Edited version of private advice

Authorisation Number: 1052248335639

Date of advice: 8 May 2024

Ruling

Subject: Roll-overs for business reorganisation

Question

Will the taxpayers be taken to have chosen rollover under Division 615 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect to the disposal of their shares in Company 1 Pty Ltd under the Restructure?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

XX/XX/20XX

Relevant facts and circumstances

Company 1 is an Australian resident company. The Company was founded in XXX as a software consulting company. In XXXX, the Company expanded into Asia and Europe to become a global independent software vendor.

Company 1 is the head company of a tax consolidated group consisting of wholly owned subsidiaries in Australian, Europe, Asia and North and South America.

Company 1 has XX million shares on issue, all of which are ordinary class shares.

It is proposed that a new holding company (Holdco) will be interposed between Company 1 and its Shareholders (the Restructure). Holdco will be incorporated as a new Australian proprietary company. The constitution of Holdco will not differ materially from the constitution of Company 1.

Under the Restructure, Holdco will enter into an agreement with the Shareholders (Restructure Deed) pursuant to which Holdco will acquire all of the issued shares in Company 1 (Sale Shares). As consideration for the acquisition of the Sales Shares, Holdco will issue fully paid ordinary shares (Consideration Shares) to the Shareholders on a one for one basis and nothing else. Each Company 1 shareholder will own the Consideration Shares in Holdco in the same proportion that they held their shares in Company 1.

The share capital of Company 1 consists solely of the Sale Shares. Company 1 has no options, performance rights or any other securities on issue, and has not agreed to issue any shares, options, performance rights or other securities.

Immediately prior to the Restructure, the initial capital of Holdco consists solely of X ordinary shares (existing shares). The existing shares have nominal value and have the same rights as the ordinary Consideration Shares. The existing shares are held by Company2 immediately before and after the restructure completion. Holdco has no options, performance rights or any other securities on issue.

Immediately after the Restructure Completion:

•         the share capital of Holdco will consist of the existing shares and the same number of fully paid ordinary shares as the number of Sale Shares it acquired.

•         Holdco will be the head company of a tax consolidated group consisting of itself and the members of Company 1 consolidated group.

Completion of the Restructure will be when the completion of the sale, purchase and transfer of the Sale Shares occurs.

Relevant legislative provisions

Income Tax Assessment Act 1936 paragraph 160ZZPA(1)(k)

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(4)

Income Tax Assessment Act 1997 subsection 116-20(1)

Income Tax Assessment Act 1997 paragraph 116-20(1)(b)

Income Tax Assessment Act 1997 Division 615

Income Tax Assessment Act 1997 subsection 615-5(1)

Income Tax Assessment Act 1997 paragraph 615-5(1)(a)

Income Tax Assessment Act 1997 paragraph 615-5(1)(b)

Income Tax Assessment Act 1997 paragraph 615-5(1)(c)

Income Tax Assessment Act 1997 subsection 615-5(2)

Income Tax Assessment Act 1997 Subdivision 615-B

Income Tax Assessment Act 1997 section 615-15

Income Tax Assessment Act 1997 subsection 615-20(1)

Income Tax Assessment Act 1997 paragraph 615-20(1)(a)

Income Tax Assessment Act 1997 paragraph 615-20(1)(b)

Income Tax Assessment Act 1997 subsection 615-20(2)

Income Tax Assessment Act 1997 subsection 615-20(3)

Income Tax Assessment Act 1997 paragraph 615-20(3)(a)

Income Tax Assessment Act 1997 section 615-25

Income Tax Assessment Act 1997 subsection 615-25(1)

Income Tax Assessment Act 1997 subsection 615-25(2)

Income Tax Assessment Act 1997 subsection 615-25(3)

Income Tax Assessment Act 1997 paragraph 615-25(3)(b)

Income Tax Assessment Act 1997 subsection 615-30(2)

Income Tax Assessment Act 1997 section 615-40

Income Tax Assessment Act 1997 section 960-130

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.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for decision

CGT event A1 will happen when you disposed of your Company 1 shares in exchange for Holdco shares.[1] The timing of CGT event A1 will be when you execute the transfer of the Sale Shares to Holdco.

The capital proceeds in respect of CGT event A1 happening will be the market value of Holdco shares you received as consideration for each Company 1 share exchanged.[2] The market value of Holdco shares you received is worked out at the time CGT event A1 happens.[3]

You will make a capital gain from CGT event A1 happening if the capital proceeds from the disposal of a Company 1 share exceeds the cost base of that share. Conversely, you will make a capital loss if the capital proceeds from the disposal of a Company 1 share is less than the reduced cost base of that share. [4]

Division 615 roll-over

Division 615 provides for a roll-over where a taxpayer owns shares in a company or units in a unit trust (the original entity) which is restructured with the result that the taxpayer becomes the owner of new shares in another company (the interposed company) and the interposed company owns all the shares or units in the original entity. The effect of the roll-over is that the capital gains or capital losses you make under the restructure will be deferred.

You can choose to obtain the roll-over if the conditions in subsection 615-5(1) are satisfied:

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

b)            at least two entities must own all the shares in the original entity; and

c)            there must be a scheme for reorganising the original entity's affairs, and consideration for the disposal of the shares in the original entity must consist only shares in another company (the interposed company) and nothing else; and

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

The Restructure involves interposing Holdco between Company 1 and the Shareholders. Under a scheme set out in the Restructure Deed, each Shareholder agreed to sell their shares in Company 1 to Holdco for consideration consisting of only ordinary shares in Holdco on a one for one basis and nothing else.

A 'member', in relation to an entity, has the meaning given by section 960-130 which states that where an entity is a company, a stockholder is a member of the company. Each shareholder of Company 1 is therefore, a member and between them, the Shareholders own all the shares in Company 1. Therefore, the conditions set out in paragraphs 615-5(1)(a) to (c) are satisfied.

Requirements in Subdivision 615-B

Subdivision 615-B sets out other requirements which must be satisfied to be eligible to choose to obtain the roll-over under Division 615. Each relevant requirement within Subdivision 615-B is considered below.

Interposed company must own all the original interests

Section 615-15 states '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.'

The 'completion time' will be the time when the Restructure is completed, being the date on which the sale, purchase and transfer of the Sale Shares occurs.

Immediately after the completion time, Holdco will own all of the shares in Company 1. Therefore, this requirement will be satisfied.

A whole number of shares in the same proportion

Subsection 615-20(1) states:

Immediately after the completion time, each exchanging member must own:

(a)          a whole number of *shares in the interposed company; and

(b)          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 in the original entity that were:

             (i)    owned by the member; and

             (ii)    disposed of, redeemed or cancelled under the *scheme.

Pursuant to the Restructure Deed, the Shareholders will receive one share in Holdco in exchange for each Company 1 share that they disposed under the scheme. This means, each Shareholder will own a whole number of shares in Holdco immediately after the completion time. Therefore, the requirement in paragraph

615-20(1)(a) will be satisfied.

Paragraph 615-20(1)(b) requires each Shareholder's percentage of replacement shares in Holdco must equal the percentage of shares they owned in Company 1. This requires a comparison of the proportion held by each exchanging shareholder of the replacement shares issued in the interposed company with the proportion of original shares held by that exchanging shareholder. The replacement shares for the purpose of working out the proportion is all the shares on issue in the interposed company at the completion time, subject to the exception set out in paragraph 615-25(3)(b).[5]

In this regard, Taxation Ruling TR 97/18 Income tax: capital gains: roll-over relief following reorganisation of the affairs of a unit trust or company - sections 160ZZPA, 160ZZPB, 160ZZPC and 160ZZPD (TR 97/18) considers aspects of a CGT roll-over under a predecessor provision in the Income Tax Assessment Act 1936 (ITAA 1936) with the same policy intent as Division 615. Paragraph 81 of TR 97/18 states:

Paragraph 160ZZPA(1)(k) requires a comparison to be made of the number of units held by the exchanging taxpayer to the total number of units in the unit trust... The time at which the proportion of each exchanging taxpayer's units to the total units in the unit trust for the purposes of this comparison is determined, is immediately before the earliest exchanging taxpayer's disposal time, being the only practical and reliable time. At any earlier time, there may be persons holding units that affect the relevant proportions who will not be disposing of those units under the scheme. Any time after the earliest exchanging taxpayer's disposal time and before the completion time would produce proportions that are distorted by the earlier disposals of exchange units by exchanging taxpayers.

Based on the above, the time at which the proportions are worked out is immediately before the first Sale Share is disposed of by a Shareholders under the Restructure scheme.

In accordance with the Restructure Deed, each of the Shareholders will receive shares in Holdco in their respective proportion that is equal to the percentage of the shares in Company 1 they originally owned and disposed of under the Restructure. As such, the requirement in paragraph 615-20(1)(b) will be satisfied.

Market value ratios

Subsection 615-20(2) states:

The following ratios must be equal:

(a)          the ratio of:

             (i)    the market value of each exchanging member's shares in the interposed company; to

             (ii)    the market value of the shares in the interposed company issued to all exchanging members (worked out immediately after the completion time);

(b)          the ratio of:

             (i)    the market value of that member's shares or units in the original entity that were disposed of, redeemed or cancelled under the scheme; to

             (ii)    the market value of all the shares or units in the original entity that were disposed of, redeemed or cancelled under the scheme (worked out immediately before the first disposal, redemption or cancellation).

The exchange ratio of Company 1's shares for Holdco's shares is one for one. In total, there are XXX million ordinary shares in Company 1, all having the same rights. Holdco will acquire all the shares in Company 1 and in exchange Holdco will issue fully paid ordinary shares to the Shareholders on a one for one basis and nothing else. It follows that the proportionate market value of the interest of each Shareholder in Holdco immediately after the completion time will be the same as the proportionate market value of the prior interest that was held by the Shareholder in Company 1 immediately before the first disposal of the Sale Shares. As continuity of market value will be preserved, the requirements in subsection 615-20(2) will be satisfied.

Residency

Subsection 615-20(3) states:

Either:

(a)          you are an Australian resident at the time your *shares or units in the original entity are disposed of, redeemed or cancelled under the *scheme; or

(b)          if you are a foreign resident at that time:

             (i)    your shares or units in the original entity were *taxable Australian property immediately before that time; and

             (ii)    your shares in the interpose company are taxable Australian property immediately after the completion time.

You have stated that not all Shareholders are residents of Australia for tax purposes at the time their shares in Company 1 will be disposed of under the Restructure. Accordingly, for the shareholders who are Australian residents, the requirement in paragraph 615-20(3)(a) will be satisfied.

For the shareholders who are not an Australian resident, they must satisfy the requirements in paragraph 615-20(3)(b). If the non-resident shareholders do not satisfy requirements in paragraph 615-20(3)(b), they will not be eligible to choose to obtain a roll-over notwithstanding all other requirements for roll-over being satisfied.

Requirements relating to the interposed company

Section 615-25 imposes requirements specifically relating to the interposed company. Subsection

615-25(1) states that shares in the interposed company must not be redeemable shares. Holdco will issue ordinary shares to the Shareholders in exchange for their shares in Company 1. Therefore, this condition will be satisfied.

Subsection 615-25(2) requires 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. The completion time will be when the completion of the sale, purchase and transfer of the Sale Shares occurs. This condition will be satisfied as each of the shareholders, being the exchanging members who will be issued Holdco shares, will have held those shares from the time they were issued until at least the completion time.

Additionally, subsection 615-25(3) requires that immediately 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 is such that it is reasonable to treat the exchanging members as owning all the shares.

The exception in paragraph 615-25(3)(b) permits entities other than the exchanging members to own up to 5 shares in the company, provided that based on the relative market values of shares, it is reasonable to treat the exchanging members as owning all of the shares.

Immediately after the completion time the Shareholders will own all of the shares in Holdco, other than the existing shares held by Company 2 prior to the Restructure. Company 2 is not an exchanging member under the Restructure and all shares issued in Holdco will have the same rights. Immediately after the completion time, Holdco will have XXX million shares on issue. As such, the existing shares held by Company 2 will only have a nominal value such that it is reasonable to treat the exchanging members as owning all the Holdco shares. Accordingly, the condition in paragraph 615-25(3)(b) will be satisfied.

Choice to be made by the interposed company

If the original entity was the head company of a consolidated group, and the interposed company becomes the head company of a consolidatable group after the restructure, subsection 615-30(2) requires the interposed company to choose that the consolidated group continues to exist. The group comprises of the interposed company and only the members of the group that exist immediately before the completion time. The choice is irrevocable and must be made within 28 days after the completion time, or such further time as the Commissioner allows.[6] You stated that Holdco will make a choice within the required time that the consolidated group continues to exist after the completion of the Restructure with itself as the head company. Therefore, the requirement in subsection 615-30(2) will be satisfied.

Conclusion

As each of the basic conditions under subsection 615-5(1) and each of the further conditions under Subdivision 615-B are satisfied:

(a)          you will be taken under subsection 615-5(2) to have chosen to obtain a roll-over because:

•               immediately before the completion time, Company 1 will be the head company of the tax consolidated group, and

•               immediately after the completion time, Holdco will be the head company of the tax consolidated group.

(b)          you will be eligible to choose to obtain a roll-over to disregard the capital gains or capital loss resulting from the disposal of their shares under the proposed Restructure.

(c)           Holdco will make a choice within the required time that the consolidated group continues to exist after the completion of the Restructure with itself as the head company.

[1] Section 104-10

[2] Subsection 116-20(1)

[3] Paragraph 116-20(1)(b)

[4] Subsection 104-10(4)

[5] Paragraph 59 of TR 97/18

[6] Subsection 615-30(3)