Edited version of private advice

Authorisation Number: 1052206088577

Date of advice: 20 December 2023

Ruling

Subject: CGT - roll-over subdivision

Question 1

Will you be able to choose to obtain the roll-over in Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) to the transfer of shares you hold in Company A to a new company (Company X) in which you will hold 100% of the ordinary shares?

Answer

Yes.

Question 2

Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) (Part IVA) apply to cancel the tax benefit you obtain if you choose to apply the roll-over in Subdivision 122-A of the ITAA 1997 to disregard any capital gain or loss that arises from the transfer of your shares in Company A to Company X?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You are a natural person and an Australian resident for income tax purposes.

Company A is an Australian resident company for income tax purposes that was incorporated in Australia.

You currently hold X ordinary shares in Company A which you acquired on incorporation of Company A. These shares are beneficially held by you and represent X% of the total shares issued by Company A.

All shares on issue in Company A are ordinary class shares, with each share having equal rights and value to all other ordinary shares.

The Company A shares are held by you on capital account.

The cost base of your shares in Company A is $X.

Company A derives business income each year, which is subject to tax at corporate rates. It is not an exempt entity for income tax purposes.

Company X has not yet been incorporated; however, upon incorporation you will own 100% of the ordinary shares in it.

Company X will acquire 100% of your shares in Company A.

A portion of the annual after-tax profits derived by Company A are paid to the shareholders each year by way of fully franked dividends.

It is your intention that the earnings from the shares will be retained in Company X until such time as it is considered appropriate to declare and pay a dividend.

Assumptions

1. There are no further steps in the proposed arrangement and there will be no further roll-overs or transactions/loans that would change the actual or beneficial ownership of the membership interests in Company X.

2. Any future loans from Company X to its shareholders will be on commercial terms that would satisfy section 109N of the ITAA 1936.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 Subdivision 122-A

Reasons for decision

Question 1

As you will satisfy all the requirements you can choose to obtain a roll-over under Subdivision 122-A of the ITAA 1997 and any capital gain or capital loss that arises from the transfer of your shares in Company A to Company X will be disregarded under subsection 122-40(1) of the ITAA 1997.

Detailed reasoning

Subdivision 122-A of the ITAA 1997 sets out when you can choose to obtain a roll-over if you transfer a capital gains tax (CGT) asset to a company.

You can choose to obtain a roll-over if one of the CGT events (the trigger event) specified in the table in section 122-15 of the ITAA 1997 happens involving you and a company in the circumstances set out sections 122-20 and 122-25 of the ITAA 1997 (section 122-15 of the ITAA 1997).

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

(a)  shares in the company, or

(b)  for a disposal of a CGT asset to the company - shares in the company and the company undertaking to discharge one or more liabilities in respect of the asset (section 122-20 of the ITAA 1997).

Section 122-25 of the ITAA 1997 contains further conditions that must be satisfied before roll-over can be chosen. Relevantly these are:

•         the transferor must own all of the shares in the company just after the disposal of the asset (subsection 122-25(1) of the ITAA 1997)

•         under item 1 in the table in subsection 122-25(2) of the ITAA 1997 roll-over relief does not apply to the disposal or creation of any of the following assets:

o   a collectable or personal use asset

o   a decoration awarded for valour or brave conduct (except if you paid money or gave any other property for it)

o   a precluded asset, such as a depreciating asset, trading stock or a registered emissions unit, as defined in subsection 122-25(3) of the ITAA 1997

o   an asset that becomes trading stock of the company just after the disposal, or

o   an asset that becomes a registered emissions unit held by the company just after the disposal.

•         if:

o   the CGT asset is a right, option, convertible interest or exchangeable interest, and

o   the company acquires another CGT asset by exercising the right or option or by converting the convertible interest or in exchange for the disposal or redemption of the exchangeable interest

•         the other asset cannot become trading stock of the company just after the company acquired it (subsection 122-25(4) of the ITAA 1997).

•         the company must not be an exempt entity (subsection 122-25(5) of the ITAA 1997).

•         If you are an individual at the time of the trigger event, either:

o   you and the company must both be Australian residents at that time, or

o   both of the following requirements must be satisfied:

§  each asset must be taxable Australian property at that time, and

§  the shares in the company mentioned in subsection 122-20(1) must be taxable Australian property just after that time (subsection 122-25(6) of the ITAA 1997).

In your case, you can choose to obtain a roll-over under Subdivision 122-A of the ITAA 1997 because:

•         CGT event A1 will happen when you dispose of your shares in Company A to Company X

•         as Company X will not provide any consideration for the transfer of the shares there is no need to consider the application of section 122-20 of the ITAA 1997

•         you will be the sole shareholder in Company X just after the time of the trigger event (that is, the disposal of the shares in Company A to Company X)

•         the shares in Company A are not one of the assets included in the table in subsection 122-25(2) of the ITAA 1997 nor are they a right, option, convertible interest or exchangeable interest

•         Company X will not be a tax exempt entity and all income derived by Company X will be subject to income tax in Australia, and

•         you and Company X will be Australian residents at the time of the share transfer.

Additional information

The cost base of the shares in Company X is worked out in accordance with subsection 122-40(2) of the ITAA 1997 and section 122-70 of the ITAA 1997 outlines the consequences for Company X.

Question 2

Summary

Choosing to apply the roll-over in Subdivision 122-A of the ITAA 1997 is a choice expressly provided for under the ITAA 1997 and no steps are required to be taken or circumstances created to enable you to be able to choose the roll-over. As such, any tax benefit gained from applying the Subdivision 122-A roll-over will be excluded from Part IVA.

Detailed reasoning

Practice Statement Law Administration PS LA 2005/24 Application of General Anti-Avoidance Rules (PS LA 2005/24) provides practical guidance on the application of Part IVA.

Part IVA is a general anti-avoidance provision which gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. This power is found in subsection 177F(1) of the ITAA 1936 (paragraph 44 of PS LA 2005/24).

Before the Commissioner can exercise the power in subsection 177F(1) of the ITAA 1936, the requirements of Part IVA must be satisfied. These requirements are that:

•         a 'tax benefit', as identified in section 177C of the ITAA 1936, was or would, but for subsection 177F(1) of the ITAA 1936, have been obtained

•         the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A of the ITAA 1936, and

•         having regard to section 177D of the ITAA 1936, the scheme is one to which Part IVA applies.

For Part IVA of the ITAA 1936 to apply, the identified scheme must fall within the wide definition of 'scheme' in subsection 177A(1) of the ITAA 1936 (paragraph 55 of PS LA 2005/24). 'Scheme' is defined as any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and any scheme, plan, proposal, action, course of action or course of conduct.

The breadth of what may constitute a scheme reflects the objective nature of the inquiry to be made under Part IVA. The scheme ultimately matters only in the context of whether there is a tax benefit obtained by the taxpayer in connection with the scheme for which the conclusion in subsection 177D(2) of the ITAA 1936 can be reached (paragraph 62 of PS LA 2005/24).

Under subsection 177C(1) of the ITAA 1936, the definition of tax benefit includes the non-inclusion of income that would otherwise have been included in the assessable income of a taxpayer in a year of income, had the scheme not been entered into or carried out.

Relevantly, subsection 177C(2) of the ITAA 1936 excludes a tax benefit from Part IVA where:

•         the tax benefit is attributable to the making of a choice expressly provided for under the ITAA 1936 or the ITAA 1997 (other than an agreement or election specifically dealt with by subsection 177C(2A) of the ITAA 1936), and

•         the relevant scheme was not entered into or carried out by any person for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable the choice to be made (paragraph 69 of PS LA 2005/24).

In your case, it is considered that the proposed transaction to transfer the shares in Company A from you to Company X falls within the definition of a scheme as described in subsection 177A(1) of the ITAA 1936. However, it is considered that there is nothing in the scheme that is being carried out for the purpose of creating any circumstances necessary to enable the choice to be made. That is, the roll-over is specifically provided for under Subdivision 122-A of the ITAA 1997. Any steps taken are taken solely to ensure compliance with the specific steps required to apply the roll-over.

As such, any tax benefit gained from applying the Subdivision 122-A roll-over will be excluded from Part IVA.

Additional information

Taxation Determination TD 95/4 Income tax: does the simple disposition of an income producing asset by a natural person to a wholly owned private company constitute the carrying out of a scheme to which Part IVA of the Income Tax Assessment Act 1936 will be applied? (TD 95/4) provides that, of itself, the simple disposition of an income producing asset by a natural person to a wholly owned private company is not an arrangement to which the Commissioner will seek to apply Part IVA.

TD 95/4 further provides that it should be noted however, that where there are other associated transactions, transfers or arrangements, whether antecedent or subsequent, the disposition will be examined within that broader context, and it may be concluded that Part IVA of the Act should be applied.