event that the Company shares in HoldCo are post-CGT assets as a result of Division 149, will the single entity rule apply to disregard any income tax consequences as a result of Step 3 of the Proposed Restructure for both companies?

Summary

The cancellation of the Company's HoldCo shares will be treated as an intra-group dealing. Accordingly, this will not result in any income tax consequences for either the Company or HoldCo under the single entity rule if the cancellation occurs while they are members of the same consolidated group.

Detailed reasoning

27.          The single entity rule (SER) operates for the purposes set out in subsections 701-1(2) and (3) (the core purposes). These purposes are to work out the amount of the head company and subsidiary member's liability for income tax and the amount of a loss for a relevant period. They include all matters relevant and incidental to those calculations. The intended operation of the SER is to apply the income tax laws to a consolidated group as if it were a single entity.

28.          Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997 sets out the Commissioner's view on the consequences of the SER:

7. For income tax purposes the SER deems subsidiary members to be parts of the head company rather than separate entities during the period that they are members of the consolidated group.

8. As a consequence, the SER has the effect that:

(a)          the actions and transactions of a subsidiary member are treated as having been undertaken by the head company;

(b)          the assets a subsidiary member of the group owns are taken to be owned by the head company (with the exception of intra-group assets) while the subsidiary remains a member of the consolidated group;

(c)           assets where the rights and obligations are between members of a consolidated group (intra-group assets) are not recognised for income tax purposes during the period they are held within the group whether or not the asset, as a matter of law, was created before or during the period of consolidation (see also paragraph 11 and paragraphs 26-28); and

(d)          dealings that are solely between members of the same consolidated group (intra-group dealings) will not result in ordinary or statutory income or a deduction to the group's head company.

9. An example of an intra-group dealing is the transfer of a capital gains tax (CGT) asset from one group member to another. This transfer is not treated for income tax purposes as a disposal or acquisition in the hands of the head company. Although the legal transfer of the CGT asset between the subsidiary members occurs at general law, it has no income tax consequences as the group's head company is taken to be the owner of the asset both before and after the transfer.

29.          HoldCo will make a choice to form a consolidated group in writing and a notice documenting this choice will be given to the Commissioner in an approved form by the time HoldCo lodges the group's first consolidated income tax return or the due date pursuant to the requirements in section 703-50.

30.          HoldCo will then repurchase the shares the Company holds in HoldCo, likely by way of a capital reduction and cancellation.

31.          The cancellation of the Company's HoldCo shares will be treated as an intra-group dealing and accordingly will not result in any income tax consequences for either the Company or HoldCo if the cancellation occurs while they are members of the same consolidated group.