Edited version of private advice

Authorisation Number: 1052303245394

Date of advice: 11 September 2024

Ruling

Subject: CGT - assessable income

Question 1

Did former section 160ZZN of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the transfer of goodwill from A and B (the Taxpayers), in their capacity as partners in a partnership, to ABC Pty Ltd (ABC)?

Answer 1

No.

Question 2

Is the capital gain made by the Taxpayers on the disposal of their shares in ABC in the 2022 income year disregarded on the basis that they are pre-CGT assets pursuant to former paragraph 160ZZN(7)(a) of the ITAA 1936?

Answer 2

No.

Question 3

Did CGT event K6 under subsection 104-230(1) of the Income Tax Assessment Act 1997 (ITAA 1997) happen when the Taxpayers disposed of their shares in ABC in the 2022 income year?

Answer 3

No.

This ruling applies for the following period

Year ended 30 June 20XX

Relevant facts and circumstances

The taxpayers

1.            The Taxpayers are spouses. In the late 19XXs, the Taxpayers lived overseas for approximately 5 years. During this time, they worked at a university.

2.            The Taxpayers returned to Australia in December 19XX with the intention of residing in Australia permanently. Since that date, the Taxpayers have continued to live in Australia and were residents of Australia for tax purposes after 19 September 19XX when the relevant transaction occurred (described further below).

The partnership

3.            Since before XX September 19XX, the Taxpayers carried on a business. The business was conducted as a partnership by the Taxpayers (the Partnership) who held equal interests in the Partnership.

4.            The capital to commence the business was contributed by them equally, from their joint savings. The income of the Partnership was deposited into, and expenses of the Partnership were paid from, a joint bank account in the joint names of the Taxpayers. The Taxpayers each reported 50% of the Partnership profits in their personal income tax returns.

5.            The Taxpayers were both actively involved in the operation and management of the Partnership business and jointly made all operational and strategic decisions. A worked in the business full time. B's time commitment varied but on average was approximately 80% of a full-time load.

ABC

6.            On a date after XX September 19XX, ABC was incorporated in Australia by a colleague of the Taxpayers.

7.            Between the date of incorporation and X August 19XX, ABC did not operate and on X August 19XX did not have any value.

Transfer of partnership assets to ABC

8.            On X August 19XX:

(i)            Prior to the transfer of the Partnership assets to ABC, the Taxpayers each acquired 1 ordinary share in ABC (being all of the share capital) for 'a nominal amount'.

(ii)           Subsequent to the acquisition of the ABC shares, the assets of the Partnership were then transferred to ABC. These assets were largely acquired before 20 September 1985 and comprised of goodwill, office furniture and equipment, field equipment and reference books and materials.

(iii)          The business ceased to be carried on by the Partnership and commenced to be carried on by ABC.

9.            The Taxpayers did not receive any consideration for the transfer of the Partnership assets to ABC. No additional shares in ABC were issued to the Taxpayers in connection with the transfer of the Partnership assets on X August 19XX or after this date.

Election under former subsection 160ZZN(2)(d) of the ITAA 1936

10.         The election required by former paragraph 160ZZN(2)(d) of the ITAA 1936 was not provided to the Commissioner at the time of the transfer of the Partnership assets. The Taxpayers have no record of providing the Commissioner with the written notice and have stated that they "inadvertently failed to lodge the election at the time of the transfer, though it was always the intention that section 160ZZN apply".

Sale of ABC shares

11.         Between X August 19XX and the 20XX income year, ABC carried on a business and there were no changes to the shareholding of the company.

12.         In the 20XX income year, the Taxpayers sold their shares in ABC to an unrelated third party for consideration of $X. The excess of the consideration received by the Taxpayers over the market value of the net assets (being $X) was $X which the Taxpayers have attributed to the goodwill in ABC.

Relevant legislative provisions

Income Tax Assessment Act 1936 former section 160B

Income Tax Assessment Act 1936 former subsection 160M(1)

Income Tax Assessment Act 1936 former section 160ZZN

Income Tax Assessment Act 1936 former subsection 160ZZN(1)

Income Tax Assessment Act 1936 former subsection 160ZZN(2)

Income Tax Assessment Act 1936 former paragraph 160ZZN(2)(a)

Income Tax Assessment Act 1936 former subparagraph 160ZZN(2)(a)(i)

Income Tax Assessment Act 1936 former paragraph 160ZZN(2)(b)

Income Tax Assessment Act 1936 former paragraph 160ZZN(2)(ba)

Income Tax Assessment Act 1936 former paragraph 160ZZN(2)(c)

Income Tax Assessment Act 1936 former paragraph 160ZZN(2)(ca)

Income Tax Assessment Act 1936 former paragraph 160ZZN(2)(d)

Income Tax Assessment Act 1936 former subsection 160ZZN(4)

Income Tax Assessment Act 1936 former subsection 160ZZN(5A)

Income Tax Assessment Act 1936 former subsection 160ZZN(7)

Income Tax Assessment Act 1936 former paragraph 160ZZN(7)(a)

Income Tax Assessment Act 1936 former section 160ZZNA

Income Tax Assessment Act 1997 section 1-3

Income Tax Assessment Act 1997 subsection 104-230(1)

Income Tax Assessment Act 1997 section 112-105

Income Tax Assessment Act 1997 Subdivision 122-A

Income Tax Assessment Act 1997 section 122-20

Income Tax Assessment Act 1997 subsection 122-20(1)

Income Tax Assessment Act 1997 subsection 122-20(2)

Income Tax Assessment Act 1997 section 122-40

Income Tax Assessment Act 1997 subsection 122-40(2)

Income Tax Assessment Act 1997 subsection 122-40(3)

Income Tax Assessment Act 1997 Subdivision 122-B

Income Tax Assessment Act 1997 Subdivision 152-E

Act Interpretation Act 1901 section 15AA

Reasons for decision

All subsequent legislative references are to the ITAA 1936, unless otherwise indicated.

Question 1

Summary

No. Not all the conditions required to access the roll-over under former section 160ZZN were satisfied, namely former paragraph 160ZZN(2)(d) which required the Taxpayers to provide written notice of the election to apply the roll-over to the Commissioner on or before the date of lodgment of the tax return of the Taxpayers for the year of income in which the disposal of the roll-over asset took place, or within such further period as the Commissioner allows.

Written notice of the election was not provided to the Commissioner at the required time and the Commissioner will not exercise the discretion to extend time to make this election to enable the Taxpayers to satisfy the requirements under former paragraph 160ZZN(2)(d). As a consequence, the roll-over under former section 160ZZN did not apply to the disposal of the Taxpayers' interests in the goodwill of the Partnership to ABC that occurred on X August 19XX.

Detailed Reasoning

Former section 160ZZN applies

Since the disposal of the assets on X August 19XX occurred before the 1999 income year, Subdivisions 122-A and 122-B of the ITAA 1997 do not apply. The provisions of former section 160ZZN (transfer of asset to wholly-owned company) and former section 160ZZNA (transfer of partnership assets to wholly-owned company), were instead applicable.

Even though former subsection 160ZZNA specifically applied to the transfer of partnership assets to companies, the provision only applied to disposals after 6 December 1990. Therefore, former subsection 160ZZN was the relevant roll-over to consider in respect of the transfer.

Former section 160ZZN - transfer of asset to wholly-owned company

Former section 160ZZN provided roll-over relief where an asset (other than a personal-use asset) was transferred by an individual, partnership or a trustee of a trust to a wholly-owned company.

A personal-use asset was defined in former section 160B to include an asset owned by the taxpayer and used or kept primarily for the personal use or enjoyment of the taxpayer or his/her associates, a debt owed to the taxpayer in respect of an asset that was formerly a personal-use asset of the taxpayer and an option or right to acquire an asset that would be a personal-use asset.

Former section 160ZZN was intended to apply to the transfer of partnership assets to a company. This is supported by references to 'partnership' in former section 160ZZN as well as the Explanatory Memorandums (EM) to amending legislation associated with former section 160ZZN during its history.

The EM to Income Tax Assessment Amendment (Capital Gains) Bill 1986 that introduced former section 160ZZN provided that:

Section 160ZZN, in broad terms, permits a roll-over in circumstances where a change occurs in the legal ownership of assets but not in their underlying ownership. It contains measures to provide roll-over relief where an individual, partnership or trust transfers an asset (other than a personal-use asset) to a company solely in exchange for stock or securities of the company and immediately after the transfer beneficially owns 100 per cent of the shares in the company or, in the case of a partnership, the partners beneficially own shares in the company in the same proportion as their interests in the partnership immediately before the disposal...

The EM to Taxation Laws Amendment Bill (No.6) 1990 which introduced section 160ZZNA and repealed the former provisions within section 160ZZN relating to the transfer of partnership assets also stated:

Section 160ZZN provides rollover relief (i.e. deferral of tax on accrued gains or retention of CGT-exempt status for pre 20 September 1985 assets) on the transfer of assets by a taxpayer (other than a company) to a wholly-owned company for consideration consisting only of shares or securities in that company. The section is also intended to apply on the transfer of partnership assets to a company, as specifically contemplated in paragraph 160ZZN(2)(ca) and subsection 160ZZN(6). (Those two provisions are being deleted by clause 57 of the Bill.)

Since the section was inserted in the Act, some uncertainty about its application has arisen. This is because the section contemplates that the transferor taxpayer is the partnership, yet rollover relief is provided to the individual partners who, following the transfer of assets, are shareholders in the transferee company.

Consistent with the approach adopted in Taxation Ruling IT 2540 Income tax: capital gains: application to disposals of partnership assets and partnership interests to treat partners, rather than a partnership, as the owners of partnership assets for CGT purposes, we consider roll-over was available under former section 160ZZN if all of the partners in a partnership transferred their interest in a partnership asset to a company wholly owned by the partners in the same proportion as the interests transferred. In a partnership context, the roll-over asset referred to in former section 160ZZN is all of the interests of the partners in a particular asset.

The conditions necessary to obtain the roll-over where the transferor was an individual or a partner in a partnership were contained in former subsection 160ZZN(2).

Former paragraph 160ZZN(2)(a) - residency of transferor and company

The taxpayer was required to satisfy one of the 4 subparagraphs in former subsection 160ZZN(2).

The first subparagraph required a taxpayer (other than a company or a trustee of a trust) who is a resident of Australia to dispose of an asset (the roll-over asset) to a company that is resident of Australia.

In this case, the roll-over asset was each Taxpayer's interest in the goodwill of the Partnership business (a partnership asset) which was not a personal-use asset.

Former subsection 160M(1) states that where a change has occurred in the ownership of an asset, this change is deemed to have effected a disposal of the asset. The Taxpayers each transferred their ownership interests in the goodwill of the Partnership to ABC and this constituted a disposal of the asset. Both the Taxpayers and ABC were residents of Australia at the time of the disposal. Therefore, the condition under former subparagraph 160ZZN(2)(a)(i) was satisfied.

Former paragraph 160ZZN(2)(b) - consideration must be shares or securities

For a disposal that occurred on or before 15 August 1989, former paragraph 160ZZN(2)(b) required that 'the consideration in respect of the disposal consists only of shares in or securities of the company'.

The critical facts are as follows:

•                     the Taxpayers each acquired their shares in ABC on X August 19XX before they transferred the assets of the Partnership (including the roll-over asset) to ABC;

•                     the Taxpayers did not receive any consideration for the transfer of the assets (including the roll-over asset) to ABC and no shares in ABC were issued to the Taxpayers as consideration for the transfer of any of the assets (including the roll-over asset); and

•                     no other consideration was paid by ABC.

Subsections 122-20(1) and 122-20(2) of the ITAA 1997 provide:

122-20(1)

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

(a)          shares in the company; or

(b)          for a disposal of a CGT asset, or all the assets of a business, to the company (a disposal case) - shares in the company and the company undertaking to discharge one or more liabilities in respect of the asset or assets of the business (as appropriate).

122-20(2)

The shares cannot be redeemable shares.

Subsections 122-20(1) and (2) of the ITAA 1997 are considered to be the successor provisions to former paragraph 160ZZN(2)(b) on the basis that they are the rewritten form of former paragraph 160ZZN(2)(b) and express the same idea in a different form of words.[1] Therefore, interpretations given by the Commissioner on former section 160ZZN or its rewritten form (i.e. Subdivision 122-A of the ITAA 1997) are relevant and applicable to the interpretation of either provisions.

In ATO ID 2004/94: Income Tax: Capital gains tax: Subdivision 122-A rollover: no consideration received (ATO ID 2004/94), the Commissioner expresses his view that subsection 122-20(1) of the ITAA 1997 does not specifically require that consideration must be provided in respect of the transfer. Rather, the requirement is that where consideration is given by the company, it must be either shares in the company or shares in the company and the company undertaking to discharge one or more liabilities in respect of the assets.

The taxpayer in ATO ID 2004/94 received no consideration in respect of the disposal so there was no need to consider the application of section 122-20 of the ITAA 1997. The taxpayer was eligible for the roll-over since the other conditions in Subdivision 122-A of the ITAA 1997 were satisfied. Like the taxpayer in ATO ID 2004/94, the Taxpayers did not receive any consideration for the transfer of the roll-over asset to ABC. Consistent with the view in ATO ID 2004/94:

•                     the absence of consideration received by the Taxpayers does not preclude the Taxpayers from choosing the roll-over under former subsection 160ZZN(2); and

•                     since no consideration was received in respect of the disposal, there is no need to consider the application of former paragraph 160ZZN(2)(b).

Former paragraph 160ZZN(2)(c) - taxpayer is the owner of all the shares in the company

The requirement under former paragraph 160ZZN(2)(c) was that the taxpayer must be the beneficial owner of all the shares in the company immediately after the disposal.

The condition under former paragraph 160ZZN(2)(c) was satisfied since the Taxpayers:

•                     in their capacity as partners of the Partnership each owned a 50% interest in the goodwill of the Partnership business;

•                     transferred their interests in the goodwill to ABC; and

•                     immediately after the transfer beneficially owned between them 100% of the issued shares in ABC.

Former paragraph 160ZZN(2)(ca) - taxpayer is a partnership

For disposals of partnership assets after 28 January 1988 and before 7 December 1990, the operation of former section 160ZZN was governed by former paragraph 160ZZN(2)(ca) which read:

in a case where the disposal took place after 28 January 1988 and the taxpayer is a partnership:

(i)            if one or more of the partners is a trustee of a trust estate:

....

(ii)           if one or more of the partners is not a trustee of a trust estate - immediately after the disposal, each such partner beneficially owns the shares in the company in the same proportions as the partner held the partner's interests in the partnership immediately before the disposal; and

The requirements in former paragraph 160ZZN(2)(ca) were satisfied on the basis that immediately after the disposal of the goodwill to ABC, A and B each beneficially owned 50% of the shares in ABC which was the same proportion as their interests in the Partnership immediately before the disposal.

Former paragraph 160ZZN(2)(d) - written election

The condition in former paragraph 160ZZN(2)(d) required the taxpayer to give to the Commissioner notification in writing of the choice to apply the roll-over in respect of the disposal. The notice had to be given before the date of lodgment of the tax return of the taxpayer for the year of income in which the disposal took place or within such further period as the Commissioner allows.

The Taxpayers have confirmed that they:

•                     have no record of providing the Commissioner with such a written notice; and

•                     inadvertently failed to lodge the election at the time of the transfer (i.e. 19XX income year), though it was always the intention that former section 160ZZN apply.

The Taxpayers have therefore requested the Commissioner to accept the notice of the election that has now been submitted with this ruling application. Should the Commissioner accept the notice, the requirements of former paragraph 160ZZN(2)(d) and (as a result) former subsection 160ZZN(2) will be met and roll-over relief under former section 160ZZN would have applied in respect of the disposal of the goodwill on X August 19XX. If the discretion is not exercised, former paragraph 160ZZN(2)(d) would not have been satisfied and the roll-over would not have applied to the disposal.

Will the Commissioner grant an extension of time for the Taxpayers to lodge written notice to choose the roll-over under former section 160ZZN?

Hunter Valley Developments Pty Ltd v Cohen (1984) 3 FCR 344; 58 ALR 305 provides some principles to guide the exercise of a discretion to extend a procedural time limit. The principles summarised by Wilcox J in that case are accepted as relevant to guide the exercise of some of the discretions exercisable by the Commissioner to extend time and have been referenced in past rulings.

In determining if the discretion would be exercised by the Commissioner, the following factors are considered:

1.            Evidence of an acceptable explanation for the delay and that it would be fair and equitable in the circumstances to provide such an extension.

2.            Prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension.

3.            Unsettling of people, other than the Commissioner, or of established practices.

4.            Fairness to people in like positions and the wider public interest.

5.            Whether there was any mischief involved;

6.            The consequences to the taxpayer in granting an extension.

These principles will now be considered and applied to the Taxpayers' circumstances.

Explanation for the delay and fairness to extend time

The Taxpayers have provided no reason for the delay in providing the written notice other than that they "inadvertently failed to lodge the election at the time of the transfer.." The Taxpayers have referenced a number of edited versions of private rulings (EVs) where the Commissioner has exercised the discretion under former paragraph 160ZZN(2)(d). However, EVs issued are not binding on the Commissioner and should not be interpreted as giving indication of how the Commissioner is likely to rule on any particular matter. The conclusions reached in a private ruling are based on the particular taxpayer's facts and circumstances which are not necessarily reproduced in entirety in the EVs.

Even if EVs could be seen as persuasive or directive (which for the avoidance of doubt is refuted), the EVs referenced by the Taxpayers can be distinguished from the Taxpayers' circumstances. In EV 1013100794384 and 1051363927636, the respective taxpayers asserted that they had made a valid election under paragraph 160ZZN(2)(d) by written notice to the Commissioner but were unable to locate any copy of written confirmation for the roll-over election. ATO records have since been destroyed. In those cases, the Commissioner exercised his discretion and accepted that the requirements under former paragraph 160ZZN(2)(d) were satisfied on the basis that the elections occurred more than (or close to) 30 years ago and it was reasonable to misplace or destroy records.

The Taxpayers' case is not about misplaced or destroyed records but rather a case of an omission to make the written election and lodge with the Commissioner at the required time. The contention that it was always the intention that former section 160ZZN apply is of limited relevance given the provision requires the provision of notice to the Commissioner in order to constitute a valid election.

The Taxpayers' omission can also be distinguished from the situations in the following rulings where a discretion was granted:

•                     ATO ID 2003/693 (withdrawn) Income Tax: Capital gains tax: Commissioner's discretion to allow further time to make a section 160ZZO election - the original notice was lodged in time but incorrectly referred to the wrong provision. The taxpayer's new tax agent detected the error and promptly notified the Commissioner. In contrast to this situation, no notice of the election has ever been lodged by the Taxpayers.

•                     ATO ID 2003/102 (withdrawn) Capital gains tax: Extension of time to choose the small business roll-over - due to an oversight by the taxpayer's former agent, the small business CGT concessions were not considered and the choice to apply the small business roll-over in Subdivision 152-E of the ITAA 1997 was not made within the required time. In contrast to this situation, the Taxpayers were aware of the former section 160ZZN roll-over (since it was 'always the intention that section 160ZZN apply') and the oversight was more to do with ensuring the conditions of the roll-over were satisfied rather than a lack of awareness of the concession itself.

Further, there is no evidence of any corrective action taken by the Taxpayers since 19XX to rectify the initial omission (other than the current submission).

Overall it is considered that it is not fair and equitable to provide the extension. The Taxpayers have not provided any compelling reasons or grounds for the non-lodgment of the election other than mere oversight (in contrast to the situations outlined in the ATO IDs above).

Prejudice to the Commissioner if the extension were to be granted

Based on the Commissioner's interpretation of the consequences of the roll-over under former subsection 160ZZN(7), there is no prejudice to the Commissioner if the extension were to be granted. However, the mere absence of any prejudice is not enough to justify the grant of the extension.

Further, there will be prejudice to the Commissioner if the extension were granted (and the roll-over consequently made available) if the consequences of the roll-over under former subsection 160ZZN(7) were in the manner contended by the Taxpayers, being that their shares in ABC were pre-CGT assets. In these circumstances, the Commissioner would be prejudiced in relation to the Taxpayers' 20XX income tax returns on the basis that the capital gain realised by the Taxpayers on the disposal of their ABC shares (as reported in their 20XX income tax returns) would then be disregarded.

Unsettling of people or of established practices

The Commissioner is unaware of any people that would be unsettled or any established practices disrupted if the discretion were granted but notes his comments below on the fairness to others and the wider public if the discretion were granted.

The Commissioner also reiterates the non-binding nature of EVs in case they are incorrectly construed as an indication of our established practices or how any discretion would be exercised for different taxpayers.

Consideration of fairness to people in like positions and the wider public interest

Allowing the late election in the Taxpayers' circumstances would not be fair to other taxpayers in like positions who either made efforts to comply with their obligations under the law by making the election on time or those who have had their applications for the exercise of the discretion rejected.

Allowing the late election would send a wrong message to the public in terms of the diligence and care the ATO expects from taxpayers to comply with the law when seeking to apply concessions (such as the roll-over) and therefore would not be in the wider public interest.

Whether there was any mischief involved

As part of their request for the extension of time to make the election, the Taxpayers submit that it was always the intention that the former section 160ZZN roll-over apply. However, the Taxpayers have not provided the Commissioner with any supporting evidence of this asserted intention from more than 30 years ago. Further, while the Taxpayers have noted that income tax returns in respect of the year of the transfer were prepared on the basis that former section 160ZZN was to apply, a copy of the returns has not been provided to the Commissioner nor an explanation given of how the return itself was consistent with the Taxpayers' intended application of the roll-over.

Overall, the lack of documentation provided to the Commissioner in support of the Taxpayers' intention from over 30 years ago (that roll-over was intended) means that the existence of such intention is brought into question such that the potential for mischief cannot be discounted and must be considered as part of the decision to grant the extension.

Consideration of the consequences

A consideration of the ultimate consequence of allowing an extension in the Taxpayers' circumstances does not support the exercise of the discretion. Should the discretion be exercised and roll-over relief apply to the disposal of the Taxpayers' interests in the goodwill of the Partnership business in 19XX, this would not have the effect of altering the status of the Taxpayers' shares in ABC to be pre-CGT shares (as intended by the Taxpayers) under the Commissioner's interpretation of former subsection 160ZZN(7). The Commissioner remains of the view that former subsection 160ZZN(7) does not apply to the Taxpayers' shares since those shares did not constitute the consideration for the disposal of the goodwill and no consideration was involved in respect of the disposal.

Therefore, the exercise of the discretion would be futile if the consequences of its exercise are in the manner contended by the Commissioner and this does not support the granting of the extension in these circumstances.

Conclusion

Upon consideration of the relevant factors outlined above, the Commissioner will not exercise the discretion to extend the time to allow the Taxpayers to make and provide the written election under former paragraph 160ZZN(2)(d). As a result, the Taxpayers do not satisfy former paragraph 160ZZN(2)(d) and the roll-over under former subsection 160ZZN(2) does not apply to the transfer of goodwill from the Taxpayers to ABC on X August 19XX.

Question 2

Summary

No. The requirements of the former section 160ZZN roll-over were not satisfied and the Taxpayers were ineligible for the roll-over. As a result, the consequences of the roll-over, including under former paragraph 160ZZN(7)(a), did not apply to the Taxpayers' ABC shares in the first instance. Further, even if former paragraph 160ZZN(7)(a) applied (which for the avoidance of doubt is denied), it is the Commissioner's view that the provision did not operate in the manner contended by the Taxpayers and specifically did not apply to the Taxpayers' shares in ABC since they were not 'the shares that constituted the consideration for a disposal by a taxpayer to a company' of the roll-over asset.

The Taxpayers' shares in ABC were acquired in August 19XX and were post-CGT assets at the time of the disposal in the 2022 income year. The capital gain made by the Taxpayers on this disposal was therefore not disregarded.

Detailed reasoning

Taxpayers' ABC shares were post-CGT shares

The Taxpayers each acquired their one ordinary share in ABC (which they disposed of in the 2022 income year) on X August 19XX for 'a nominal amount'. The Taxpayers' shares in ABC were therefore post-CGT shares at the time of their disposal in the 2022 income year in the absence of any other provision applying to those shares that would change the status of these shares.

The Taxpayers contend that their shares in ABC were pre-CGT assets on the basis that:

•                     the roll-over under former section 160ZZN applied to the transfer of the goodwill (conditional on the exercise of the discretion by the Commissioner in relation to former paragraph 160ZZN(2)(d)); and

•                     the consequences set out under former paragraph 160ZZN(7)(a) applied to the ABC shares to deem those shares to be pre-CGT shares on the basis that the goodwill that was transferred by the Taxpayers was acquired before 20 September 1985.

Former section 160ZZN roll-over did not apply

As determined in answer to Question 1 of this ruling, the roll-over under former section 160ZZN did not apply to the transfer of the goodwill to ABC on X August 19XX since all the conditions necessary for the roll-over under former subsection 160ZZN(2) were not satisfied, notably former paragraph 160ZZN(2)(d). As a result, the consequences of the roll-over, including the specific consequences under former paragraph 160ZZN(7)(a), did not apply to the Taxpayers' shares in ABC which remained at all times post-CGT shares up to the time of their disposal in the 2022 income year. The capital gain made by the Taxpayers on the disposal of their ABC shares in the 2022 income year is therefore not disregarded.

Former subsection 160ZZN(7)

For completeness, the Commissioner sets out his view of former paragraph 160ZZN(7)(a) in relation to the Taxpayers' shares in ABC, even though former paragraph 160ZZN(7)(a) was not applicable since the roll-over under 160ZZN(2) did not apply in the first instance.

Former subsection 160ZZN(7) provided as follows:

160ZZN(7) [Acquisition of shares]

The shares that constituted the consideration for a disposal by a taxpayer to a company of a roll-over asset to which subsection (2) or (4) applies -

(a)          shall, if the asset was acquired by the taxpayer before 20 September 1985 - be deemed for the purposes of this Part to have been acquired before that date; or

(b)          shall, if the asset was acquired by the taxpayer on or after 20 September 1985, ...

Taxpayers' contentions

The Taxpayers contend that the acquisition of a 'shell' company by them should be sufficient to meet the requirements of subsection 160ZZN(7) even where no additional share consideration is provided for the roll-over asset and provide the following reasons in support of this position:

(i)            The ABC shares were acquired by the Taxpayers prior to the transfer of the Partnership assets specifically for the purpose of acquiring the Partnership assets and since the 2 shares in ABC were already held by the Taxpayers, any such further issue of shares would not have any economic or commercial purpose.

(ii)           The Taxpayers did not place a specific value on the Partnership assets at the time of transfer, and as the shares in ABC were already wholly owned by the Taxpayers, they saw no practical or economic purpose in recording a specific value for the Partnership assets in ABC's financial accounts.

(iii)          Under the Commissioner's interpretation where only additional shares issued are eligible for roll-over relief it would never be possible for 100% roll-over to be achieved for the Partnership assets since at least one share would need to be issued to a founding shareholder on incorporation. This produces an anomalous outcome and the better view is that the original shares acquired in a company that is purchased or incorporated to acquire Partnership assets under roll-over relief should be entitled to roll-over relief.

(iv)          Statutes should not be interpreted in a manner that results in an absurdity. Section 15AA of the Act Interpretation Act 1901 states that:

In interpreting a provision of an Act, the interpretation that would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act) is to be preferred to each other interpretation.

Consistent with this rule to construe legislation purposively, there is authority that states that beneficial and remedial legislation (such as roll-over relief) should be read liberally rather than given a literal or technical interpretation.

Commissioner's view of former subsection 160ZZN(7)

Former subsection 160ZZN(7) provides a replacement asset roll-over which:

•                     allows an entity to defer the making of a capital gain or loss from one CGT event until a later CGT event happens; and

•                     involves an entity's ownership of one CGT asset (the original asset) ending and the entity acquiring another one (the replacement asset).

In the Commissioner's view, the words of former subsection 160ZZN(7) are clear and unambiguous - the consequences under former subsection 160ZZN(7) only applied to the shares that constituted the consideration for a disposal of the roll-over asset to which former subsection 160ZZN(2) or (4) applied. Therefore, if no shares were issued as consideration for the disposal of the roll-over asset (or if no consideration was given at all), then the consequences under former s160ZZN(7) did not apply. The Taxpayers have confirmed that they did not receive any consideration for the transfer of the Partnership assets to ABC. Therefore, former paragraph 160ZZN(7)(a) cannot apply to the existing ABC shares held by the Taxpayers that were not part of the consideration for the disposal. The pre-CGT status of these shares were governed by normal acquisition rules. Since these shares were acquired on X August 19XX, they were post-CGT shares at the time of the disposal by the Taxpayers in the 2022 income year.

ATO ID 2004/94

The Commissioner's position above is supported by ATO ID 2004/94 which illustrates a situation where a taxpayer owned all the shares in a company to which it subsequently transferred land. No shares were issued by the company as consideration for the transfer and no other consideration was paid by the company. The following comments were made in relation to section 122-40 of the ITAA 1997:

Subsections 122-40(2) and 122-40(3) of the ITAA 1997 provide rules for determining the first element of cost base and reduced cost base of each share received as consideration for the disposal of the asset and the pre-CGT status of those shares.

In this case, the rules in subsections 122-40(2) and 122-40(3) of the ITAA 1997 will not apply in relation to the taxpayer's existing shares as those rules only apply to shares received as consideration for the disposal of the asset.

Subsection 122-40(3) of the ITAA 1997 states that if you acquired the roll-over asset before 20 September 1985, you are taken to have acquired the shares before that day.

Subsection 122-40(2) of the ITAA 1997 tells you the consequences if you acquire the roll-over asset on or after 20 September 1985 and is not relevant in this instance since the goodwill was acquired before 20 September 1985.

Subsections 122-40(2) and 122-40(3) of the ITAA 1997 are the re-written provisions to former subsection 160ZZN(7) and it is clear from the cited passage above from ATO ID 2004/94 that the Commissioner has interpreted the new provisions in the same manner as the former provisions. While section 122-40 of the ITAA 1997 does not include the words 'the shares that constituted the consideration for the disposal' that was present in former subsection 160ZZN(7), section 1-3 of the ITAA 1997 confirms that where the ITAA 1997 contains a re-written provision and expresses the same idea in a different form of words, the ideas are not taken to be different just because different forms of words were used.

In relation to the Taxpayers' contentions the Commissioner makes the following observations:

(i)            The Commissioner agrees that the issue of additional shares in ABC to the Taxpayers after they had already acquired 100% of the shares in ABC would not have an economic impact on their shareholding or ownership in ABC. However, this fact alone does not afford much assistance to the application of former subsection 160ZZN(7). It is incumbent on taxpayers seeking to access any roll-over to structure their own affairs to ensure they comply with the requirements of the roll-over.

(ii)           ATO ID 2004/95 (withdrawn)[2] Income Tax: Capital gains tax: Subdivision 122-A rollover: shares transferred from current shareholders (ATO ID 2004/95) provides an illustration of a transaction that could have been undertaken by taxpayers to obtain roll-over relief and 100% pre-CGT status (or 100% exemption) for shares in a company acquiring the roll-over asset. As illustrated in ATO ID 2004/95, the roll-over condition is satisfied if the shares are transferred to the taxpayer from the company's existing shareholders - i.e. the company arranged for the existing shareholders to transfer all their shares in the company to the taxpayer.

The Taxpayers could have adopted a transaction similar to the one in ATO ID 2004/95, that is arranging for the shares in ABC that were held at the time by their colleague to be transferred to themselves as consideration for the disposal of the Partnership assets.

(iii)          Under the 'Golden Rule', statutes are interpreted in a manner that does not result in absurdity but only where absurdity exists in the language of the statute (i.e. grammatical or 'linguistic absurdity'[3]) rather than in the result of the statute's operation.

As stated by Griffiths J in The President, etc, of the Shire of Arapiles v The Board of Land and Works (1904) 1 CLR 679 at 687:

The Court is not called upon to say whether the legislation is wise or foolish, or whether the individual members of the Court would have voted in favour of it, or whether the difficulties in carrying the Act into operation are likely to render it futile. It is the Court's duty to interpret the language of the legislature, and, no matter how unreasonable the legislation appears to be, it is not the function of the Court to express an opinion on the point.

There is nothing in the wording of former subsection 160ZZN(7) that constitutes manifest absurdity on the face of the legislation. The result that the Taxpayers' shares in ABC will not be deemed to be pre-CGT is not the outcome the Taxpayers desire but it is not an absurd outcome. Rather, this outcome is a direct result of the transaction undertaken by the Taxpayers. To reiterate, it is incumbent on taxpayers seeking to access any roll-over to structure their own affairs to ensure they comply with the requirements of the roll-over.

(iv)          Roll-over relief is provided by ascribing certain attributes to the replacement shares a taxpayer acquires as a replacement for the roll-over asset it has disposed to the company. This is reflected in the qualification in former subsection 160ZZN(7) that the consequences deemed in that section applies only to 'the shares that constituted the consideration for a disposal by a taxpayer to a company of a roll-over asset...'.

(v)           The Commissioner considers that the responsibility of ensuring that the conditions of a roll-over are met rests solely with the taxpayer and it is not the function of the Commissioner to overlook the deficiencies in a transaction or to rectify it, by taking a liberal approach to the interpretation of legislation to assist taxpayers to obtain the roll-over.

Conclusion

The requirements of the former section 160ZZN roll-over were not satisfied and the Taxpayers were ineligible for the roll-over. As a result, the consequences of the roll-over, including under former paragraph 160ZZN(7)(a), did not apply in the first instance.

For completeness, the Commissioner also considers that even if the roll-over under former section 160ZZN applied (which for the avoidance of doubt it did not), the consequences under former paragraph 160ZZN(7)(a) did not apply to the Taxpayers' shares in ABC since the shares did not constitute the consideration for the disposal by the Taxpayers of their interests in the goodwill of the Partnership.

The Taxpayers' shares in ABC were acquired in August 19XX and were post-CGT assets at the time of the disposal in the 2022 income year. The capital gain made by the Taxpayers on this disposal was therefore not disregarded.

Question 3

Summary

No. CGT event K6 only happens under subsection 104-230(1) of the ITAA 1997 if a taxpayer owns shares in a company (or an interest in a trust) they acquired before 20 September 1985 and the other conditions in subsection 104-230(1) are satisfied.

The Taxpayers' ABC shares were post-CGT shares at the time of their disposal and CGT event K6 did not happen.

Detailed reasoning

CGT event K6 happens under subsection 104-230(1) of the ITAA 1997 if you own shares in a company or an interest in a trust you acquired before 20 September 19XX and the other conditions in subsection 104-230(1) are satisfied.

The Taxpayers' shares in ABC which were disposed of in the 20XX income year were acquired on X August 19XX. As concluded in answer to Question 1, the roll-over under former section 160ZZN did not apply to the disposal of the Partnership goodwill. As concluded in answer to Question 2, the consequences under former paragraph 160ZZN(7)(a) also did not apply to the Taxpayers' shares in ABC in the first instance (since the roll-over did not apply) nor in the manner contended by the Taxpayers to render their existing ABC shares as pre-CGT shares.

Therefore, the Taxpayers' ABC shares were post-CGT shares at the time of their disposal and CGT event K6 did not happen.

[1] Under section 1-3 of the ITAA 1997, differences in style do not affect meaning given to rewritten provisions.

[2] Although the ATO ID has been withdrawn, its withdrawal is due to it being a straight application of the law rather than it being incorrect

[3] Statutory Interpretation in Australia, 8^th edition, Chapter 2 - Approaches to the interpretation of Legislation, page 200