Edited version of private advice

Authorisation Number: 1052285997739

Date of advice: 2 August 2024

Ruling

Subject: CGT - rollovers - transfer to wholly owned company

Question 1

Is the rollover in Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) available to each Applicant when they transfer their shares in the Company to a wholly owned private company (referred to as their NewCo)?

Answer

Yes.

Question 2

If each Applicant transfers their shares in the Company to their NewCo and chooses the rollover under subdivision 122-A of the ITAA 1997, will each Applicant be entitled to disregard any capital gain that results from disposing of their shares?

Answer

Yes.

Question 3

Will the first element of the cost base and reduced cost base of each Applicant's shares in their Newco equal the first element of the cost base or reduced cost base of the shares in the Company that the Applicant disposed of to their Newco?

Answer

Yes.

Question 4

Will the first element of the cost base and the reduced cost base of the shares in the Company that each Newco acquires equal the first element of the cost base and reduced cost base of the shares that the Applicant has transferred to their Newco?

Answer

Yes.

Question 5

Will the ATO apply Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936), to the scheme (as identified at paragraph 10 below) pursuant to which the shares in the Company are exchanged for shares in NewCo under Subdivision 122-A of the ITAA 1997?

Answer

No.

Question 6

If after each Applicant transfers their shares to their NewCo and chooses to apply the subdivision 122-A roll-over, the Company distributes its retained earnings to its shareholders (dividends), will the scheme constitute a scheme to which section 177E of the ITAA 1936 applies?

Answer

No.

Question 7

If the dividends referred to in Question 6 are franked and are paid at least 45 days after each Applicant transfers their shares to their Newco, will the franking credits be disallowed on the basis that they are paid as part of a 'dividend stripping operation' for the purposes of section 207-145 of the ITAA 1997?

Answer

No.

Question 8

Will the Commissioner make a determination under section 177EA of the ITAA 1936 denying any imputation benefit to the Applicants, or that a franking debit arises to the Company?

Answer

No.

This private ruling applies for the following period:

1 July 20XX to 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.         The Company was incorporated in Australia and is a resident of Australia for income tax purposes.

2.         The Company's current shareholders were provided to the Commissioner.

3.         The shareholders are related. The Applicants are shareholders.

4.         The Company's assets consist of amounts receivable (loans) from companies related to the Applicants and undrawn present entitlements from a related trust. The Company also owes an amount to the same related trust.

5.         The Company's retained earnings were provided to the Commissioner.

6.         The Applicants hold their shares in the Company on capital account.

7.         The Applicants are Australian residents for tax purposes.

Proposed restructure

8.         The Applicants each wish to transfer the shares that they hold in the Company to a newly incorporated wholly owned company.

9.         The purpose of the proposed restructure is succession planning. The Applicants now wish to separately deal with their share of the assets held in the Company within their own family groups.

10.      The Applicant's intend to restructure in accordance with the following steps:

•         Each Applicant will establish a new private company incorporated in Australia in which they will own all of the shares (their NewCo). The Applicant will be the sole director and shareholder;

•         Each NewCo will have only nominal assets (e.g. $1 or $2);

•         Each Applicant will transfer their shares in the Company to their NewCo in exchange for which NewCo will issue the Applicant non-redeemable shares in NewCo;

•         Each Applicant will choose to apply the rollover in subdivision 122-A of the ITAA 1997;

•         At least 45 days after the Applicants have transferred their shares in the Company to their NewCo, the Company will distribute all of its retained earnings to its shareholders in proportion to their shareholdings;

•         It is expected the dividends will be fully franked;

•         The Company will be wound up after all retained earnings have been distributed to its shareholders.

11.      In order to distribute the retained earnings to its shareholders, loans owing to the Company will be called up and paid, to the extent the cash flows of the lendees allow, or consideration will be given to the Company assigning some or all of the receivables to the shareholders in satisfaction of the distribution of retained earnings.

12.      The NewCo's will not discharge any liabilities of any of the Applicants as part of the consideration for the disposal of the Company's shares.

13.      The NewCo's will not be exempt entities and will not have exempt income.

Assumptions

14.      There are no further steps in the proposed arrangement and there will be no further rollovers or transactions that would change the actual or beneficial ownership of the membership interests in the respective new companies.

15.      Dividends, where paid by the respective new companies, will be payable directly to the relevant shareholder(s) in the capacity in which they held their respective shares in the Company.

16.      The respective new companies will have a distributable surplus under section 109Y of the ITAA 1936 sufficient to fully cover any loans made by the new companies and any such loans will be on terms that comply with the requirements of section 109N of the ITAA 1936.

Reasons for decision

Question 1

Is the rollover in Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) available to each Applicant when they transfer their shares in the Company to a wholly owned private company (referred to as their NewCo)?

Summary

Yes, each Applicant will be eligible to choose the Capital Gains Tax (CGT) roll-over in Subdivision 122-A of the ITAA 1997 when each Applicant transfers their shares in the Company to their NewCo.

Detailed reasoning

Capital gains tax roll-over relief

1.         Generally, section 122-15 in Subdivision 122-A of the ITAA 1997 allows for the roll-over of a capital gain or loss when an individual or trustee disposes of a CGT asset to a company if the conditions in sections 122-20 and 122-35 are met.

Disposal or creation of assets - wholly owned company

2.         In order for an individual or trustee to obtain roll-over relief under Subdivision 122-A of the ITAA 1997, the CGT event which triggers the capital gain or loss must be one listed in the table of section 122-15. CGT event A1, when you dispose of a CGT asset to a company, is one of the trigger events listed in the table.

3.         Under subsection 104-10(1) of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. Under subsection 104-10(2), you dispose of a CGT asset if a change of ownership occurs from you to another entity. Shares in a company are CGT assets (section 108-5 of the ITAA 1997).

Application to your circumstances

4.         The transfer of the shares in the Company by each of the Applicants to their respective NewCo will trigger CGT event A1 pursuant to section 104-10 of the ITAA 1997 as a change of ownership will occur.

5.         Therefore, section 122-15 of the ITAA 1997 will be satisfied if the conditions in sections 122-20 and 122-35 are met.

What is received for the trigger event

6.         Under subsection 122-20(1) of the ITAA 1997, the consideration received for the disposal of the shares must only be shares in the wholly owned company or, in addition to shares in the wholly owned company, the company undertaking to discharge any liabilities in respect of the shares.

7.         In addition, subsection 122-20(2) of the ITAA 1997 requires that the shares received in the wholly owned company cannot be redeemable shares.

8.         Subsection 122-20(3) of the ITAA 1997 provides that the market value of the shares received for the trigger event happening must be substantially the same as the market value of the shares disposed of, less any liabilities the company undertakes to discharge.

Application to your circumstances

9.         The consideration that each Applicant will receive for the disposal of their shares to their respective NewCo, will be shares in their NewCo.

10.      The shares in the NewCos will not be redeemable shares.

11.      We accept that the market value of the shares in the Company disposed of by each Applicant to their respective NewCo will be substantially the same as the market value of the shares they each receive in their NewCo.

12.      Thus, section 122-20 of the ITAA 1997 will be satisfied.

Other requirements that must be satisfied

13.      Section 122-25 of the ITAA 1997 lists further requirements that must also be satisfied for roll-over relief to be available under subdivision 122-A, relevantly being that:

(a)  the individual or trustee must own all the shares in the company just after the time of the disposal of their shares to the company - and they must own the shares in the same capacity as they owned the assets that the company now owns (subsection 122-25(1));

(b)  the disposal of the asset is not one listed in the table in subsection 122-25(2);

(c)   the ordinary and statutory income of the recipient company must not be exempt from income tax because it is an exempt entity for the income year the roll-over occurs (subsection 122-25(5)); and

(d)  the company and individual are Australian residents at the time of disposal (paragraph 122-25(6)(a)), or for a trustee, a resident trust for CGT purposes (122-25(7)(a)).

Application to your circumstances

14.      The Applicants will each own 100% of the shares in their NewCo just after the share transfer. They will own those shares in the same capacity as they held the shares in the Company Therefore, the requirement in subsection 122-25(1) of the ITAA 1997 will be satisfied.

15.      None of the exceptions in the table in subsection 122-25(2) of the ITAA 1997, which lists certain assets for which the roll-over is not available, apply.

16.      Subsection 122-25(5) of the ITAA 1997 will be satisfied as the ordinary or statutory income of the NewCos will not be exempt from income tax due to it being an exempt entity in the year the roll-over occurs.

17.      The residency requirement under paragraph 122-25(7)(a) of the ITAA 1997 will be satisfied as all of the Applicants are Australian residents.

Company undertakes to discharge a liability

18.      Section 122-35 of the ITAA 1997 provides additional requirements if a CGT asset has been disposed of and the company has undertaken to discharge a liability in respect of it.

Application to your circumstances

19.      Section 122-35 of the ITAA 1997 will not apply to the proposed arrangement as the arrangement does not include a discharge of liability in relation to the disposal of the shares in the Company.

Conclusion

20.      The transfer of the shares in the Company from each of the Applicants to their respective NewCo will enable the Applicants to choose to obtain a roll-over of any capital gain or loss as specified in Subdivision 122-A of the ITAA 1997. The choice to obtain roll-over relief under Subdivision 122-A does not require a specific election. The way in which the income tax return is prepared is sufficient evidence of making the choice, pursuant to subsection 103-25(2).

Question 2

If each Applicant transfers their shares in the Company to their NewCo and chooses the rollover under subdivision 122-A of the ITAA 1997, will each Applicant be entitled to disregard any capital gain that results from disposing of their shares.

Summary

Yes, if each Applicant transfers their shares in the Company to their NewCo and chooses the rollover under subdivision 122-A of the ITAA 1997, each Applicant be entitled to disregard any capital gain that results from disposing of their shares.

Reasoning

21.      Subsection 122-40(1) of the ITAA 1997 provides that if the transferor chooses to obtain a roll-over, a capital gain or loss made from the trigger event is disregarded.

Conclusion

22.      If each Applicant chooses the rollover when they transfer their shares in the Company to their NewCo, any capital gain or capital loss made on the disposal of the shares will be disregarded.

Question 3

Will the first element of the cost base and reduced cost base of each Applicant's shares in their Newco equal the first element of the cost base/reduced cost base of the shares in the Company that the Applicant disposed of to their Newco?

Summary

Yes, the first element of the cost base and reduced cost base of each Applicant's shares in their NewCo will equal the first element of the cost base/reduced cost base of the shares in the Company that each Applicant disposed of to their Newco.

Reasoning

23.      Subsection 122-40(2) of the ITAA 1997 provides that if the transferred asset was acquired by the taxpayer on or after 20 September 1985, the first element of the cost base, or reduced cost base (as appropriate) of each share received by the transferor as consideration for the transfer is the cost base or reduced cost base (as appropriate) of the asset when transferred (less any liabilities the company undertakes to discharge in respect of the asset), divided by the number of shares.

Conclusion

24.      In this case, the cost base and reduced cost base of each of the shares in the NewCo that will be received by each Applicant as consideration for the transfer of their shares in the Company is the cost base or reduced cost base (as appropriate) of the shares in the Company when transferred, divided by the number of NewCo shares received.

Question 4

Will the first element of the cost base and the reduced cost base of the shares in the Company that each NewCo acquires equal the first element of the cost base and reduced cost base of the shares that the Applicant has transferred to their NewCo?

Summary

The first element of the cost base and the reduced cost base of the shares in the Company that each NewCo acquires will be equal to the first element of the cost base and reduced cost base of the shares that the Applicant transfers to the NewCo.

Reasoning

25.      Section 122-70 sets out the consequences for the company when an asset is disposed of and the transferor chooses to obtain a roll-over under Subdivision 122-A of the ITAA 1997.

26.      Subsection 122-70(2) provides that, for assets acquired on or after 20 September 1985, the first element of the assets cost base and reduced cost base in the hands of the company, is the assets cost base and reduced cost base when the asset was transferred to the company.

Conclusion

27.      The first element of the cost base and reduced cost base of the shares in the Company in each NewCo's hands is the cost base and reduced cost base of the shares in the Company when the Applicant disposes of the shares to the NewCo.

Question 5

Will the ATO apply Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936), to the scheme (as identified at paragraph 10 of the Relevant facts and circumstances) pursuant to which the shares in the Company are exchanged for shares in NewCo under Subdivision 122-A of the ITAA 1997?

Summary

No, the ATO will not apply Part IVA of the ITAA 1936, to the scheme (as identified at paragraph 10 of the Relevant facts and circumstances) pursuant to which the shares in the Company are exchanged for shares in NewCo under Subdivision 122-A of the ITAA 1997.

Detailed reasoning

28.      Section 177D of the ITAA 1936 provides that Part IVA applies to a scheme, or any part of a scheme, entered into or carried out by a person for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme.

29.      If Part IVA applies to a scheme, the Commissioner can make a determination under section 177F to cancel the tax benefit obtained under the scheme.

30.      A conclusion about a relevant person's purpose is the conclusion of a reasonable person based on all the facts and evidence that are relevant to considering the matters outlined in subsection 177D(2).

Application to your circumstances

31.      While there is a degree of tax deferral, which can constitute a tax benefit for the purposes of section 177D, on the facts and having consideration of the matters outlined in subsection 177D(2), the tax purpose is insufficient to engage the application of the general anti-avoidance provisions in Part IVA.

Question 6

If after each Applicant transfers their shares in the Company to their NewCo and chooses to apply the subdivision 122-A roll-over, the Company distributes its retained earnings to its shareholders (dividends), will the scheme constitute a scheme to which section 177E of the ITAA 1936 applies?

Summary

The Proposed Restructure will not constitute a scheme by way of or in the nature of dividend stripping.

Detailed reasoning

32.      Section 177E is an anti-avoidance provision designed to prevent tax benefits being obtained as part of a dividend stripping scheme or a scheme with substantially the same effect as a dividend stripping scheme.

33.      Section 177E embraces a scheme which can be said objectively to have the dominant (although not necessarily exclusive) purpose of avoiding tax. Assessing the purpose of the scheme is an objective test having regard to the characteristics of the scheme and the objective circumstances in which the scheme was designed and operated.

Application to your circumstances

34.      While there is a degree of tax deferral, which can constitute a tax benefit for the purposes of section 177E, on the facts the tax purpose is insufficient to engage the application of the dividend stripping provisions in section 177E.

Question 7

If the dividends referred to in Question 6 are franked and are paid at least 45 days after each Applicant transfers their shares to their Newco, will the franking credits be disallowed on the basis that they are paid as part of a 'dividend stripping operation' for the purposes of section 207-145 of the ITAA 1997?

Summary

The Proposed Restructure is not considered a dividend stripping operation for the purposes of section 207-145 of the ITAA 1997.

Detailed reasoning

35.      Subdivision 207-F of the ITAA 1997 has the effect of cancelling the consequences of the gross-up and tax offset rules where the imputation system has been manipulated.

36.      Under paragraph 207-145(1)(d) of the ITAA 1997 recipients of a franked distribution are denied the benefits of the franking credits where the distribution is made as part of a dividend stripping operation.

37.      'Dividend stripping operation' in this context is defined in section 207-155 of the ITAA 1997 which provides:

A distribution made to a member of a corporate tax entity is taken to be made as part of a dividend stripping operation if, and only if, the making of the distribution arose out of, or was made in the course of, a scheme that:

(a)  was by way of, or in the nature of, dividend stripping; or

(b)  had substantially the effect of a scheme by way of, or in the nature of, dividend stripping.

38.      The threshold condition for the application of section 177E of the ITAA 1936, found in paragraph 177E(1)(a) of the ITAA 1936, is in substantially the same terms to section 207-155 of the ITAA 1997.

Application to your circumstances

39.      As the proposed arrangement is not a scheme by way of, or in the nature of, dividend stripping, or a scheme that has substantially the effect of a scheme by way of, or in the nature of, dividend stripping for the purpose of paragraph 177E of the ITAA 1936, it is not a dividend stripping operation for the purpose of paragraph 207-145(1)(d) of the ITAA 1997.

Question 8

If after each Applicant transfers their shares in the Company to their NewCo and chooses to apply the subdivision 122-A roll-over, the Company distributes its retained earnings to its shareholders (dividends), will the scheme constitute a scheme to which section 177EA of the ITAA 1936 applies?

Summary

The proposed restructure will not constitute a scheme to which section 177EA of the ITAA 1936 applies.

Detailed reasoning

40.      Section 177EA is a general anti-avoidance rule that supports the operation of the imputation system with the purpose of ensuring that the benefits of the imputation system flow to the economic owner of the share which is the source of the franked distribution. The section is directed at schemes involving the transfer of franking credits on a dividend from entities that cannot fully use them to entities that can. If the section applies, the Commissioner may debit the company's franking account or deny the franking credit benefit to the recipient of the dividend.

41.      Specifically, subsection 177EA(3) provides that for section 177EA to apply, the following must be present:

(a)  there is a scheme for the disposition of shares, or interest in shares, in a company (paragraph 177EA(3)(a))

(b)  a franked dividend has been paid, or is expected to be paid, directly or indirectly (paragraphs 177EA(3)(b) and (c))

(c)   the relevant taxpayer would, or could reasonably be expected to, receive imputation benefits from the distribution (paragraph 177EA(3)(d)), and

(d)  having regard to relevant circumstances of the scheme (as provided for in subsection 177EA(17)), it would be concluded that the scheme was entered into for the not-incidental purpose of enabling the relevant taxpayer to obtain an imputation benefit (paragraph 177EA(3)(e)).

Application to your circumstances

42.      In this case, the Proposed Restructure and the interposition of each NewCo, would not be considered to be a scheme the purpose of which was to enable the Applicants or the NewCos to obtain imputation benefits.

43.      Therefore, section 177EA will not apply.