Edited version of private advice

Authorisation Number: 1052343916323

Date of advice: 16 December 2024

Ruling

Subject: Former section 160ZZN roll-over

Question 1

Pursuant to former section 160ZZN, were the shares in the Company issued to Person A and Person B deemed to have been acquired before 20 September 1985?

Answer 1

Yes

This ruling applies for the following period:

1 July 19XX to 30 June 20XX

The scheme commenced on:

XXXX

Relevant facts and circumstances

Background

The Partnership was established in XXXX. Person A and Person B were equal partners in the Partnership, each holding a 50% interest in the Partnership.

Transfer of business to a wholly owned company

On XXXX, the Company was incorporated for the purposes of a roll-over of the business assets from the Partnership to the Company. As part of the transfer of the Partnership business, the goodwill of the business, as well as other assets and liabilities held by the Partnership, were transferred to the Company. The assets of the Partnership at the time of the roll-over did not include any personal use assets and did not include any assets acquired by the Partnership after 20 September 1985 (post-capital gains tax (CGT)).

In consideration for the disposal of the Partnership assets, which were acquired before 20 September 1985 (pre-CGT), to the Company, the partners of the Partnership received shares in the Company in equal proportions to their Partnership interests (i.e. they each received 50% of the total share capital, equalling one ordinary share each), as well as an unsecured loan from the Company. On the same day (i.e. XXXX), the Partnership was wound up.

Upon the passing of Person B in XXXX, Person B's one share in the Company was bequeathed to Person A. No further ordinary shares were issued in the Company since this time. Therefore, since the passing of Person B, Person A has held 100% of the ordinary share capital of the Company.

Person A asserts that Person A and Person B intended to access the CGT roll-over relief to apply to the transfer of the pre-CGT Partnership assets of the Partnership to the Company. However, it is unclear if a written notice was provided to the Commissioner prior to or along with the lodgment of the 30 June XXXX income tax return for the Partnership.

Person A has provided the lodged income tax return for the Partnership for the year ended 30 June XXXX, which states that in XXXX XXXX the Partnership ceased to operate as its activities were transferred to the Company. The documentation provided also stated that the Partnership would not earn further income and that no future tax returns would be lodged for the Partnership. Person A has also provided the lodged year end 30 June XXXX income tax return for the Company which states that the Company was incorporated on XXXX.

It is also asserted by Person A that both the income tax returns together with the information recorded in them is contemporaneous documentation which demonstrates a clear intention on the part of the Partnership to access the CGT roll-over on the transfer of assets of the Partnership to the Company.

Person A, Person B and the Company were Australian residents for income tax purposes at the time of roll-over of the Partnership assets to the Company.

Relevant legislative provisions

Income Tax Assessment Act 1936 former section 160ZZN

Income Tax Assessment Act 1936 former section 160B

Reasons for decision

Former section 160ZZN provided CGT roll-over relief where an asset (other than a personal-use asset)[1] was transferred by a non-corporate taxpayer 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.

In order to access the roll-over relief, former subsection 160ZZN(2) stipulated that certain conditions needed to be satisfied at the time the assets were transferred to the company, as follows:

•                a taxpayer (other than a company or a taxpayer in the capacity of a trustee) who is a resident of Australia disposes of an asset to a company that is a resident of Australia;[2]

•                the consideration in respect of the disposal consisted of only non-redeemable shares in the company;[3]

•                immediately after the disposal the taxpayer was the beneficial owner of all the shares in the company;[4]

•                the taxpayer elected by notice in writing that subsection 160ZZN(2) is to apply in respect of the disposal and gave the notice to the Commissioner on or before the date of lodgement of the return for the year of income in which the disposal took place.[5]

With regards to the consideration provided by the company for the disposal of the asset, the Explanatory Memorandum to Income Tax Assessment Amendment (Capital Gains) Bill 1986[6] introducing former section 160ZZN states that:

Section 160ZZN ...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 legislation at the time former section 160ZZN was in force defined 'security' as[7]:

(a) stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security;

(b) a deposit with a bank or other financial institution;

(c) a secured or unsecured loan; or

(d) any other contract, whether or not in writing, under which a person is liable to pay an amount or amounts, whether or not

Pursuant to former paragraph 160ZZN(2)(e), if the roll-over asset was acquired by the taxpayer prior to 20 September 1985, the company is deemed to have acquired the asset before this date. Conversely, if the roll-over asset was acquired after 20 September 1985, the company is deemed to have paid or given as consideration for the acquisition of the asset, an amount equal to the cost base of the asset upon the disposal.[8]

Under former subsection 160ZZN(3), if an asset as described in former paragraph 160ZZN(2)(f) was disposed of by the company within 12 months of the acquisition by the taxpayer, specific rules applied to determine the cost base of the asset.

Former subsection 160ZZN(4) applied to the transfers by trustees and modified the provision such that a trustee of a trust estate could obtain roll-over relief.

If an asset as described in former paragraph 160ZZN(4)(f) was disposed of by the company within 12 months of the acquisition by the taxpayer, former subsection 160ZZN(5) applied specific rules to determine the cost base of the asset.

Former subsection 160ZZN(6) specified that former subsection 160ZZN(2) applied:

...to a taxpayer being a partnership notwithstanding that one or more of the partners is a company provided that

(a)           at least one of the partners is a natural person; and

(b)           immediately after the disposal the persons who were the partners in the partnership beneficially owned the shares in the company in the same proportions as they held their interests in the partnership immediately before the disposal.

Where the requirements in former subsection 160ZZN(2) were satisfied, former paragraph 160ZZN(7)(a) specified that if the asset was acquired prior to 20 September 1985, then the consideration received (i.e. the shares or securities that constituted the consideration) for that asset will also be deemed to have been acquired that date.

Application to your circumstances

As the assets of the Partnership at the time of the roll-over did not include any personal use assets, former subsection 160ZZN(1) was satisfied.

It is determined that the conditions in former subsection 160ZZN(2) were satisfied for the roll-over relief to apply, for the following reasons discussed below.

Both partners in the Partnership, as well as the Company, were Australian residents for tax purposes at the time of the disposal of the Partnership assets to the Company, therefore satisfying former subparagraph 160ZZN(2)(a)(i).

Former paragraph 160ZZN(2)(b) is satisfied as Person A and Person B, as the partners of the Partnership, received ordinary shares and securities in the Company as consideration for the transfer of the Partnership assets.

Immediately after the disposal of the Partnership assets to the Company, Person A and Person B were the beneficial owners of all the shares in the Company in the same proportions as their respective Partnership interests immediately before the disposal (i.e. 50% each), therefore satisfying former paragraph 160ZZN(2)(c).

Person A asserted that they intended to access the CGT roll-over relief to apply to the transfer of the Partnership assets to the Company. However, Person A is unable to confirm if a separate, written notice was provided to the Commissioner prior to or along with the lodgment of the 30 June XXXX income tax return, pursuant to former paragraph 160ZZN(2)(d).

Given the roll-over election occurred over XX years ago, it is reasonable to accept that records, including any notice provided to the Commissioner for the purposes of former paragraph 160ZZN(2), may have been misplaced or lost and so cannot be located. Nevertheless, Person A provided the Commissioner with the Partnership's lodged XXXX income tax return, which specifically stated that the Partnership ceased to operate as its business was transferred to the Company. Furthermore, the Company's XXXX income tax return was also provided to the Commissioner, which stated that the Company was incorporated on XXXX. These contemporaneous documents would indicate and support the taxpayer's intention to access the CGT roll-over relief to apply to the transfer of the pre-CGT Partnership assets to JMC. Hence, it is determined that the requirements of former paragraph 160ZZN(2)(d) have been satisfied.

Under the roll-over the Partnership did not transfer any assets with a post-CGT status to the Company, and only transferred pre-CGT assets. Pursuant to former paragraph 160ZZN(2)(e), the Company is therefore deemed to have acquired the roll-over assets pre-CGT. Correspondingly, former paragraph 160ZZN(2)(f) did not apply and as such, former subsection 160ZZN(3) also did not apply (both provisions which are about assets acquired post-CGT).

As the Partnership was not a trustee of a trust estate, former subsection 160ZZN(4) was not applicable. Accordingly, as the Partnership did not transfer any assets to the Company pursuant to former paragraph 160ZZN(4)(f) i.e. as trustee, former subsection 160ZZN(5) was not applicable.

Person A and Person B were natural persons who were partners in the Partnership and were Australian residents at the time of the roll-over. Immediately after the disposal of the Partnership assets to the Company, Person A and Person B beneficially owned the shares in the Company in the same proportions as their respective Partnership interests immediately before the disposal (i.e. 50% each). Therefore, former subsection 160ZZN(6) was satisfied.

Accordingly, Person A and Person B were deemed to have acquired their shares in the Company before 20 September 1985 under former subsection 160ZZN(7)(a).

[1] Former subsection 160ZZN(1) specified that an 'asset' does not include a personal-use asset.

[2] Paragraph 160ZZN(2)(a).

[3] Paragraph 160ZZN(2)(b).

[4] Paragraph 160ZZN(2)(c).

[5] Paragraph 160ZZN(2)(d).

[6] See Notes on Clauses at Clause 19: Capital gains and capital losses, under section 160ZZN: transfer of asset to wholly-owned company.

[7] Subsection 159GP(1).

[8] Former paragraph 160ZZN(2)(f).