Edited version of private advice

Authorisation Number: 1052247531457

Date of advice: 31 May 2024

Ruling

Subject: CGT - roll-over relief

Question 1

Will CGT event A1 (under Subdivision 104-A) occur when a Company A shareholder disposes of their Company A shares?

Answer

Yes.

Question 2

Pursuant to subsection 104-10(3), will the time of CGT event A1 for Company A shareholders who dispose of their shares be the date they enter into a contract for the disposal of those shares?

Answer

Yes.

Question 3

Pursuant to subsection 104-10(4), will a Company A shareholder make a capital gain from CGT event A1 if the capital proceeds from the disposal of each Company A share exceed the cost base for that Company A share?

Answer

Yes.

Question 4

Pursuant to subsection 116-20(1), in respect of the Company A shares for which the Company A shareholder receives NewCo shares, will the capital proceeds from CGT event A1 happening to each of their Company A shares be the market value of the ordinary shares to be issued by NewCo in respect of the disposal of each of their Company A shares?

Answer

Yes.

Question 5

Pursuant to paragraph 116-20(1)(b), will the market value of the ordinary shares in NewCo, that the Company A shareholders receive, be worked out as at the time of CGT event A1, being the contract date?

Answer

Yes.

Question 6

Will Division 615 automatically apply to defer any capital gain or capital loss realised by a Company A shareholder as a result of the acquisition of newly issued ordinary shares in NewCo in consideration for the transfer of their Company A shares to NewCo?

Answer

Yes.

Question 7

Will subsection 124-15(3) apply so that the first element of the cost base (or reduced cost base) of each NewCo share is equal to the average cost base (or reduced cost base) of the Company A shares exchanged for the NewCo shares?

Answer

Yes.

Question 8

Will the Company A shareholders be deemed to have acquired their shares in NewCo for the purposes of the CGT discount concession at the time they acquired the shares in Company A in accordance with subsection 115-30(1)?

Answer

Yes.

Question 9

Will section 703-70 apply such that there will be no resetting in accordance with section 701-10 of the tax cost of assets of Company A that become assets of NewCo in accordance with subsection 701-1(1)?

Answer

Yes.

This ruling applies for the following period:

Year ending XX XX 20XX

Relevant facts and circumstances

Company A is a private company which is tax resident of Australia and another country and the head company of a Tax Consolidated Group (TCG).

The subsidiary members in the TCG group are:

1.    Company B which is also an Australian tax resident.

2.    Company C and D which are dormant entities and do not hold any assets.

Company A has issued X shares and there are no pre-CGT shares.

There are x shareholders in Company A and they are all tax residents of Australia.

Overview of the proposed restructure

It is intended that NewCo will be established and interposed between Company A and its x shareholders.

NewCo will be incorporated with one share on issue, to be held by a nominee shareholder (not any existing shareholders).

Proposed restructure

The shareholders will, pursuant to contract, exchange their Company A shares for newly issued ordinary shares in NewCo on a 1 for 1 basis.

NewCo will become the new holding company of the NewCo Group and the new head company of the TCG (the NewCo TCG).

The shareholders will obtain the same proportionate shareholdings in NewCo as they had in Company A.

Rationale for the restructure

Company A was incorporated (approximately 20 years ago) for the purpose of raising capital from US investors. It was previously listed on secondary "over-the counter" exchanges in the US for these purposes.

In September 2021, the shares held by the US investors in Company A were acquired by the Australian shareholders, so that Company A is now wholly owned by these Australian shareholders.

As a result of (i) the above shareholding changes; and (ii) business operations being predominately in Australia, there is a strong commercial desire for the holding company of the group to have an Australian domicile. The interposition of NewCo will also enhance the ability of the shareholders to realise the value of their shareholding investment via a 3rd party sale (should they so desire).

The proposed restructure will be undertaken to enable a transfer of the shareholding interests of the Company A shareholders from an interest in the shareholding and capital of Company A to an interest in the shareholding and capital of NewCo.

The principal assets of NewCo immediately after the completion of the restructure will be the same as Company A and the restructure will not result in any substantive change in the financial position nor the shareholding composition of the NewCo Group immediately after the completion of the restructure.

There will no new assets that will be injected into the NewCo Group pursuant to the restructure.

Assumptions

The new interposed holding company will make the choice under subsection 615-30(2) that the consolidated group continues in existence with NewCo as its head company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 104-A

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 112-115

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Division 116

Income Tax Assessment Act 1997 subdivision 124-A

Income Tax Assessment Act 1997 Division 615

Income Tax Assessment Act 1997 section 701

Income Tax Assessment Act 1997 section 703

Income Tax Assessment Act 1997 section 960

Reasons for decision

Question 1

Will CGT event A1 (under Subdivision 104-A) occur when a Company A shareholders dispose of their shares in Company A?

Summary

Yes. CGT event A1 will occur for the Company A shareholder when they dispose of their Company A shares.

Detailed reasoning

Section 102-20 states that a capital gain or capital loss is made only if a CGT event happens.

Division 104 sets out the CGT events for which you can make a capital gain or loss.

Subsection 104-10(1), relating to the disposal of a CGT asset, provides that CGT event A1 happens when you dispose of a CGT asset.

You will make a capital gain if the capital proceeds from the disposal of the shares are more than their cost base.

Under subsection 104-10(2), you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

A CGT asset is defined in section 108-5(1) of ITAA 1997 as:

(a)         any kind of property; or

(b)         a legal or equitable right that is not property.

...

Company A shareholders will exchange their Company A shares for newly issued ordinary shares in NewCo on a one-to-one basis. Provided legal ownership of these Company A shares transfers to NewCo, then CGT event A1 will happen as shares are CGT assets.

Question 2

Pursuant to subsection 104-10(3), will the time of CGT event A1 for AYSI shareholders who dispose of their shares be the date they enter into a contract for the disposal of those shares?

Summary

Yes. The time of the event, under subsection 104-10(3), is when you enter into the contract for the disposal or if there is no contract - when the change of ownership occurs.

Detailed reasoning

The time when a contract is entered into is the time when it comes into existence for general law purposes.

According to paragraph 1 of Taxation Determination TD 94/89 Income tax: capital gains: in what year of income is a taxpayer required for tax purposes to include a capital gain or loss in relation to land disposed of under a contract which is made in one year of income, but which is settled in a later year of income? (TD 94/89):

Where the contract is settled in a later year of income, a taxpayer is required to include a capital gain or loss in the year of income in which the contract is made, not in the year of income in which the contract is settled.

TD 94/89 reflects the example given in subsection 104-10(3)

Accordingly, Company A shareholders would ordinarily be required to include any capital gain in the year they entered into the contract to dispose of their Company A shares in exchange for the shares in NewCo.

Question 3

Will a Company A shareholder make a capital gain from CGT event A1 if the capital proceeds from the disposal of each Company A share exceed the cost base for that Company A share under subsection 104-10(4)?

Summary

Yes.

Detailed reasoning

Subsection 104-10(4) provides that you make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if the capital proceeds are less than the asset's reduced cost base.

Under subsection 104-10(5) a capital gain or capital loss you make is disregarded if:

(a) you acquired the asset before 20 September 1985; or

(b) for a lease that you granted:

(i) it was granted before that day; or

(ii) if it has been renewed or extended--the start of the last renewal or extension occurred before that day.

The Company A shareholders acquired their shares after 20 September 1985 and they will make a capital gain if the capital proceeds from their disposal of a Company A share is more than the share's cost base.

Question 4 and 5

Will the capital proceeds from CGT event A1 happening to each of the Company A shareholder's Company A shares be the market value of the ordinary shares to be issued by NewCo worked out at the time of CGT event A1 being the contract date?

Summary

Yes. The proceeds will be the market value of the NewCo shares that the Company A shareholder receives, at the time of the contract that is entered into to dispose of those shares.

Detailed reasoning

The capital proceeds from a CGT event are calculated in accordance with the rules set out in Division 116.

The general rule regarding capital proceeds is outlined in subsection 116-20(1) which provides that the capital proceeds from a CGT event are the total of:

(a) the money you have received, or are entitled to receive, in respect of the event happening; and

(b) the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event).

The capital proceeds in your case will be the market value of NewCo shares issued to Company A shareholders. The Company A shareholders will receive NewCo shares as consideration for disposing of their Company A shares.

Therefore, each of the shareholders of Company A will include the market value of the NewCo shares that the Company A shareholder receives.

Question 6

Will Division 615 automatically apply to defer any capital gain or capital loss realised by a Company A shareholder as a result of the acquisition of newly issued ordinary shares in NewCo in consideration for the transfer of their Company A shares to NewCo?

Summary

Yes.

Detailed reasoning

The table in section 112-115 sets out all the replacement asset roll-overs.

Item 14D in that table refers to Division 615, about the exchange of shares in one company for shares in an interposed company. Section 615-5 sets out the requirements for an entity choosing roll-over relief when it disposes of interests in one entity for shares in a company.

Subsection 615-5(1) provides 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.

The Company A shareholders own all the shares in Company A. Therefore, the requirements in subsections 615-5(1)(a) and (b) are met.

The proposed restructure will result in the exchange by the Company A shareholders of their Company A shares for NewCo shares (resulting in the interposition of NewCo between Company A and the Company A shareholders) and the requirement in subsection 615-5(c) is met.

The requirements in Subdivision 615-B are also all satisfied because:

•         Company A is the head company for the tax consolidated group prior to the proposed restructure. Under the proposed restructure NewCo will become the head company of the tax consolidated group and subsection 615-30(2) will apply.

•         Immediately after the restructure the Company A shareholders will own a whole number of shares in the interposed company (NewCo) and their ownership interest in NewCo will equal what had been their ownership interest in Company A.

•         The relevant market ratios will be met given the exchange ratio of one Company A share for one NewCo share.

•         The Company A shareholders are all Australian residents.

•         There are no redeemable shares being issued in NewCo.

Accordingly, the rollover relief will be available under Division 615 in relation to the disposal of by the Company A shareholders of their shares in Company A to NewCo.

Under subsection 615-5(2), you are taken to have chosen to obtain the roll-over if:

a)    immediately before the completion time (see section 615-15), the original entity is the head company of a consolidated group; and

b)    immediately after the completion time, the interposed company is the head company of the group.

Note: The consolidated group continues in existence because of section 703-70.

Company A is the head company of the TCG and NewCo will become the head company of the TCG, so the Company A shareholders will be taken to have chosen to obtain the roll-over.

Question 7

Will subsection 124-15(3) apply so that the first element of the cost base (or reduced cost base) of each NewCo share is equal to the average cost base (or reduced cost base) of the Company A shares exchanged for the NewCo shares?

Summary

Yes. The first element of the cost base(or reduced cost base) of each NewCo share be equal to the average cost base (or reduced cost base) of the Company A shares exchanged for the NewCo shares because one Company A share is exchanged for one share in NewCo.

Detailed reasoning

Section 615-40 says that the consequences set out in Subdivision 124-A (which applies to roll-overs covered by Division 124) also apply to a roll-over covered by Division 615. The rules for determining the cost base of new assets acquired under a roll-over are set out in Subdivision 124-A.

Section 124-15 sets out the general rules for replacement asset rollovers where your ownership of more than one CGT asset ends. If a taxpayer chooses to apply a rollover, the capital gain or capital loss from the original assets is disregarded (subsection 124-15(2)).

In this instance, all the original shares were acquired after 20 September 1985. The formula for determining the first element of the new asset's cost base is set out in subsection 124-15(3). The first element of the new asset's cost base is:

The total of the cost bases of all the original assets (worked out when your ownership of them ended) ÷ Number of new assets

Question 8

Will the existing Company A shareholders be deemed to have acquired their shares in NewCo for the purposes of the CGT discount concession at the time they acquired the relevant shares in Company A in accordance with the application of subsection 115-30(1)?

Summary

Yes. The date of acquisition of NewCo shares would be the date the Company A shareholders acquired their original Company A shares.

Detailed reasoning

Division 115 sets out when an entity may be entitled to a discount capital gain and the discount percentage.

Section 115-25(1) states that to be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event.

Note 1: Even if the capital gain results from a CGT event happening at least a year after the CGT asset was acquired, the gain may not be a discount capital gain, depending on the cause of the CGT event (see section 115-40) and the nature of the asset (see sections 115-45 and 115-50).

Note 2: Sections 115-30 or 115-34 may affect the time when the entity is treated as having acquired the CGT asset.

A "replacement-asset roll-over" is defined in section 995-1(1) to mean a replacement asset roll-over that allows you to defer the making of a capital gain or a capital loss from one CGT event until a later CGT event happens where ownership of one CGT asset ends and another one is acquired. The definition refers to a list of replacement asset rollovers in section 112-115.

Item 14D in the table in section 112-115 refers to an "exchange of shares in one company for shares in an interposed company" under Division 615.

Section 115-30 provides special rules in relation to the time of acquisition of CGT assets. Item 1 refers to CGT assets acquired through same asset roll-overs.

The date of the acquisition of NewCo shares would be the date the Company A shareholder acquired their Company A shares where roll-over relief under Division 615 is applicable.

Question 9

Will section 703-70 apply such that there will be no resetting under section 701-10 of the tax cost of assets of Company A that become assets of NewCo because of subsection 701-1(1)?

Summary

Yes. There will be no resetting of the tax cost of assets of Company A when NewCo becomes the head entity of the consolidated group.

Detailed reasoning

Subsection 615-30(2) 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:

1.    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

2.    immediately after the completion time, the interposed company is the head company of a consolidate group consisting only of itself and the other group members.

Subsection 703-70(1) states that the consolidated group is taken not to have ceased to exist under subsection 703-5(2) because the company referred in subsection 615-30(2) as the original entity ceases to be the head company of the group.

Subsection 703-70(2) states that to avoid doubt the interposed company is taken to have become the head company of the consolidated group at the completion time, and the original entity is taken to have ceased to be the head company at that time.

Section 703-80 will deal with original head entity's tax position for the income year that includes the completion time.

As the rollover relief will be available under Division 615, Newco will choose within 28 days after the completion time that the existing Company A TCG continues in existence at and after the completion time with NewCo as its head company.

Company A will cease to be the head company of the Company A TCG and Newco will be the new head company of the TCG consisting only of itself and the members of the group immediately before the completion time. The TCG will continue where Company A will be a subsidiary member of the TCG in accordance with section 703-70.

Subsection 703-70(3) states that a provision of this part that applies on an entity becoming a subsidiary member of a consolidated group does not apply to an entity being taken to have become such as member as a result of this section, unless the provision is expressed to apply despite this subsection. Subsection 701-10(1) has effect for the head company core purposes when the entity becomes a subsidiary member of the group, meaning that the members of a consolidated group are treated as a single entity for income tax purposes.

There will be no resetting of the tax cost of assets of Company A that becomes the asset of NewCo as Company A will be a member of the NewCo TCG.