Private ruling: Income tax - CGT event K6
Published: December 2011
Ruling period: Year ending 30 June 2012.
Date scheme commenced: 1 July 2011.

Ruling: Q1: Are the requirements of paragraph 104-230(2)(a) and paragraph 104-230(2)(b) of the Income Tax Act 1997 (ITAA 1997) tested independently to determine whether the 75% test has been met? | A1: 

Relevant facts and circumstances: Company X was created prior to capital gains tax (CGT). Company X holds shares in three companies two of which were acquired prior to CGT. The companies have a mixture of pre and post CGT assets. Two parents hold shares in a Company X. Two family trusts will be set up for their children. The parents will transfer some of their shares in Company X to the new family trusts. The parents and the children will form a limited liability partnership. There are no plans to dispose of property of Company X after the shares are transferred.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 104-230(2).

Reasons for decision: Summary: Taxation Ruling TR 2004/18 deals with the application of CGT event K6. The ruling states at paragraphs 68 to 70 as follows: 68. The 75% test is satisfied only if one or both of the following tests are met: • the market value of property referred to in paragraph 104-230(2)(a) equals or exceeds 75% of the net value of the company; • the market value of property referred to in paragraph 104-230(2)(b) equals or exceeds 75% of the net value of the company. 69. The use of the word 'or' between paragraphs 104-230(2)(a) and 104-230(2)(b) suggests that each of the requirements in those paragraphs must be tested independently. Ordinarily, the word 'or' is used disjunctively and invites consideration of two alternatives. 70. The Tax Office observes that such an interpretation may result in the 75% test being avoided by the placement of post-CGT property in a lower tier company rather than in the company in which the shares are held. The general anti-avoidance provisions in Part IVA may apply where this is done predominantly for the purpose of gaining a tax benefit. Also, any CGT assets acquired, or any liabilities discharged or released, may be disregarded under subsection 104-230(8) in working out the net value of the company in which the shares are held if the acquisition, or the discharge or release, was done for a purpose that included ensuring the 75% test was not satisfied. The requirements in paragraph 104-230(2)(a) and paragraph 104-230(2)(b) of the ITAA 1997 are therefore tested separately. The post CGT assets held directly by Company X are not included in the test under paragraph 104-230(2)(b).

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