Private ruling: CGT rollover relief
Date of advice: 14 July 2017
Published: November 2017
Ruling period: Year ended 30 June 20ZZ
Date scheme commenced: 1 July 20YY

Ruling: Q1: Can you apply rollover relief under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) when you transfer shares in Company A to New Company? | A1: Yes

Relevant facts and circumstances: In late 200A Company A was incorporated. Company A is an Australian resident. You were issued with one ordinary share in Company A. In early 200B you were issued further ordinary shares in Company A. You are the sole shareholder of Company A. You are an Australian resident. Your shares in Company A are unencumbered and held on capital account. You are concerned with protecting the assets of Company A as there are significant retained profits from the sale of a commercial property in 20XX. New Company will be established, incorporated in Australia and will be an Australian resident. You will transfer 100% of your shares in Company A to New Company. New Company will issue one non-redeemable ordinary share to you. The one ordinary share issued to you in New Company will be received in consideration for the shares in Company A. The rights attached to the share in New Company are identical to the rights in Company A shares. You will be the sole shareholder of New Company. The market value of the one ordinary share in New Company will be substantially the same as the market value of the shares in Company A transferred from you at the time of the transfer. After the shares have been transferred to New Company, Company A will declare and pay a dividend to New Company, to pay the retained profits of Company A. New company will operate on the same basis that Company A has been. It will undertake investment with the retained profits in a similar manner to that of which Company A has done. This will include a combination of investment in other projects, investment in shares, term deposits or lending. Allowing for retained profits to be paid as a dividend from Company A is for asset protection to reduce the risk of Company A being sued. You will receive dividends from New Company to meet living expenses as you have received in prior income years from Company A. New Company will obtain a tax file number and lodge annual income tax returns declaring assessable income derived and allowable deductions incurred during each financial year. New Company will not be an exempt entity for Australian income tax purposes.

Relevant legislative provisions: Subdivision 122-A of the Income Tax Assessment Act 1997

Reasons for decision: Summary: You have requested a private ruling on the application of rollover relief in Subdivision 122-A of the ITAA 1997 when you transfer your ordinary shares in Company A for one ordinary share in New Company. Roll-over relief is available under section 122-15 of the ITAA 1997 when you dispose of a CGT asset, or all the assets of a business, to a company in which you will own all the shares after the CGT event. There are a number of conditions in sections 122-15, 122-20 and 122-25 which much be met before roll-over relief is available. | Detailed Reasoning - Condition 1: Subsection 122-15 of the ITAA 1997 provides the list of CGT events, known as trigger events, of which one must happen involving you and the company. You will transfer your shares in Company A to New Company – the relevant CGT event A1 happens. | Detailed Reasoning - Condition 2: Under subsections 122-20(1) and (2) the consideration you receive for the trigger event happening must be only: ● shares in the company, or ● 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 all the assets of the business. You will receive a share in New Company as consideration for the CGT event. | Detailed Reasoning - Condition 3: Under subsection 122-20(3) the market value of the shares that you receive for the trigger event happening must be substantially the same as: ● for a disposal case the market value of the assets you disposed of less any liabilities the company undertakes to discharge in respect of the asset or assets ● for a creation case the market value of the CGT asset created in the company The market value of the ordinary share in New Company you receive will be substantially the same as the market value of the shares in Company A at the time of transfer (CGT event). | Detailed Reasoning - Condition 4: Under subsection 122-25(1) the transferor (you) must own all of the shares in the company just after the time of the trigger event and in the same capacity as you owned or created the assets that the company comes to own. You will be the sole shareholder of New Company after the CGT event – the rights attached to the share are identical to the rights of shares held in Company A. | Detailed Reasoning - Condition 5: Under subsection 122-25(5) the company must not be exempt from income tax on its ordinary and statutory income because it is an exempt entity in the year in which the trigger event occurs. New Company will not be an exempt entity. | Detailed Reasoning - Condition 6: Under subsection 122-25(6) you must be a resident trust for CGT purposes and the company must be an Australian resident at the time of the trigger event or both of the following requirements are satisfied: ● each asset must be taxable Australian property at that time, and ● the shares in the company mentioned in subsection 122-20(1) must be taxable Australian property just after that time. You and New Company will be both Australian residents. As all of the requirements of Subdivision 122-A will be met; rollover relief to disregard a capital gain or capital loss from the CGT event is available when you transfer Company A shares to New Company.