ATO ID 2005/217: Capital gains tax: roll-over relief: exchange of share owned jointly for shares owned individually in an interposed company
Date of decision: 22 July 2005
Year of income: Year ended 30 June 2005
Business line: Public Groups and International

Issue
Is roll-over relief available under Subdivision 124-G of the Income Tax Assessment Act 1997 (ITAA 1997) where the joint owners of a share in an original company do not own a share jointly in the interposed company just after the reorganisation of the original company is completed?

Decision
No. The requirement in paragraph 124-365(2)(b) of the ITAA 1997 can only be satisfied if the joint owners hold a share jointly in the interposed company just after the reorganisation of the original company is completed.

Facts
An Australian resident company (the original company) entered into a scheme to reorganise its affairs. Just before the reorganisation of the original company, shareholders A and B owned one share jointly in the company and C, D and E each owned one share. Under the scheme, the shareholders of the original company disposed of all their shares in the company in exchange for shares in a newly incorporated company (the interposed company). Just after the reorganisation of the original company, shareholders C, D and E each own two shares in the interposed company while A and B were each issued with one share in their own name.

Reasons for decision
Summary: An entity can choose to obtain roll-over relief under Subdivision 124-G of the ITAA 1997 on the reorganisation of a company's affairs if certain conditions are satisfied: subsection 124-360(1) of the ITAA 1997. One of the conditions is that, just after the reorganisation is completed, each entity (an 'exchanging member') that owned shares in the original company owns a whole number of the shares issued in the interposed company: paragraph 124-365(2)(a) of the ITAA 1997. Another condition is that the exchanging member owns a percentage of the shares in the interposed company issued to all exchanging members that is equal to the percentage of the shares in the original company (disposed of under the scheme) which they owned: paragraph 124-365(2)(b) of the ITAA 1997. The exchanging members in this case are shareholders A, B, C, D and E. There is no requirement that an entity own a share in the original company in its own right in order to be an exchanging member. Therefore, joint owners A and B would each be an exchanging member because they each own (jointly) one share in the original company. Each exchanging member owns a whole number of shares in the interposed company just after the reorganisation is completed: paragraph 124-365(2)(a) of the ITAA 1997. Further, the requirement in paragraph 124-365(2)(b) of the ITAA 1997 can be satisfied in relation to shareholders C, D and E. This is because they each own 25% of the total shares issued in the interposed company to all exchanging members and this is the same as their individual ownership interest in the original company's shares disposed of under the scheme. However, the requirement in paragraph 124-365(2)(b) of the ITAA 1997 cannot be satisfied in relation to shareholder A. The percentage of total shares that A owns in the interposed company just after the reorganisation (that is, one-eighth which equals 12.5%) is not the same as the percentage of shares that it owned (jointly with B) in the original company (that is, 1/4 which equals 25%). On the same basis, paragraph 124-365(2)(b) cannot be satisfied in respect of shareholder B. As the condition in paragraph 124-365(2)(b) of the ITAA 1997 cannot be satisfied in respect of each exchanging member, roll-over will not be available to any of the shareholders of the original company.

Legislative references: Income Tax Assessment Act 1997 Subdivision 124-G paragraph 124-360(1) paragraph 124-365(2)(a) paragraph 124-365(2)(b)
Related public rulings and determinations: Taxation Ruling TR 97/18
Subject references: Capital gains tax CGT event A1 - disposal of CGT asset CGT exchange of shares in one company for shares in another company (124-G) CGT replacement asset roll-over CGT roll-over relief Interposed companies Joint interests Member of an entity