Private ruling: Retained and reset cost base assets
Published: September 2014
Ruling period: Year ended 30 June 20xx
Date scheme commenced: During the year ended 30 June 20xx

Ruling: Q1: Do the Redeemable Preference Shares constitute "retained cost base assets" under subsection 705-25(5) of the Income Tax Assessment Act 1997 ? | A1: No. | Q2: Do the Redeemable Preference Shares constitute "reset cost base assets" under subsection 705-35(1) of the Income Tax Assessment Act 1997 ? | A2: Yes

Relevant facts and circumstances: As part of a planned phased corporate restructure the consolidated group had wholly acquired a company (the joining entity). This occurred after 31 March 2011. At the joining time the joining entity held redeemable preference shares (RPS) in another company (the issuer) that was also going to join the consolidated group, due to commercial reasons, under stage 2 of the group restructure. The issuer company joined some weeks after the first company. No dividends were payable by the issuer company on the RPS during this period. The RPS were pre TOFA assets for the relevant entities and not subject to Division 230.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 701-63 | section 705-25 | section 705-35

Reasons for decision: Summary: The redeemable preference shares (RPS) do not satisfy any of the tests in subsection 705-25(5) to be classified as a retained cost base asset. In relation to paragraph 705-25(5)(b), the Commissioner takes the view that 'a right to receive a specified amount of Australian currency' must be a right that is an indefeasible, present non-contingent right to the actual or constructive receipt of a fixed, nominal amount of Australian currency: per Taxation Ruling TR 2005/10. Payment of the Redemption Amount by the issuer of the RPS is subject to section 254K of the Corporations Act and subject to there being profits. Payment of dividends by the issuer on the RPS is subject to section 254T of the Corporations Act and subject to there being profits. These requirements are considered to be contingencies to the right to receive amounts under the RPS. Therefore the RPS holder does not have a present non-contingent right to amounts on the RPS. In relation to paragraph 705-25(5)(d), subsection 701-63(5) under the "prospective rules" provides that: A right to future income is a valuable right (including a contingent right) to receive an amount if: (a) the valuable right forms part of a contract or agreement; and (b) the *market value of the valuable right (taking into account all the obligations and conditions relating to the right) is greater than nil; and (c) the valuable right is neither a *Division 230 financial arrangement nor a part of a Division 230 financial arrangement; and (d) it is reasonable to expect that an amount attributable to the right will be included in the assessable income of any entity at a later time. All of paragraphs (a) - (d) need to be met for a right to constitute a 'right to future income'. However, in this instance, for the RPS at the joining time, paragraph (d) is not met. In the circumstances of the planned phased corporate restructure it is considered that at the joining time, it was reasonable to expect that the issuer company would also subsequently join the consolidated group under stage 2 of the plan, and prior to any dividends being declared and paid by the issuer. The issuer did join the consolidated group some weeks later. Accordingly, it is not reasonable to expect that an amount attributable to the RPS (dividends) will be included in the assessable income of any entity at a later time due to the single entity rule of a consolidated group ignoring for tax purposes the intra-group payment of the RPS dividends. The RPS held by the joining entity are not a 'right to future income' and therefore are not retained cost base assets under paragraph 705-25(5)(d). As none of the paragraphs of subsection 705-25(5) are met, the RPS held by the joining entity are not retained cost based assets under subsection 705-25(5). AS the RPS are assets and do not satisfy the tests in subsection 705-25(5) to be retained cost base assets they are therefore reset cost base assets under section 705-35.