Edited version of private advice

Authorisation Number: 1052304896831

Date of advice: 24 September 2024

Ruling

Subject: Division 615 roll-over

Question

Will the Applicant be entitled to choose to obtain a roll-over for the transfer of shares in ForeignCo to HoldCo under Division 615 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

A particular income year

The scheme commenced:

In a particular income year

Relevant facts and circumstances

ForeignCo

1.            ForeignCo is a company incorporated in a particular foreign jurisdiction.

2.            ForeignCo's ordinary shares are held by 2 shareholders, being the Applicant and Shareholder B. Both shareholders hold more than a 10% interest in ForeignCo.

3.            The Applicant is not a 'resident of Australia' as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

4.            All assets held by ForeignCo are located in Australia.

5.            ForeignCo is the sole shareholder of SubCo. SubCo is an Australian-incorporated company and has nominal market value.

The Property

6.            ForeignCo is the sole registered proprietor of a property located in Australia (the Property).

7.            The Shareholders intend to undertake a development of the Property.

The Restructure

8.            In order to develop the Property, the Shareholders consider that it is first necessary to reorganise the ForeignCo group.

9.            The reorganisation of the ForeignCo group will involve the steps taken below in the following order:

Step 1: Interposition of HoldCo between ForeignCo and its shareholders

10.         A new Australian company, HoldCo, has been incorporated with each Shareholder subscribing for 1 ordinary share in HoldCo. The initial shares have been issued for nil consideration (nil payable, nil unpaid). The ordinary shares in HoldCo will have the same rights as the ordinary shares in ForeignCo.

11.         The Applicant and Shareholder B will transfer all of their ForeignCo shares to HoldCo in exchange for the exact same whole number of ordinary shares (and the same proportion of ordinary shares) in HoldCo as they held in ForeignCo immediately prior to the transfer (the Exchange).

12.         The ordinary shares in HoldCo will not be redeemable shares.

13.         The Shareholders will not receive any other consideration in relation to the Exchange.

14.         As a result of the Exchange, the Shareholders will acquire the entire issued share capital of HoldCo and ForeignCo will become a direct wholly-owned subsidiary of HoldCo.

15.         Within 2 months of the Exchange, HoldCo will choose that section 615-65 of the ITAA 1997 applies.

Step 2: Tax Consolidation Election

16.         HoldCo will elect to form an income tax consolidated group, comprising HoldCo as the head company and ForeignCo and SubCo as subsidiary members.

17.         HoldCo will specify a date on and from which the group is consolidated (Consolidation Date).

Step 3: Transfer of SubCo shares to HoldCo

18.         On or after the Consolidation Date, ForeignCo will transfer all its issued ordinary shares in SubCo to HoldCo for nominal consideration.

Step 4: Transfer of the Property to SubCo

19.         Ownership of the Property will be transferred from ForeignCo to SubCo for market value consideration, to be funded by a vendor loan (Loan) and the assumption by SubCo of other liabilities owed by ForeignCo. Consideration of these other liabilities do not fall within the scope of this Ruling.

20.         SubCo will thereafter conduct the development of the Property.

Step 5: ForeignCo to pay dividend and return capital to HoldCo and deregister

21.         In order to prepare ForeignCo for deregistration, ForeignCo will, amongst other things (e.g. pay existing creditors):

a.    declare a dividend to HoldCo to the maximum extent possible (which would include profits from the sale of the Property to SubCo)

b.    return contributed capital to HoldCo as its shareholder, and

c.     reduce the value of the Loan between ForeignCo and SubCo. This would be done in a two-step process: ForeignCo will assign the receivable due under the Loan to HoldCo, and then HoldCo will contribute the receivable due under the Loan to SubCo, in exchange for the issue of new ordinary shares in SubCo such that the Loan is repaid in full.

22.         The dividend and return of capital, referred to in the preceding paragraph, will be satisfied by the distribution of any cash and the receivable due under the Loan.

23.         The market value of the shares issued by SubCo to HoldCo in paragraph 21.c) will equal the face value of the Loan.

24.         ForeignCo will have no assets or liabilities at this stage.

25.         ForeignCo will then be deregistered.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 Division 615

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 section 615-15

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 paragraph 615-20(3)(a)

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

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

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

Income Tax Assessment Act 1997 subsection 615-30(1)

Income Tax Assessment Act 1997 section 615-65

Income Tax Assessment Act 1997 section 855-15

Income Tax Assessment Act 1997 subsection 855-25(1)

Income Tax Assessment Act 1997 section 855-30

Income Tax Assessment Act 1997 subsection 960-130(1)

Income Tax Assessment Act 1997 section 960-195

Does 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

Legislative references in this reasons for decision are to the ITAA 1997 unless otherwise indicated.

1.            Division 615 contains several conditions for eligibility to choose roll-over. The main conditions that are relevant to the Exchange are:

•         you are a member of a company (the original entity) (paragraph 615-5(1)(a))

•         at least two entities (the exchanging members) must own all the shares in the original entity (paragraph 615-5(1)(b))

•         under a scheme for reorganising its affairs, the exchanging members dispose of all their shares in the original entity to a company (the interposed company) in exchange for shares in the interposed company and nothing else (paragraph 615-5(1)(c))

•         the interposed company must own all the shares in the original entity immediately after all the exchanging members have disposed of their shares in the original entity (the completion time) (section 615-15)

•         immediately after the completion time, each exchanging member must own a whole number of shares in the interposed company (paragraph 615-20(1)(a))

•         immediately after the completion time, each exchanging member must own a percentage of the shares in the interposed company that were issued to all the exchanging members of the original entity that is equal to the percentage of the shares in the original entity that the exchanging member owned and disposed of under the scheme (paragraph 615-20(1)(b))

•         the market value ratio tests in subsection 615-20(2) are satisfied

•         the exchanging member is:

­   an Australian resident at the time the shares in the original entity are disposed of under the scheme (paragraph 615-20(3)(a)), or

­   a foreign resident where their shares in the original entity and shares in the interposed company are taxable Australian property (paragraph 615-20(3)(b))

•         the shares issued in the interposed company must not be redeemable shares (subsection 615-25(1))

•         immediately after the completion time, the exchanging members must own all the shares in the interposed company (paragraph 615-25(3)(a)), and

•         the interposed company will choose that section 615-65 applies within 2 months after the completion time (subsection 615-30(1)).

2.            A member of a company includes a stockholder in the company (subsection 960-130(1)). The Applicant is a shareholder of ForeignCo and therefore is a member of a company for the purposes of paragraph 615-5(1)(a).

3.            Prior to the Exchange, 2 shareholders (being the Applicant and Shareholder B) will hold all the shares in ForeignCo. Therefore, paragraph 615-5(1)(b) will be satisfied.

4.            The Exchange will be a scheme for the reorganisation of the affairs of ForeignCo because the Exchange will involve:

•      the interposition of HoldCo between the shareholders of ForeignCo and ForeignCo, and

•      the shareholders of ForeignCo exchanging their ForeignCo shares for shares in HoldCo, such that following the Exchange, each shareholder will hold exactly the same whole number of ordinary shares and the same proportion of ordinary shares in HoldCo as they did in ForeignCo, thus retaining their existing economic ownership of the underlying assets (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).

5.            Under this scheme for reorganising ForeignCo's affairs, all the shareholders of ForeignCo will dispose of all their ForeignCo shares in exchange for HoldCo shares and nothing else. Therefore, paragraph 615-5(1)(c) will be satisfied.

6.            HoldCo will own all the shares in ForeignCo immediately after all the ForeignCo shareholders dispose of their ForeignCo shares. Therefore, section 615-15 will be satisfied.

7.            Immediately after the completion time, the shareholders of ForeignCo will each own a whole number of shares in HoldCo. Therefore, paragraph 615-20(1)(a) will be satisfied.

8.            Immediately after the completion time, the shareholders of ForeignCo will own a percentage of shares in HoldCo equal to the percentage of shares they owned in ForeignCo. Therefore, paragraph 615-20(1)(b) and subsection 615-20(2) will be satisfied.

9.            As the Applicant is a foreign resident, paragraph 615-20(3)(b) requires the ForeignCo shares and HoldCo shares to be taxable Australian property. The term 'taxable Australian property' is defined in section 855-15 to include a CGT asset that is an indirect Australian real property interest. Under subsection 855-25(1), a membership interest held by an entity in another entity at a time is an indirect Australian real property interest at the time if the interest passes the non-portfolio interest test and the principal asset test.

10.         Section 960-195 provides that the non-portfolio interest test is passed at a time if the sum of the direct participation interests held by the holding entity in the test entity is 10% or more at that time. The Applicant holds more than 10% of the shares in ForeignCo, and after the Exchange, will hold the same percentage of shares in HoldCo as they held in ForeignCo. Therefore, the Applicant will pass the non-portfolio interest test in respect of the ForeignCo and HoldCo shares.

11.         Section 855-30 provides that, to pass the principal asset test, the sum of the market value of the test entity's assets that are taxable Australian property must exceed the sum of the market value of its assets that are not taxable Australian property. The market value of ForeignCo's assets that are taxable Australian property will exceed the sum of the market value of its assets that are not taxable Australian property. Accordingly, the ForeignCo shares will satisfy the principal asset test.

12.         After the Exchange, HoldCo will hold 100% interest in ForeignCo. Therefore, the HoldCo shares will also satisfy the principal asset test.

13.         Consequently, the ForeignCo shares and HoldCo shares will be CGT assets that are indirect Australian real property interests and as such, will be taxable Australian property for the purposes of paragraph 615-20(3)(b).

14.         The shares issued in HoldCo will be ordinary shares and not redeemable shares. Therefore, subsection 615-25(1) will be satisfied.

15.         Immediately after the completion time, the shareholders of ForeignCo will own all the shares in HoldCo. Therefore, paragraph 615-25(3)(a) will be satisfied.

16.         HoldCo will choose that section 615-65 applies within 2 months after the completion time. Therefore, subsection 615-30(1) will be satisfied.

17.         As the conditions in Division 615 will be satisfied, the Applicant will be eligible to choose to obtain a roll-over.