Private ruling: CGT - exemption
Date of advice: 19 January 2024
Published: 26 February 2024
Ruling period: Income Year ending 30 June 20XX
Date scheme commenced: XXXX

Ruling: Q1: Will the capital gains or capital losses that ABC Australia makes from CGT event A1 happening because of the transfer of shares in its foreign subsidiariesto ABC New Co (the restructure) be reduced under section 768-505 by the foreign subsidiaries' respective active foreign business asset percentage? | A1: Yes. | Q2: Will the assets listed in Table 1 be the only assets included in the total assets of the foreign subsidiaries at the time of the restructure under subsection 768-545(1)? Table 1 Table 1: Will the assets listed in Table 1 be the only assets included in the total assets of the foreign subsidiaries at the time of the restructure under subsection 768-545(1)? Assets included in the total assets Cash Deferred expenses Goodwill Inventory Investments in Subsidiaries Other receivables and non-trade debtors Prepayments Property, Plant and Equipment Security deposit Trade debtors VAT receivables | A2: Yes. | Q3: Will the assets listed in Table 2 be the only active foreign business asset of the foreign subsidiaries at the time of the restructure under subsection 768-540(1)? Table 2 Table 2: Will the assets in Table 2 be the only active foreign business asset of the foreign subsidiaries at the time of restructure under subsection 768-540(1)? Assets included in the total assets Deferred expenses Goodwill Inventory Investments in Subsidiaries Prepayments Property, Plant and Equipment Trade debtors VAT receivables | A3: Yes.

Relevant facts and circumstances: 1. ABC Australia is an Australian tax resident company and head entity of an Australian income tax consolidation group . 2. The ultimate holding company for the group is ABC Head Co, a company incorporated in the Country X. 3. The ABC Group is a distributor of retail products. 4. ABC Australia owns the shares in a number of wholly owned or majority-owned foreign subsidiaries. 5. The foreign subsidiaries are tax residents of the relevant foreign countries in which they were incorporated. 6. The foreign subsidiaries do not carry-on business in Australia. The shares held by ABC Australia in the foreign subsidiaries are ordinary shares that carry the same voting, dividend, and capital rights. There are no other classes of shares that have been issued by the foreign subsidiaries. Proposed group restructure 7. ABC Head Co intends to undertake a group restructure. 8. In broad terms; the restructure will require: a. a new entity (ABC New Co) will be established in Country Y as the as the new headquarters and investment holding entity; b. the shares in ABC Australia being transferred from ABC Head Co to ABC New Co; c. the shares held by ABC Australia in its foreign subsidiaries being transferred to ABC New Co. 9. ABC Australia is not an Australian Financial Institution (AFI). 10. The capital proceeds for the sale of the shares in the foreign subsidiaries will exceed the cost base of the shares. As a result, the proposed transfer of shares in the foreign subsidiaries is expected to prime facie triggers a capital gain for the ABC Australia. Financial Information 11. For the financial years ended 30June 20XX financial statements of the foreign subsidiaries have the following listed assets: a. Assets listed in table 1 b. Provision for unrealised exchange c. Deferred tax assets 12. None of the assets in the financial statement for the year ending 30 June 20XX of foreign subsidiaries are the assets located in Australia or assets that they have any connection with Australia. 13. There are no derivates on the balance sheets of the foreign subsidiaries for the financial year ending 30 June 20XX. 14. ABC Australia has engaged an independent valuer for group valuation reports and intends to update the report at the date of the CGT event. Other information 15. For the purposes of the application of Subdivision 768-G of the ITAA 1997, ABC Australia, as head of the income tax consolidated group, will elect under subsection 768-515(1) of the ITAA 1997, to use the market valuation method, set out in section 768-520 of the ITAA 1997, for calculating the Active Foreign Business Asset Percentage of the foreign subsidiaries, and 16. It is expected that ABC New Co will carry out some management and administrative functions on behalf of all entities in the group including ABC Australia. The functions/business activities that ABC New Co will undertake post restructure includes: i. Marketing ii. Legal iii. Finance and IT iv. Quality assurance v. Procurement vi. Human Resource 17. Apart from the above, there is currently no expectation of any other material changes to the Australian business post restructure. 18. ABC Australia will undertake a transfer pricing analysis post restructure to ensure that any dealings between ABC Australia and ABC New Co are undertaken under arm's length conditions.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 108-5(1) | Income Tax Assessment Act 1997 subsection 109-5(1) | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 section 701-1 | Income Tax Assessment Act 1997 section 768-500 | Income Tax Assessment Act 1997 section 768-505 | Income Tax Assessment Act 1997 section 768-510 | Income Tax Assessment Act 1997 section 768-540 | Income Tax Assessment Act 1997 section 768-545 | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Act 1936 section 334A | Income Tax Assessment Act 1936 section 317

Reasons for decision: Summary: The disposal of the foreign subsidiaries shares by the ABC Australia income tax consolidated group satisfies the preconditions for a reduction to the capital gain or capital loss amount pursuant to subsection 768-505(1). | Detailed Reasoning - Detailed reasoning: Subdivision 768-G of the ITAA 1997 (also known as 'the participation exemption') can apply to reduce a gain arising in respect of certain CGT events. Under this exemption, the capital gain (or loss) is reduced to the extent to which the foreign company carries on an "active business", via reducing the gain/loss by an "active foreign business asset". Broadly, this percentage is determined by dividing the value of active foreign business assets of the foreign company by the value of the total assets of the foreign company. In order for the participation exemption to apply to the disposal of shares in a non-resident company, the disposing company must meet the holding requirements as set out in subsection 768-505(1) of the ITAA 1997. Subsection 768-505(1) of the ITAA 1997 states: (1) The *capital gain or *capital loss a company (the holding company) that is an Australian resident makes from a * CGT event that happened at a particular time (the time of the CGT event) to a *share in a company (the foreign disposal company) that is a foreign resident is reduced if: (a) The holding company held a *direct voting percentage of 10% or more in the foreign disposal company throughout a 12-month period that: (i) began no earlier than 24 months before the time of the CGT event: an (ii) ended no later than that time; and (b) the share is not: (i) an eligible finance share (within the meaning of that Part); and (ii) a widely distributed finance share (within the meaning of that Part); and (c) the CGT event is CGT event A1, B1, C2, E1, E2, G3, J1, K4, K6, K10 or K11. Resident is relevant defined in section 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) to mean:(b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia. Foreign resident is defined in section 995-1(1) to mean: a person who is not a resident of Australia for the purposes of the Income Tax Assessment Act 1936 . The term 'share in a company' for the purposes of subsection 768-505(1) is defined pursuant to subsection 995-1(1) to mean a share in the capital of the company and includes stock. The " direct voting " percentage that an entity has in a foreign company is calculated under section 768-550(1), as follows: An entity's direct voting percentage at a particular time in a company is: (a) if the entity has a voting interest (within the meaning of section 334A of the Income Tax Assessment Act 1936 ) in the foreign company at that time amounting to a percentage of the voting power of the company - that percentage; or (b) otherwise - zero. | Detailed Reasoning - Application to your circumstance: ABC Australia is a company that is incorporated in Australia is, at all relevant times, a resident company which will dispose shares in the foreign subsidiaries. The foreign subsidiaries are not incorporated in Australia and do not carry-on business in Australia. As they are not resident as defined in section 6(1) of the ITAA 1936 they are foreign residents as defined in section 995-1(1). Voting Interest" as defined in section 334A of the ITAA 1936 is based on the extent of a company ' s beneficial ownership of shares in another company. In applying that definition in the ABC Australia context, ABC Australia has held a direct voting percentage (beneficial ownership of shares) of 10% and more in all Foreign Subsidiaries and held those shares continually for more than 12 months leading up to the CGT event and will, therefore, meet the requirement of paragraph 768-505(1)(a) of the ITAA 1997. The shares in the foreign subsidiaries are neither eligible finance shares nor are they widely distributed finance shares within the meaning of Part X of the ITAA 1936. Therefore, paragraph 768-505(1)(b) of the ITAA 1997 is satisfied. CGT event A1 occurs when there is a disposal of a CGT asset. ABC Australia will dispose of its shares in foreign subsidiaries to ABC New Co. As there will be a change of ownership as a result of this act there will be a 'disposal' according to subsection 104-10(2) of the ITAA 1997. Furthermore, ABC Australia will not retain beneficial ownership of the shares. CGT event A1 will occur when ABC Australia disposes of the shares in foreign subsidiaries. Therefore, paragraph 768-505(1)(c) of the ITAA 1997 will be satisfied. As all of the requirements of subsection 768-505(1) of the ITAA 1997 have been satisfied, ABC Australia will satisfy the preconditions for the participation exemption under Subdivision 768-G of the ITAA 1997. | Detailed Reasoning - Question 2: Will the assets listed in Table 1 be the only assets included in the total assets of the foreign subsidiaries at the time of the restructure under subsection 768-545(1)? Table 1 Table 3: Assets included in the total assets (as shown above in Table 1) | Detailed Reasoning - Assets included in the total assets: Cash Deferred expenses Goodwill Inventory Investments in Subsidiaries Other receivables and non-trade debtors Prepayments Property, Plant and Equipment Security deposit Trade debtors VAT receivables | Summary: Only the assets listed in Table 1 will be included in the total assets of the ABC Australia foreign subsidiaries for the purpose of 'Participation exemption' as they satisfy the criteria in subsection 768-545(1). | Detailed Reasoning - Detailed reasoning: Section 995-1 defines "asset included in the total assets" of a company that is a foreign resident has the meaning given by section 768- 545, where Subsection 768-545(1) stipulates three criteria which must be satisfied in order for an asset to be included in the total assets of a foreign company at the time of calculating the active foreign business asset percentage. This includes: At a particular time, an asset is an asset included in the total assets of a company (the foreign company ) that is a foreign resident if: (a) the asset is a *CGT asset at that time; and (b) the foreign company owns the asset at that time; and (c) if at that time the foreign company is not an AFI subsidiary (within the meaning of Part X of the Income Tax Assessment Act 1936 ) whose sole or principal business is financial intermediary business (within the meaning of that Part) - the asset is not a foreign company derivative asset covered by subsection (2). A CGT asset for the purposes of paragraph 768-545(1)(a), is defined pursuant to subsection 108-5(1) as: (a) any kind of property; or (b) a legal or equitable right that is not property. For the avoidance of doubt, subsection 108-5(2) specifies particular CGT assets including: (a) part of, or an interest in, an asset referred to in subsection (1); (b) goodwill or an interest in it; (c) an interest in an asset of a partnership; (d) an interest in a partnership that is not covered by paragraph (c). Examples of CGT assets are: • land and buildings; • shares in a company and units in a unit trust; • options; • debts owed to you; • a right to enforce a contractual obligation; • foreign currency. Property is a very broad term and can be used to describe everything that a party may have control over. The current definition (subsection 108-5(1)) makes it clear that CGT assets include both assets of a proprietary nature [1] and other rights otherwise enforceable by law [2] . In summary, property can be following: Legal and equitable rights that are not Property, would include non-proprietary rights and enforceable contractual obligation. Paragraph 1.137 of the Explanatory Memorandum to the New International Tax Arrangements (Participation Exemptions and Other Measures) Bill 2004 ('EM') explains that a foreign company is considered to own a CGT asset where it is both the legal and beneficial owner of the asset at that time. | Detailed Reasoning - Application to your circumstances: Pursuant to subsection 995-1(1), a foreign resident is a person who is not a resident of Australia for the purposes of the ITAA 1936. ABC Australia Foreign Subsidiaries are the resident of the country in which they incorporated. The foreign subsidiaries are not incorporated in Australia and do not carry-on business in Australia. As they are not residents as defined in section 6(1) of the ITAA 1936 this means they are foreign residents as defined in section 995-1(1) of the ITAA 1997. Under subsection 109-5(1) of the ITAA 1997, a taxpayer is considered to be the owner of a CGT asset when it acquires the CGT asset. ABC Australia foreign subsidiaries have acquired the CGT assets recognised on their accounting balance sheets and are the legal and beneficial owners of those assets. Therefore, they will be the owner of these CGT assets for subsection 768-545(1) purposes. None of the foreign Subsidiary is an ADI within the meaning of Part X of the Income Tax Assessment Act 1936 and there are no derivates on the balance sheets of the respective subsidiaries for the year ended 30 June 20XX. In applying subsection 768-545(1) to all assets included in the total assets of ABC Australia foreign Subsidiaries: Cash is a type of property and will be considered as a CGT asset. Further, a bank account represents a contractual arrangement between the depositor and the bank. The depositor lends their money to a bank by depositing money into an account. A savings or deposit account is in law a loan to the banker. Thus, paragraph 768-545(1)(a) and (b) is satisfied and be an asset included in the total assets of ABC Australia foreign subsidiaries. Deferred Expenses -A deferred expenses are a cost that has already incurred, but which has not yet been consumed. Same as with prepayment, deferred expenses are a right to enforce a contractual obligation and can be taken as a CGT asset. As they are legally and beneficially owned by the foreign companies, they are considered to be assets of the foreign companies for the purposes of subsection 768-545(1). Goodwill -Subsection 108-5(2)(b) provides that goodwill is a Capital Gains Tax (CGT) asset. Goodwill refers to the value of a business that is beyond its tangible assets and liabilities. And due to its non-physical nature considered as an intangible asset that arises as a result of name, reputation, location, product, customer loyalty, good management and similar factors connected with business. Thus paragraph 768-545(1)(a) and (b) is satisfied and be an asset included in the total assets of ABC Australia foreign subsidiaries. Inventory is a type of property; that business acquires, produces, or manufactures, for the purpose of manufacturing, selling, or exchanging. Foreign subsidiaries own inventory for the purposed of exchanging or selling. As a property, Inventory will be considered as a CGT asset. Thus, paragraph 768-540(1)(a) and (b) is satisfied and be an asset included in the total assets of the foreign subsidiaries Investment in Subsidiaries - The membership interests of the foreign subsidiary in indirect foreign subsidiaries are shares in the capital of a company and as an intangible asset will be considered a CGT asset (section 108-5, note 1). As they are legally and beneficially owned by the foreign companies, they are considered to be assets of the foreign companies for the purposes of subsection 768-545(1). Other Receivables and non-trade debtors- Other receivables comprises sundry debtors and non- trade debtors. Both are the same as trade debts, except they may include debtors for various reasons not merely for credit sale. In line with Trade debtors, both can be taken as a debt and a debt is an intangible asset and therefore, is a CGT asset. Thus paragraph 768-545(1)(a) and (b) is satisfied and be an asset included in the total assets of ABC Australia foreign subsidiaries. Prepayment - The prepayments are in essence a right to enforce a contractual obligation owed to the foreign companies and will therefore be CGT assets (section 108-5, note 1). The prepayments in the respective trial balances were all related to purchase of goods (especially rice) or services for business operations. These prepayment or deposit payment to suppliers were made in accordance with the agreed purchase order terms. As they are legally and beneficially owned by the foreign companies, they are considered to be assets of the foreign companies for the purposes of subsection 768-545(1). Property, Plant and Equipment (PPE) - PPEs are tangible assets characterized by physical existence or substance. Therefore, PPE meet the definition of a CGT asset. Thus, paragraph 768-545(1)(a) and (b) is satisfied and be an asset included in the total assets of ABC Australia foreign subsidiaries. VAT receivables- The Net VAT receivables are recognised under the relevant resident country tax law as being available as a tax credit or refund. Therefore, right to Net VAT receivable is a legal right and meet the definition of a CGT asset. Thus paragraph 768-545(1)(a) and (b) is satisfied and be an asset included in the total assets of ABC Australia foreign subsidiaries. Security Deposits - Security deposits relate to bonds paid in relation to leasing premises, and other business/government deposits. They represent financial obligations. Same as prepayments, security deposits are right to enforce a contractual obligation and will therefore be CGT assets. As they are legally and beneficially owned by the foreign companies, they are considered to be assets of the foreign companies for the purposes of subsection 768-545(1). Trade Debtors - A trade debt is a contractual right to receive money from customers in respect of sales made on credit and therefore, is a CGT asset (section 108-5, note 1). Thus paragraph 768-545(1)(a) and (b) is satisfied and be an asset included in the total assets of ABC Australia foreign subsidiaries. | Detailed Reasoning - Accounting assets that are not CGT Assets: Provision for unrealised foreign exchange - An unrealized gain or loss will be a temporary difference reflecting the change in the value of foreign currency denominated sales/purchase/investment transactions that are recorded in financial statements prior to the settlement of the invoices and will eventually reverse itself once the gain/loss is realized. It is a notional or a paper gain/ loss that has not been realized through a transaction. Therefore, any unrealised foreign exchange fluctuations taken as not being a CGT asset for the purpose of section 768-545(1)(a) of the ITAA 1997 and will not be included in the total asset of the foreign subsidiaries. Deferred Tax Asset- For accounting purposes, a deferred tax asset can arise (as an accounting asset in the financial statement), for example, when income that will be recognised for accounting purposes in a later financial year/s is subject to tax in the current financial year/s. The tax paid is recognised as an asset in the current year's financial statements and expenses only in the year when the related income is recognised for accounting purposes. As a notional asset, a deferred tax asset is not, however, an asset for CGT purposes. Therefore, not being a CGT asset for the purpose of section 768-545(1)(a) of the ITAA 1997 and will notbe included in the total asset of the foreign subsidiaries. | Detailed Reasoning - Question 3: Will the assets listed in Table 2 be the only active foreign business asset of the foreign subsidiaries at the time of the restructure under subsection 768-540(1)? Table 2 Table 4: Assets included in the total assets (as shown above in Table 2) | Detailed Reasoning - Assets included in the total assets: Deferred expenses Goodwill Inventory Investments in Subsidiaries Prepayments Property, Plant and Equipment Trade debtors VAT receivables | Summary: Only the assets listed in column 2 of Table 2 will be included in the active assets of the foreign subsidiaries for the purpose of 'Participation exemption' as they satisfy criteria in subsection 768-540(1). | Detailed Reasoning - Detailed reasoning: Section 768-540 of the ITAA 1997 outlines when an asset is an active foreign business asset of a foreign company for the purposes of working out whether there is an entitlement to a reduction in capital gains upon the occurrence of a capital gains tax event in relation to the shares in the foreign company. Subsection 768-540(1) of the ITAA 1997 states: An asset is, at a particular time, an active foreign business asset of a company (the foreign company) that is a foreign resident if, at that time: (a) the asset is an *asset included in the total assets of the company; and (b) the asset satisfies any of these conditions: (i) the asset is used, or held ready for use, by the company in the course of carrying on a *business; (ii) the asset is goodwill; (iii) the asset is a *share; and (c) the asset is not any of the following: (i) *taxable Australian property; (ii) a *membership interest in a company that is an Australian resident; (iii) a membership interest in a *resident trust for CGT purposes; (iv) an option or right to acquire a membership interest mentioned in subparagraph (ii) or (iii); and (d) the asset is not covered by subsection (2); and (e) if the foreign company is an AFI subsidiary (within the meaning of Part X of the Income Tax Assessment Act 1936) whose sole or principal business is financial intermediary business - the asset is not covered under subsection (4). Subsection 768-540(2) states that: An asset is covered by this subsection if it is: (a) a financial instrument (other than a *share or trade debt); or (b) either: (i) an eligible finance share...; or (ii) a widely distributed finance share; or (c) an interest in a trust or partnership; or (d) a life insurance policy; or (e) a right or option in respect of: (i) a financial instrument; or (ii) an interest in a company, trust or partnership; or (iii) a life insurance policy; or (f) cash or cash equivalent; or (g) an asset whose main use in the course of carrying on the business mentioned in subparagraph (1)(b)(i) is to derive interest, an annuity, rent, royalties or foreign exchange gains unless: (i) the asset is an intangible asset and has been substantially developed, altered or improved by the foreign company so that its market value has been substantially enhanced; or (ii) its main use for deriving rent was only temporary. Paragraph 768-540(1)(b)(i) requires that the asset must be either: (1) used (or held ready for use) in the course of carrying on the company's business, or (2) ...... Paragraph 1.106 of the EM explains that the purpose of this restriction is to ensure that only business assets have the opportunity to be classified as an active foreign business asset. Paragraph 1.104 of the EM provides that "the definition of active foreign business asset is broadly based on existing definitions in the income tax law of 'tainted asset' in section 317 of the ITAA 1936 and 'active asset' in section 152-40 of the ITAA 1997" The word 'used' takes its ordinary meaning, which in any particular case will depend on the context in which the word is employed and the purpose for which the asset is held ( Newcastle City Council v Royal Newcastle Hospital (1956) 96 CLR 493. For an asset to be used 'in' the course of carrying on a business, it is necessary for the use to have a direct functional relevance to the carrying on of the normal day-to-day activities of the business. In summary, Subsection 768-540(1) sets out the rules for determining whether an asset will be an 'active foreign business asset' of a foreign company at a particular time. The asset must be included in the total assets of the company, and it must not be an asset of the kind covered by subsection 768-540(2). | Detailed Reasoning - Application to your circumstances: In applying subsection 768-540(1) to all assets included in the total assets of ABC Australia foreign subsidiaries. | Detailed Reasoning - Active Foreign Business Assets: Deferred Expenses - A deferred charge include costs that have been invoiced but not incurred for an underlying asset or for goods and services that will be used in business in future. Same as prepayment, deferred expenses in the financial statements of the foreign subsidiaries can be said to be used, or held ready for use, in the course of carrying on a business and will therefore satisfy paragraph 768-540(1)(b)(i) and thus taken as an active asset. Goodwill - is specifically listed as an active foreign business asset in accordance with subparagraph 768-540(1)(b)(ii). Inventory- Inventory is one of the major assets for foreign subsidiaries distribution business for the purpose of revenue production. Therefore, inventory will be an active asset as they are used or held ready for use by the company in carrying on business per subparagraph 768-540(1)(b)(i). Investment in Subsidiaries - Ownership interest held by the foreign are listed as an active foreign business asset in accordance with subparagraph 768-540(1)(b)(iii). Prepayments - The prepayments in the respective trial balances were all related to purchase of goods (especially rice) or services for business operations. These prepayment or deposit payment to suppliers were made in accordance with the agreed purchase order terms. It is considered that the prepayments in the financial statements of the foreign subsidiaries are used (or held ready) for use in the carrying on of their respective business. Therefore, in this case, prepayment can be said to satisfy paragraph 768-540(1)(b)(i) and thus taken as an active asset. Property, Plant and Equipment (PPE) - PPE assets are used by foreign subsidiaries for the purpose of operating their distribution business. Therefore, both are active assets as they are used or held ready for use by the company in carrying on business per subparagraph 768-540(1)(b)(i). Trade Debtors- Where a business makes sales on credit in the normal course of its operations, the resulting trade debtors can reasonably be seen as being "inherently connected" with that business and satisfying subparagraph 768-540(1)(b)(i). Trade Debtors are specifically excluded from paragraph 768 -540(2)(a ). Therefore, Trade Debtors will be considered an active foreign business asset under subsection 768-540(1). VAT receivables- The foreign subsidiaries net balance 'VAT and other tax receivables' is claimable in accordance with the Value Added Tax regulation in the respective jurisdiction of the foreign subsidiaries. Net VAT receivables are comparable to a trade debt as it is a debt (receivable) that is due to subsidiaries from the government as a result of its business activities, and a trade debt should not be narrowly viewed as being restricted to debts due from sales to customers. The nature of subsidiaries net VAT receivables is in essence a trade debt. On the basis trade debts are considered active assets, net VAT receivables should also be considered an active asset. In this case, the right to the VAT can be said to be used, or held ready for use, in the course of carrying on a business and will therefore satisfy paragraph 768-540(1)(b)(i). [1] ATP ITAA 1997 Commentaries [108-A.1200]. [2] ATP ITAA 1997 Commentaries [108-A.1300].

Does IVA apply to this private ruling?: This ruling has not considered the application of any anti-avoidance rules. | Question 1: Will the capital gains or capital losses that ABC Australia makes from CGT event A1 happening because of the transfer of shares in its foreign subsidiariesto ABC New Co be reduced under section 768-505 by the foreign subsidiaries' respective active foreign business asset percentage? | Tangible property that has physical existence such as land, buildings. They are capable of possession; ownership may be transferred, and the right of ownership may be defended in a court. | Intangible property can be an idea if it is manifest either in a Trademark, a copyright, or an application for patent. It has to be in the form of copyright, IP or patent as it is transferable and may be the subject of legal action.