ATO ID 2007/216: Capital gains tax: Subdivision 124-G roll-over - requirements that must be met for interposed company to choose that the consolidated group continue in existence
Date of decision: 11 July 2007
Year of income: 30 June 2007
Business line: Public Groups and International

Issue
Is it necessary to demonstrate satisfaction with the requirements in subsection 124-365(4) of the Income Tax Assessment Act 1997 (ITAA 1997) to enable an interposed company to make a choice under subsection 124-380(5) of the ITAA 1997 that the consolidated group is to continue in existence?

Decision
No. It is not necessary for the interposed company to demonstrate satisfaction with the requirements of subsection 124-365(4) of the ITAA 1997 for it to make a choice under subsection 124-380(5) of the ITAA 1997.

Facts
Company B is a resident of Australia and the head company of a consolidated group. Under a scheme for reorganising its affairs it intends to interpose between itself and its shareholders a non operating head company (interposed company). Immediately after the shareholders in Company B have exchanged their shares in it for shares in the interposed company, the interposed company is the head company of a consolidatable group consisting only of itself and the members of the group immediately before the completion time.

Reasons for decision
Summary: Subdivision 124-G of the ITAA 1997 allows, where specified requirements are satisfied, roll-over for certain shareholders who, under a scheme for reorganising a company's affairs (the original company), exchange their shares in that company for shares in another company, the interposed company. In certain circumstances where the original company is a head company of a consolidated group the interposed company may choose that the consolidated group will continue in existence under subsection 124-380(5) of the ITAA 1997. An effect of this choice is that the interposed company is taken to have become the head company of the consolidated group and in that case certain shareholders who dispose of their shares in the original company are taken to have chosen roll-over under subsection 124-360(2) of the ITAA 1997. A requirement that must be satisfied before a shareholder can choose or is taken to have chosen roll-over is set out in subsection 124-365(4) of the ITAA 1997, which requires: Either: The Explanatory Memorandum to the New Business Tax System (Consolidations and Other Measures) Bill (No 1) 2002 (the EM), which became the New Business Tax System (Consolidations and Other Measures) Act (No 1) 2002 which introduced subsection 124-380(5) of the ITAA 1997 states at paragraph 2.11 of Chapter 2: 2.11 Before the interposed company can make a choice that the consolidated group is to continue in existence, the share exchange which results in the interposed company being interposed between the original company and its shareholders must also be in accordance with the conditions set out in Subdivision 124-G of the ITAA 1997... [emphasis added]. The EM states further at paragraphs 2.32 to 2.33 of Chapter 2: 2.32 Where the interposed company makes a choice for the consolidated group to continue in existence, the shareholders of the original company will be taken to have chosen rollover relief on the disposal, cancellation or redemption of their shares in the original company which are exchanged for replacement shares in the interposed company if: Accordingly, all of the conditions in Subdivision 124-G of the ITAA 1997 that relate to or refer to the conditions of the share exchange must be satisfied before the interposed company can make the choice under subsection 124-380(5) of the ITAA 1997. However, it is not necessary for the interposed company to demonstrate satisfaction with the conditions in subsections such as 124-365(4) of the ITAA 1997 that do not relate to or refer to the conditions of the share exchange in order for it to make the choice under subsection 124-380(5) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 Subdivision 124-G section 124-360 subsection 124-360(2) subsection 124-365(4) subsection 124-380(5)
Related public rulings and determinations: Taxation Ruling TR 97/18
Other references: Explanatory Memorandum to the New Business Tax System (Consolidations and Other Measures) Bill (No 1) 2002
Subject references: Capital gains tax CGT exchange of shares in one company for shares in another company (124-G) CGT replacement asset roll-over CGT roll-over relief Consolidated group