Private ruling: Income tax - Capital gains tax - Subdivision 126-B roll-over
Date of advice: 17 November 2015
Published: February 2016
Ruling period: Year ended 31 December 2015 | Year ended 31 December 2016
Date scheme commenced: 1 January 2015.

Ruling: Q1: Will company C qualify for the roll-over under Subdivision 126-B of the Income Tax Assessment Act 1997 for the transfer of shares in company S1 and company S2 to company D? | A1: Yes.

Relevant facts and circumstances: Company D is the ultimate controlling entity of companies C, S1 and S2. Company D is exempt from Australian tax under the common law doctrine of sovereign immunity for its passive investments. Company D beneficially owns 100% shares in company N, a foreign resident company. Company N wholly owns company C, a foreign resident company. Company C owns shares in Australian companies S1 and S2 respectively. Company D is restructuring their asset holdings in Australia. The purpose of the restructuring transactions is to have the ownership of the Australian companies and therefore their assets directly held by company D. It is proposed that the shares in S1 and S2 be transferred from company C to company D (the transactions ). The newly incorporated Australian companies S1 and S2 are part of a MEC (member of a multiple entry consolidated) group. No changes are occurring to this MEC group as a result of the restructure. Companies D, S1 and S2 are not exempt entities as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 ( ITAA 1997 ). None of the roll-over assets will become trading stock in the hands of the recipient company following the respective transfers or have obtained the Subdivision 126-B of the ITAA 1997 roll-over before. Company C will make a capital gain in relation to each of the transactions. In relation to the transfer of the CGT assets, company C is choosing to obtain the roll-over under Subdivision 126-B of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 350 | Income Tax Assessment Act 1936 subsection 350(1) | Income Tax Assessment Act 1997 subsection 126-45(1) | Income Tax Assessment Act 1997 subsection 126-45(2) | Income Tax Assessment Act 1997 paragraph 126-45(2)(a) | Income Tax Assessment Act 1997 subdivision 126-B | Income Tax Assessment Act 1997 section 126-50 | Income Tax Assessment Act 1997 subsection 126-50(1) | Income Tax Assessment Act 1997 subsection 126-50(2) | Income Tax Assessment Act 1997 subsection 126-50(4) | Income Tax Assessment Act 1997 subsection 126-50(5) | Income Tax Assessment Act 1997 subsection 126-50(6) | Income Tax Assessment Act 1997 paragraph 126-55(1)(a) | Income Tax Assessment Act 1997 subsection 126-60(1) | Income Tax Assessment Act 1997 section 855-15 | Income Tax Assessment Act 1997 section 855-25 | Income Tax Assessment Act 1997 subsection 855-30(2) | Income Tax Assessment Act 1997 section 960-190 | Income Tax Assessment Act 1997 section 960-195 | Income Tax Assessment Act 1997 section 975-500 | Income Tax Assessment Act 1997 paragraph 975-500(b) | Income Tax Assessment Act 1997 subsection 975-505(1) | Income Tax Assessment Act 1997 paragraph 975-505(1)(b) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: Please note that all legislative references referred to below are in relation to the Income Tax Assessment Act 1997 unless otherwise specified. A roll-over under Subdivision 126-B will be available if: • a CGT event (the trigger event ) happens involving a company (the originating company ) and another company (the recipient company ) that are members of the same wholly-owned group at the time of the trigger event; • the CGT event is one of the events listed in subsection 126-45(2); and • the requirements set out in section 126-50 are satisfied. | Detailed Reasoning - Trigger event: Subsections 126-45(1) and (2) require that a CGT event of a specified type happened to the originating company. CGT event A1 is one of the listed CGT events in paragraph 126-45(2)(a) for the roll-over. In relation to the proposed transactions, CGT event A1 will happen when company C disposes of the shares in S1 and S2 to company D. CGT event A1 will happen on the transfer of the shares of company C to company D. | Detailed Reasoning - Wholly-owned group: Subsection 126-50(1) requires that the originating company and recipient company must be members of the same wholly-owned group at the time of the trigger event. Section 975-500 defines 'wholly-owned group': Two companies are members of the same wholly-owned group if: (a) one of the companies is a *100% subsidiary of the other company; or (b) each of the companies is a *100% subsidiary of the same third company. Section 975-505(1) defines 'what is a 100% subsidiary': A company (the subsidiary company ) is a 100% subsidiary of another company (the holding company ) if all the *shares in the subsidiary company are beneficially owned by: (a) the holding company; or (b) one or more 100% subsidiaries of the holding company; or (c) the holding company and one or more 100% subsidiaries of the holding company. Companies C, S1 and S2 are members of the same wholly-owned group because company C 100% owns S1 and S2 pursuant to paragraph 975-500(b). Company C is also a 100% subsidiary of company D pursuant to subparagraph 975-505(1)(b) because company D beneficially owns all shares in company N that 100% owns company C. Companies D, N, C, S1 and S2 are members of the same wholly-owned group. Accordingly, the condition in subsection 126-50(1) is met. | Detailed Reasoning - Not trading stock: Under subsection 126-50(2), the roll-over asset must not be trading stock of the recipient company just after the time of the trigger event. None of the roll-over assets will be trading stock in the hands of the recipient company just after the respective transfers. Accordingly, the condition in subsection 126-50(2) is met. | Detailed Reasoning - Non-exempt entity: Subsection 126-50(4) provides that the ordinary income and statutory income of the recipient company must not be exempt from income tax because it is an exempt entity for the income year of the trigger event. Subsection 995-1(1) defines 'exempt entity': (a) an entity all of whose ordinary income and statutory income is exempt from income tax because of this Act or because of another Commonwealth law, no matter what kind of ordinary income or statutory income the entity might have; or (b) an untaxable Commonwealth entity. Note: see section 11-5 for a list of entities of the kind referred to in paragraph (a). Companies D, S1 and S2 are not exempt entities, within the definition of that term in subsection 995-1(1). Accordingly, subsection 126-50(4) is met. | Detailed Reasoning - Taxable Australian property: Subsection 126-50(5) provides that there must be a foreign resident in the transaction and the roll-over must be taxable Australian property. Section 855-15 lists five categories of CGT assets that are taxable Australian property. The first two categories are taxable Australian real property and indirect Australian real property interests. | Detailed Reasoning - Shares in S1 and S2: Under section 855-25, an indirect Australian real property interest refers to a membership interest held by a foreign resident in an entity at that time if the interest passes the non-portfolio interest test and the principal asset test. • Non-portfolio interest test Under section 960-195, an interest held by an entity (the holding entity ) in another entity (the test entity ) passes the non-portfolio interest test at a time if the sum of the direct participation interests held by the holding entity and its associates in the test entity at that time is 10% or more. Section 960-190 explains how to work out the direct participation interest that one entity holds in another entity. If the other entity is a company, the direct participation interest that the first entity holds in the other entity is the direct control interest (within the meaning of section 350 of the Income Tax Assessment Act 1936 ) that the first entity holds in the other entity. The direct control interest in a company is calculated by the greater or greatest of percentages of the total paid-up share capital, total rights of shareholders to vote, or participate in any decision-making concerning a number of matters or rights to distributions listed in subsection 350(1) of the Income Tax Assessment Act 1936 . Company C holds 100% of the total paid-up share capital of S1 and S2 and has direct control interest of 100% in both S1 and S2. Therefore company C has the direct participation interest of 100% in S1 and S2. Since the direct participation interest is more than 10%, shares in S1 and S2 held by company C pass the non-portfolio interest test. • Principal asset test The principal asset test is used to determine when an entity's underlying value is principally derived from Australian real property. Subsection 855-30(2) provides that a membership interest held by an entity (the holding entity ) in another entity (the test entity ) passes the principal asset test if the sum of the market values of the test entity's assets that are taxable Australian real property exceeds the sum of the market values of its assets that are not taxable Australian real property. The market value of the taxable Australian real property held by S1 and S2 will exceed the market values of all assets that are not taxable Australian real properties. Interests in S1 and S2 pass the non-portfolio test and the principal asset test and therefore are taxable Australian properties pursuant to section 855-25. Where the originating company and the recipient company are foreign residents, Item 1 of subsection 126-50(5) also requires that at the time of the trigger event the roll-over asset must be a taxable Australian property just before and just after the trigger event. Companies C and D are foreign residents. Just before and just after the transfers, shares in S1 and S2 are taxable Australian properties. Consequently, the requirement in subsection 126-50(5) is satisfied. | Detailed Reasoning - Member of a multiple entry consolidated (MEC) group: Subsection 126-50(6) provides that if the originating company or the recipient company is an Australian resident at the time of the trigger event, that company must either: (a) be a member of a consolidated group or MEC group at that time; or (b) not be a member of a consolidatable group at that time. S1 and S2 are Australian residents at the time of the transfers and are also members of a MEC group at that time. Accordingly, the requirement in subsection 126-50(6) is met. | Detailed Reasoning - Capital gain: Paragraph 126-55(1)(a) limits the roll-over to the following circumstances if the originating company and recipient company both choose to obtain it: • the originating company makes a capital gain under the trigger event, or makes no capital loss and is not being entitled to a deduction; or • the originating company acquired the roll-over asset before 20 September 1985. Company C will make a capital gain under CGT event A1 as a result of each transfer. Both company C and the recipient company for each of the transfers choose to obtain the Subdivision 126-B roll-over. Accordingly, company C can disregard any capital gain that arises from the transfer of the CGT assets, i.e. the shares in S1 and S2, to company D under subsection 126-60(1).