Private ruling: CGT consequences of a restructure, including eligibility for rollover relief
Date of advice: 20 July 2021
Published: October 2021
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will CGT event A1 in subdivision 104-A occur in relation to each Company A share at the time of exchange of Company A shares for the 'Total Consideration' (The 'Total Consideration' being the total ordinary shares issued by Company B as consideration for the acquisition of shares in Company A')? | A1: Yes | Q2: Will Shareholder D and Shareholder E be eligible to choose CGT roll-over relief under Division 615 in respect of the exchange of their Company A shares? | A2: Yes | Q3: If the CGT roll-over under Division 615 is chosen, will the cost base of the ordinary shares acquired in Company B under the Proposed Restructure be determined in accordance with section 615-40? | A3: Yes | Q4: Will a consolidated group continue to exist without a deconsolidation and reconsolidation event pursuant to section 703-70? | A4: Yes

Relevant facts and circumstances: Current group structure The application has been submitted by an income tax consolidated group ('the Group') currently consisting of two entities: • Company A, which is the current holding company • Company C, which is the current trading/operating entity, and a wholly owned subsidiary of Company A. Company A and Company C are both resident private companies incorporated in Australia. Company A's share structure, before any transactions covered by this private ruling took place [1] , is described in Table 1 . Table 1: Company A's share structure [2] Shareholder Ordinary shares Preference shares [3] Total Shareholder D About 80% - About 67% Shareholder E About 20% - About 17% Shareholder F - 100% About 16% Total X Y X+Y Shareholder D and Shareholder E are trusts. Both trustees are Australian residents for tax purposes. The preference shares held by Shareholder F are treated as equity interests for Australian income tax purposes. Company A had current loans to shareholders (before any transactions described in this private ruling began). These loans are described in Table 2 . Some of these loans to shareholders ('Div 7A loans') have been made on terms which are subject to Division 7A of the ITAA 1936 ('Division 7A'). Each year, Company A makes a Div 7A loan to the shareholders. Before the relevant tax returns are lodged, these Div 7A loans are settled by set-off against a fully franked dividend declared by Company A to those shareholders. Other loans ('non-Div 7A loans')are not subject to Division 7A because they were made in the 2011 income year, when Company A did not have a distributable surplus. Table 2: Company A's current loans to shareholders Shareholder Div 7A loans Non-Div 7A loans Shareholder D X X Shareholder E X X Shareholder F [4] X - Total X X The transactions The Group is preparing for a potential Initial Public Offering ('IPO') on the Australian Securities Exchange ('ASX'). The timing is uncertain. The Group will create a new holding entity ('Company B') which will become the listed vehicle on the ASX. Company B will acquire all the shares in Company A immediately before listing on the ASX, so that Company A and Company C will become wholly owned subsidiaries of Company B. The Group has planned several transactions in preparation for, and including, the potential IPO (collectively, 'the transactions'): • buying back preference shares ('Step 1') • repay existing debt ('Step 2') • interpose Company B ('Step 3') • transfer Company C from Company A to Company B ('Step 4') • transfer Company A from Company B to the ordinary shareholders, Shareholder D and Shareholder E ('Step 5') • sale of up to 50% of the shares in Company B to new investors on the ASX ('Step 6'). We describe Steps 1 through 6 in Table 3. Table 3: the Transactions Transaction Details Step 1: buy back preference shares Company A bought back the preference shares from Shareholder F for cash. The buy back price was $X. Step 2: repay existing debt Company A will declare fully franked ordinary dividends to Shareholder D and Shareholder E, equal to their Div 7A and non-Div 7A loans. The dividends will be set-off against the loans to settle them. The $X loan was repaid to Shareholder F through the declaration of a dividend. This dividend was set-off against the $X loan owed by Shareholder F to the company. Step 2 is likely to happen shortly before Step 3. The applicant submits that there is no contractual connection between the debt repayment under Step 2, and the share consideration under Step 3. Step 3: interpose Company B Company B will be incorporated with ordinary, non-redeemable shares held in the same proportion to the current shareholding of Company A. Shareholders D and E will enter into a binding Share Purchase Agreement ('SPA') with Company B to dispose of their shares in Company A to Company B, in exchange for the shares in Company B. They will receive a whole number of ordinary shares in Company B which are of equal percentage and market value to their respective shares disposed of in Company A. The share transfer documents under the SPA are expected to be executed on the same date as the actual share transfer by the ordinary shareholders to Company B. The Company B shares issued to Shareholders D and E in exchange for their Company A shares will represent all the shares in Company B immediately after completion. Company B will choose within 28 days after completing the interposition that the Group continues to exist with Company B as its head company. Shareholders D and E will hold shares in Company B in the following proportions: • about 80% for Shareholder D • about 20% for Shareholder E The Interposition must take place at least one week before the prospectus is reviewed by the Australian Securities and Investments Commission ('ASIC') . Company B is likely to be formed between one to two months before that point. The interposition of Company B is not conditional on there being a successful listing on the ASX. The applicant submits that there is genuine commercial risk that the IPO will not go ahead. Step 4: transfer Company C from Company A to Company B Company A will transfer its shares in Company C to Company B as an 'in-specie distribution' to Company B. Step 4 is expected to take place soon after Step 3, and before the prospectus is reviewed by ASIC. Step 5: transfer Company A from Company B to Shareholder D and Shareholder E Company B will transfer its shares in Company A to Shareholder D and Shareholder E for nominal consideration. Step 5 is also expected to take place soon after Step 3, and before the prospectus is reviewed by ASIC. Step 6: sale of shares on the ASX Up to 50% of the shares in Company B (held by Shareholder D and Shareholder E) will be sold to new investors on the ASX in exchange for cash. The timing of the IPO Sale is uncertain. The applicant submits that the timing depends on the review/issue of prospectus, as well as due diligence and IPO processes being satisfactorily completed. The applicant expects the IPO to go ahead between two to three months after the prospectus is issued. The applicant submits that there is genuine commercial risk that the IPO will not go ahead. Applicant's submissions The applicant submits that it has commercial rationales for listing using a new entity, rather than listing an existing entity. We restate these submissions in Table 4 . Table 4: applicant's explanations about the commercial rationale for listing using a new entity Consideration Details Facilitation listing a new entity facilitates a due diligence and offer process by aggregating security holders and provides a vehicle through which shareholders can sell their securities into the IPO Governance and legal due diligence it is expected to be easier to attract appropriate board members in respect of a newly formed holding company rather than one with a significant history Capital raising it is expected to be easier to attract external capital and expertise in the form of directors: a newly formed company with minimal corporate history is commercially more attractive to directors and investors Company's constitution listing a new entity allows an ASX appropriate constitution to be in place from a public company, and reduces the challenges of changing an existing operating company's constitution The applicant also submits that the Proposed Transactions can be broken down into three distinct, and independent, phases, each achieving separate commercial objectives. The client's description of each phase and their respective purposes is described in Table 5 . Table 5: applicant's classification of the phases and submissions about purpose Phase description Applicant's submissions about purpose Steps 1 and 2 (described by the applicant as 'prior to the Proposed Restructure') rationalise and eliminate existing intra-group loan balances between Company A and Company A's existing shareholders Step 3 (described by the applicant as 'the Proposed Restructure') facilitate interposition of Company B as a new holding company for the IPO Steps 4 and 5 (described by the applicant as 'after the Proposed Restructure') remove Company A from the corporate group, as it will be a dormant entity with no remaining commercial purpose The applicant submits that the IPO is subject to clear commercial risk: it may not go ahead. The applicant submits that the timing of Steps 4 and 5 has been determined because there are restrictions on Company B's ability to pay dividends and transfer assets after the prospectus is approved and issued.

Relevant legislative provisions: Section 104-10 of the Income Tax Assessment Act 1997 | Section 108-5 of the Income Tax Assessment Act 1997 | Section 124-15 of the Income Tax Assessment Act 1997 | Section 615-5 of the Income Tax Assessment Act 1997 | Section 615-15 of the Income Tax Assessment Act 1997 | Section 615-20 of the Income Tax Assessment Act 1997 | Section 615-25 of the Income Tax Assessment Act 1997 | Section 615-30 of the Income Tax Assessment Act 1997 | Section 615-40 of the Income Tax Assessment Act 1997 | Section 701-1 of the Income Tax Assessment Act 1997 | Section 701-10 of the Income Tax Assessment Act 1997 | Section 703-5 of the Income Tax Assessment Act 1997 | Section 703-15 of the Income Tax Assessment Act 1997 | Section 703-20 of the Income Tax Assessment Act 1997 | Section 703-70 of the Income Tax Assessment Act 1997 | Section 995-1 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Yes. CGT event A1 will happen when Shareholder D and Shareholder E exchange their Company A shares for shares in Company B under Step 3. | Detailed Reasoning - Detailed reasoning: CGT event A1 happens if you dispose of a CGT asset: subsection 104-10(1). Subsection 104-10(2) says: You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. Subsection 108-5(1) says: A CGT asset is: (a) any kind of property; or (b) a legal or equitable right that is not property. Note 1 to section 108-5 says 'shares in a company' and 'units in a unit trust' are examples of CGT assets. Under Step 4, Shareholder D and Shareholder E ('Company A's original ordinary shareholders') will enter into a binding SPA with Company B. Under the SPA, Company A's original ordinary shareholders will transfer their shares in Company A to Company B, so that Company B will hold all the issued shares in Company A. Shares in a company are property, and therefore CGT assets. There is no suggestion that Company B will hold the shares on trust for another entity (such as Shareholder D and Shareholder E). This is a change of ownership, and therefore, a disposal for the purposes of section 104-10. It follows that CGT event A1 will happen. Subsection 104-10(3) says: The time of the event is: (a) when you enter into the contract for the *disposal; or (b) if there is no contract - when the change of ownership occurs. Under Step 3, the SPA is expected to be executed on the same date as Company A's original ordinary shareholders (Shareholder D and Shareholder E) transfer their shares in Company A to Company B. Therefore, CGT event A1 will happen at that time. | Detailed Reasoning - Conclusion: CGT event A1 will happen when Shareholder D and Shareholder E exchange their Company A shares for shares in Company B under Step 3. | Detailed Reasoning - Question 2: Will the applicants be eligible to choose CGT roll-over relief under Division 615 in respect of the exchange of their Company A shares? | Summary: Yes, Shareholder D and Shareholder E will be eligible to choose CGT roll-over relief under Division 615 for the exchange of their Company A shares for replacement shares in Company B, because they meet all the relevant conditions in Division 615. | Detailed Reasoning - Detailed reasoning: Broadly, Division 615 applies where shareholders, as part of an eligible business restructure, exchange shares in a company (or units in a trust) for shares in another company. The effect of Division 615 is to provide 'roll-over relief' so that the consequences which would normally flow from the disposal/acquisition under the CGT provisions are modified. Relevant requirements are contained in sections 615-5, 615-15, 615-20, 615-25 and 615-30. We summarise and apply these requirements in Table 5. Our analysis in Table 5 suggests that whether some conditions are satisfied will depend on the scope of the 'scheme for reorganising'. Some steps may be failed if transactions other than Step 3 are included. | Detailed Reasoning - Application - considering other steps: Paragraph 615-5(a) The exchanging member is a member of the original entity Met - Company A's original ordinary shareholders (Shareholder D, Shareholder E) are the exchanging members. Met. Paragraph 615-5(b) The exchanging members own all the shares in the original entity Met. After Step 1, Shareholder F's preference shares have been cancelled. Company A's original ordinary shareholders own all shares in Company A immediately before Step 3. The test may be failed if it had to be applied before Step 1, when Shareholder F's redeemable preference shares remained on issue. See paragraphs 28 and 33 for some discussion. Paragraph 615-5(c) Under a scheme for reorganising its affairs, the exchanging members dispose of all their shares or units in it to the interposed company, in exchange for shares in the interposed company (and nothing else) Met. Under Step 3, Company A's original ordinary shareholders will dispose of all their shares in Company A, in exchange for shares in Company B. May not be met, because: • under Step 2, the repayment of Company A's original ordinary shareholders' debts could be characterised as 'something' under the scheme, which would cause the 'nothing else' requirement in paragraph 615-5(c) to be failed • under Step 5, Company A's original ordinary shareholders will have their shares in Company A returned to them under the scheme. This might be either 'something' or have the effect of invalidating the 'disposal' or 'exchange', either of which could cause 615-5(c) to be failed. See paragraphs 29 to 35 for some discussion. Section 615-15 the interposed company must own all the shares or units in the original entity immediately after the time (the completion time ) all the exchanging members disposed of their shares or units under the scheme Met. Immediately after the disposal, Company B will own all the shares in Company A. After Step 5, Company B will no longer own all the shares in Company A. This requirement may be failed if the relevant 'completion time' means immediately after the entire 'scheme for reorganising', if that scheme includes Step 5. See paragraphs 30 and 35 for some discussion. Subsection 615-20(1) immediately after the completion time, each exchanging member must own a percentage of shares in the interposed company equal to their former holding in the original entity Met. Immediately after Step 3, Company A's original ordinary shareholders will hold the same percentage of shares in Company B as they held in Company A immediately before Step 3 (approximately 80% for Shareholder D, and 20% for Shareholder E). May not be met if the scheme includes Step 1. Shareholder F holds redeemable preference shares in Company A before the 'scheme for reorganising', and does not hold shares in Company B after the 'scheme for reorganising'. We see no reason why the reference percentage of the shares or units in the original entity' in this subsection would disregard redeemable preference shares. The percentages would include all shares on issue, irrespective of class. Therefore, each 'exchanging member' - that is, Shareholder D and the Shareholder E - would have different percentages of shares in Company B to their original shareholding percentages in Company A before the scheme. Shareholder D had about 67% of total shares in Company A before Step 1, and will have about 80% of the shares in Company B after Step 3. Likewise, Shareholder E had about 17% before Step 1, and 20% of the shares in Company B after Step 3. See Table 1. Also may not be met if the scheme includes Step 6, and the relevant completion time is after Step 6. See paragraphs 30 and 35. In this case, then Company A's original ordinary shareholders would only hold 50% of the shares in Company B, as opposed to 100% of the shares in Company A before Step 3 (or about 84% before Step 1). Subsection 615-20(2) for each exchanging member, the following ratios must be equal: • in the original entity, the market value of their original shares or units, to the market value of the total shares or units disposed of under the scheme • in the interposed company, the market value of the shares they receive, to the market value of total shares received by all the exchanging members Met. Immediately after Step 3, Company A's original ordinary shareholders will hold the same percentage of shares in Company B as they held in Company A immediately before Step 3. Company B's only assets will be its shares in Company A. Therefore, it follows that the market value of the shares in Company B will be the same as the former market value of the Company A shares before Step 3. The proportions of market value for each shareholder will be the same because they are all ordinary shares. May not be met if the scheme includes Step 1. Shareholder F holds redeemable preference shares in Company A before the 'scheme for reorganising'. The value of Company A's original shares before Step 1 would most likely be less than the value of their shares in Company A immediately before Step 3, and their replacement shareholding in Company B after Step 3. May not be met if the scheme includes Step 6, and the relevant completion time is after Step 6. See paragraphs 30 and 35. In this case, then Company A's original ordinary shareholders would only hold 50% of the shares in Company B, as opposed to 100% of the shares in Company A before Step 3 (or 80% before Step 1). Subsection 615-20(3) the exchanging member seeking rollover relief must either: • be an Australian resident at the time it disposed their original shares or units, [5] or • if a foreign resident at that time, both all their original shares or units, and also their shares in the interposed company, must be taxable Australian property immediately after the completion time Met. The trustees of Shareholder D and Shareholder E are both Australian residents. Therefore, it is not necessary for the shares to be taxable Australian property. Met. Section 615-25 the shares issued in the interposed company must not be redeemable shares Met. The shares issued by Company B are all ordinary shares, and not redeemable. Met. The shares issued by Company B are all ordinary shares, and not redeemable. Subsection 615-25(2) each exchanging member must own the shares in the interposed company from the time they are issued until at least the completion time Met, assuming Step 6 is not part of the 'scheme' - exchanging members will continue to own shares in interposed company until the IPO sale. Not met if the 'scheme for reorganising' includes Step 6 and the relevant 'completion time' is at the completion of the entire scheme. See paragraphs 30 and 35. After the IPO sale (if it happens), then the exchanging members only own 50% of the shares in Company B. Subsection 615-25(3) immediately after the completion time, the exchanging members must own all shares in the interposed company (with an exception where other members can own up to 5 shares, where those shares represent a small percentage of the total market value) Met, assuming Step 6 is not part of the 'scheme' - Company A's original shareholders (Shareholder D, Shareholder E) will own all the shares in Company B until the IPO sale. Not met if the 'scheme for reorganising' includes Step 6, and the relevant 'completion time' is at the completion of the entire scheme. See paragraphs 30 and 35. After the IPO sale (if it happens), then the exchanging members only own 50% of the shares in Company B. section 615-30 broadly, for a consolidated group, the interposed company must choose that an interposed consolidated group continues in existence after the completion time, within 28 days [6] This will be met. Company B will choose the rollover within 28 days. This will be met. Company B will choose the rollover within 28 days. From our analysis in Table 5 , the arrangement may fail several requirements if the 'scheme for reorganising' includes multiple proposed transactions described in the Application. We restate this analysis in paragraphs 28 to 31. If the 'scheme for reorganising' includes Step 1, then: • exchanging members may not own 'all' the shares in the original entity at the test time (assuming that is at the beginning of the scheme), which would cause paragraph 615-5(b) to be failed [7] • the ratios of number and market value of shares in the original entity compared to the interposed company for the exchanging members would not be equal, causing subsections 615-20(1) and 615-20(2) to be failed. If the 'scheme for reorganising' includes Step 2, then the exchanging members have had their debts repaid, which could be 'something else' under the scheme, causing paragraph 615-5(c) to be failed. If the 'scheme for reorganising' includes Step 5, then it could be suggested that: • there is no 'disposal' or 'exchange' in the relevant sense, because Company A's original ordinary shareholders have had their original shares in Company A returned to them as part of the 'scheme for reorganising' (or to put that another way, the 'disposal' or 'exchange' is unwound or invalidated through the subsequent return of the shares): this could cause paragraph 615-5(c) to be failed, or • the return of Company A shares to Company A's original ordinary shareholders under Step 5 is 'something else' under the 'scheme for reorganising', which would cause the 'nothing else' requirement in paragraph 615(5)(c) to be failed, or • the return of Company A shares to Company A's original ordinary shareholders under Step 5 could mean that Company B doesn't hold all the shares in Company A at the relevant 'completion time'. If the 'scheme for reorganising' includes Step 6, then it could be suggested that the number and market value of shares in the original entity compared to the interposed company for the exchanging members would not be equal, because after the IPO they would only hold 50% of the shares in Company B. This could cause subsections 615-20(1) and 615-20(2) to be failed. However, this would only be the case if the relevant 'completion time' was at the conclusion of the entire scheme, rather than the actual disposal under Step 3. See paragraphs 30 and 35. Alternative arguments could be raised to the effect that some of the proposed transactions, even if they form part of the 'scheme for reorganising', would not cause the relevant conditions to be failed. We raise some in paragraphs 33 to 35. For Step 1, one interpretation could be that under paragraph 615-5(b), there is no explicit requirement that this condition be met at any particular time (ie, at the beginning of the 'scheme for reorganising'). Therefore, it is enough if the exchanging members own all the shares in the original entity at any time before the exchange or interposition. For Step 2, it could be suggested that the repayment of a debt in full (ie, face value, without discounting or part forgiveness) with separate consideration to the exchange of shares, should not cause the 'nothing else' requirement in paragraph 615-5(c) to be failed. For Step 5, it could be argued that: • the requirement of a 'disposal' or 'exchange' is still met (under the ordinary meaning of those words), even if it is contemplated that something disposed of or exchanged will be returned to the original owner in the future • Company A will have no assets and be a dormant company, so the shares would have no value: therefore, the return of Company A shares to Company A's original ordinary shareholders under Step 5 would not cause the 'nothing else' requirement in paragraph 615(5)(c) to be failed [8] • the relevant 'completion time' for section 615-15 is immediately after the disposal: this will be met even if the interposed company will later return the shares in the original entity to the original shareholders (this argument would also apply to Step 6). However, even if some of these arguments are correct, taking a 'broad' approach to characterising the 'scheme for reorganising' could still cause some or at least one of the conditions in Division 615 to be failed. Therefore, it is necessary to determine which proposed transactions for part of the 'scheme for reorganising'. | Detailed Reasoning - Characterising the 'scheme for reorganising' - existing ATO guidance: Section 995-1 says 'scheme' means 'any arrangement,' or 'any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.' While the Commissioner may determine that a single scheme will be treated as two or more separate schemes, this is restricted to the debt/equity rules in Division 974. The phrase 'scheme for reorganising its affairs' is not described or defined in section 615-5. However, a similar phrase 'reorganisation of the affairs' [of a unit trust or a company] was used in former sections 160ZZPA, 160ZZPB, 160ZZPC and 160ZZPD of the ITAA 1936. The ATO discussed the meaning of these provisions in Taxation Ruling TR 97/18 Income tax: capital gains: roll-over relief following reorganisation of the affairs of a unit trust or company - sections 160ZZPA, 160ZZPB, 160ZZPC and 16OZZPD ('TR 97/18') . In the 'explanations' section, Paragraph 26 of TR 97/18 says: ...the expression 'scheme for the reorganisation of the affairs of a unit trust' must be interpreted in the context in which that expression appears. What is meant is the interposition of a company between the unit trust and its unitholders. Paragraph 32 of TR of TR 97/18 says: It is not possible to consider parts of schemes in isolation. In considering a scheme, we must look at the entirety of the scheme and its effect in determining whether the scheme is one for the reorganisation of the affairs of a unit trust. Paragraphs 53 through 57 of TR 97/18 reject alternative views to the effect that the relevant scheme could not extend to steps 'other than those for which roll-over relief is sought'. For example, paragraph 55 says: The requirement in section 160ZZPA is that, under a scheme for the reorganisation of the affairs of a company, certain requirements must be met for roll-over relief to be available. In no way does the legislation restrict the scheme to those other requirements of the roll-over provision. It is the entire scheme, and not just the part of the scheme necessary to satisfy roll-over requirements, which is to be considered in determining whether the entire operative requirements, including the requirement under paragraph 160ZZPA(1)(a) of the purpose of the scheme, are satisfied. Applying the reasoning in TR 98/17 to the Division 615 rollover, this suggests that while the 'reorganisation' involves interposing a company, a broader scheme or arrangement may not be eligible if it includes other steps which would fail the roll-over requirements. Taxation Determination TD 2020/6 Income tax: what is a 'restructuring' for the purposes of subsection 125-70(1) of the Income Tax Assessment Act 1997? ('TD 2020/6') discusses the meaning of the phrase 'restructuring of the demerger group,' which is used in Division 125, which provides roll-over relief for demergers. TD 2020/6 makes several points at paragraphs 2 through 12 for identifying the restructuring, including that: • what steps form part of the restructuring is a question of fact [paragraph 2] • the restructuring is not necessarily confined to the steps or transactions that deliver ownership interests, but may include previous or subsequent transactions in a sequence [paragraph 2] • transactions may form part of the restructuring even where they are legally independent of each other, contingent on different events, or may not occur [paragraph 3] • a transaction is not necessarily part of the restructuring merely because it is enabled or a consequence of the restructuring [paragraph 4] • whether transactions occur simultaneously or are separated by a significant period is relevant but not necessarily decisive [paragraph 9]. Example 1 in TD 2020/6 is about a listed public company which demerges a subsidiary. It is expected that the subsidiary will subsequently list on the ASX and undertake a capital raising on the open market. TD 2020/6 concludes that the subsequent capital raising would not form part of the relevant restructuring. However, Example 2 suggests that the result could be different if the capital raising was restricted in a manner which would have the effect of changing the respective economic positions of existing shareholders (for example, if some existing shareholders were prevented from participating). While the phrase 'restructuring of the demerger group' is not used in Division 615, we consider that the general approach taken in TD 2020/6 would be relevant to identifying the 'scheme for reorganising its affairs'. That is, what steps form part of the scheme is a question of fact: several transactions occurring in a sequence might form part of a single scheme. Taken together, both TR 97/18 and TD 2020/6 suggest that when evaluating an arrangement's eligibility for CGT rollover relief, multiple transactions may form part of the relevant scheme. Therefore, we need to determine which steps in the proposed transactions form part of the 'scheme for reorganising'. We address this at paragraphs 49 to 66. | Detailed Reasoning - Step 1: buy back preference shares: One possible link between Steps 1 and 3, is that redeeming the preference shares is essential to eligibility for the rollover. This is because: • the preference shares in LSI are redeemable • the Division 615 rollover will only be available if the number and market value of shareholdings in the original entity, before the interposition, is mirrored in the interposed company afterwards, and • the interposed company cannot issue redeemable shares in exchange for shares in the original entity. [9] It seems likely that the scheme will be ineligible for the Division 615 rollover if the preference shares remain on issue before the interposition. [10] Therefore, redeeming the preference shares might be characterised as part of the 'scheme for reorganising.' However, under Step 1, the shares will be redeemed in exchange for cash. Shareholder F does not receive any shares in Company B as part of the exchange in Step 3, so the consideration is not linked to the interposition of Company B. Redemption was authorised and contemplated by the terms of issue of the preference shares. Also, the existence of preference shares in the Group (for example, if Company A was the listed entity, or if Company A kept Shareholder F's preference shares on issue after the interposition) may interfere with the IPO. For example, it seems reasonable to expect that a potential investor would be concerned that preference shares within the group could reduce the value of their shareholding, or limit future dividends. This could reduce the share price and effectiveness of the IPO sale. On balance, we conclude that Step 1 is best characterised as either a separate step, or as a preparatory step to the IPO sale under Step 6. It does not form part of the 'scheme for reorganising.' | Detailed Reasoning - Step 2: repay existing debt: The debts are repaid in full, by set-off against dividends. The consideration is not linked to the exchange of shares with Company B. For the Div 7A loans, Company A currently declares dividends each year equal to the amount of the loan so that they are repaid by lodgment date. Therefore, this step is likely to have happened anyway, without any plan to reorganise. It could be suggested that the non-Div 7A loans would not have been repaid, but for the plan to reorganise, because: • there may have be no unfavourable consequences under Division 7A if they were left on the books • Company A would not have been able to enforce repayment in court for the non-Div 7A loans if the loans had become statute barred. [11] However, it does not follow that the non-Div 7A loans would not have otherwise be repaid, just for these reasons. Non-payment of debts in a closely held company may have consequences for the personal or working relationships between the company's shareholders, so parties may well repay loans without an enforceable legal obligation. Arranging for the repayment of shareholder debts (whether enforceable or not) could be commercially explicable without the scheme, as their presence in the Group accounts could cause difficulties in raising finance. For example, a bank may be reluctant to advance credit to the Group while the shareholder loans remain on foot, or the loans might affect the IPO issue price or require additional disclosure. On balance, we conclude that Step 2 is best characterised as either a separate step, or as a preparatory step to the IPO sale under Step 6. It does not form part of the 'scheme for reorganising.' | Detailed Reasoning - Steps 4 and 5: Under Step 4, Company A transfers its shares in Company C to Company B. This step transfers all of Company A's assets to Company B. It has no economic impact for the Group, because the total value of assets held by Company B will not change. Company A loses all its assets at this step, becoming an almost valueless shell company. The step is best understood as a preliminary step to Step 5. Under Step 5, Company B transfers its shares in Company A to Company A's original shareholders. This is arguably linked to the interposition of Company B under Step 3, because it has the effect of unwinding part of that transaction. Under Step 3, Company A's original ordinary shareholders transfer their shares to Company B. Under Step 5, Company B returns those shares to Company A's original ordinary shareholders. However, Step 3 is not unwound in any economic sense. The ordinary shares in Company A do not have any significant value when returned, so the shares have a completely different character. Step 5 can also be explained as a preparatory step to the IPO. The presence of a dormant company with no assets or activities might cause problems during the IPO. For example, potential investors or underwriters may be concerned, affecting the share price or subscription take-up. It may also become necessary, or be thought prudent, to make additional disclosure in the prospectus. Removing Company A from the Group simplifies the group structure, and may alleviate these problems. On balance, we conclude that Steps 4 and 5 are best characterised as either a separate step, or as a preparatory step to the IPO sale under Step 6. They do not form part of the 'scheme for reorganising.' | Detailed Reasoning - Step 6: One possible reason to link Step 6 to the 'scheme for reorganising' is that it is likely to substantially change the ownership of the Group. Company A's original ordinary shareholders will dispose of up to 50% of their shareholding through the IPO. That disposal will affect the economic ownership, and therefore the group structure. It could be suggested that if the interposition of Company B is performed in contemplation of a future change to the economic ownership of the business, that is enough for it to form part of the 'scheme for reorganising.' However, there are other factors which suggest otherwise. • An IPO is a common means of raising capital for a business, which is commercially explicable in isolation, independent of any group reorganisation. • An IPO could have occurred without Company B being interposed. For example, Company A could have been listed on the ASX: from the facts presented, the Group is primarily creating a new holding company because this option is considered more likely to be attractive to potential investors and board members. • The interposition of Company B under Step 3 is not contingent on the IPO going ahead. • The timing of the IPO is uncertain, may not happen for some time, and may not proceed at all. On balance, from the facts presented with this ruling application, we conclude that Step 6 is best characterised as a separate step. It does not form part of the 'scheme for reorganising'. | Detailed Reasoning - Conclusion on characterising the scheme: Therefore, we conclude that the 'scheme for reorganising' is limited to Step 3 (the interposition of Company B). Steps 1, 2, 4, 5 and 6 do not form part of that 'scheme for reorganising.' However, the outcome could be different if there were other facts or circumstances linking the transactions. Possible facts or circumstances which (if present) might suggest a different conclusion could include: • Group planning (whether documented or otherwise) treated Steps 1 through Step 6 as a combined scheme directed at a single purpose of reorganising Company A • Group planning suggested that Steps 4 through 6 would follow Step 3 in quick succession, as a matter of course • circumstances suggesting that there was no commercial uncertainty about the IPO, ie, it was virtually certain to go ahead. It is also possible that Part IVA of the ITAA 1936('Part IVA') could apply to arrangements which contain contrived or unusual features which appear designed to meet conditions of the Division 615 rollover, particularly in combination with other transactions which appeared designed, for example, to change the respective economic positions of existing shareholders. We have not considered whether Part IVA would apply to the arrangement covered by this ruling. [12] | Detailed Reasoning - Conclusion: Given our conclusion that the 'scheme for reorganising' is limited to Step 3, it follows that the conditions in Division 615 are met for the reasons discussed in Table 5. The relevant entities will be eligible to choose roll-over relief under Division 615. Given we have taken a 'narrow' approach to characterising the 'scheme for reorganising,' we do not need to determine whether the issues raised at paragraphs 28 to 31 could cause any conditions in Division 615 to be failed. | Detailed Reasoning - Question 3: If the CGT roll-over under Division 615 is chosen, will the cost base of the ordinary shares acquired in Company B under the proposed restructure be determined in accordance with section 615-40? | Summary: Yes. The cost base of the original ordinary shareholders' ownership of their shares in Company B will be determined under sections 615-40 and 124-15. | Detailed Reasoning - Detailed reasoning: The consequences for entities choosing a rollover under Division 615 are set by subdivisions 615-C, 615-D and 124-A. Broadly, section 615-40 and 124-A are relevant for the exchanging shareholders. Section 615-40 says that the consequences set out in Subdivision 124-A (which applies to roll-overs covered by Division 124) also apply to a roll-over covered by Division 615. Subdivision 124-A sets out the CGT consequences if you obtain a roll-over when your ownership of a CGT asset (the original asset) ends, and you acquire one or more CGT assets (the new assets) in a situation. Section 124-15 applies where your ownership of more than one CGT asset ends. We summarise and apply relevant provisions in section 124-15 in Table 6. | Detailed Reasoning - Application: Subsection 124-15(1) There are these consequences (in most cases) if you can obtain a roll-over when your ownership of more than one *CGT asset (the original assets ) ends and you acquire one or more CGT assets (the new assets ) in a situation covered by this Division. Met. The Div 615 rollover is available. Under Step 3, Company A's original ordinary shareholders' ownership of their original asset (shares in Company A) ends, and they acquire CGT assets (shares in Company B) in a situation covered by Div 615. The effect of section 615-40 is that a situation covered by Division 615 is taken to be a situation covered by Division 124. Subsection 124-15(2) A *capital gain or a *capital loss you make from each original asset is disregarded. Company A's original ordinary shareholders can disregard any capital gain/capital loss on disposing shares. Subsection 124-15(3) If you *acquired all the original assets on or after 20 September 1985, the first element of each new asset ' s cost base is: The total of the cost bases of all the original assets (worked out when your ownership of them ended) Number of new assets The first element of each new asset's *reduced cost base is worked out similarly. Company A was incorporated in 1998, so the shares are post-CGT assets. The cost base of Company A's original ordinary shareholders' Company B shares will be the cost base of their Company A shares, divided by the number of Company B shares they receive. Subsection 124-15(4) If you *acquired all the original assets before 20 September 1985, you are taken to have acquired each new asset before that day. Company A was incorporated in 1998, so this is not applicable. | Detailed Reasoning - Conclusion: The effect of section 615-40 is that the cost base of the Company A's original ordinary shareholders' replacement shares in Company B will be determined under subsection 124-15(3). | Detailed Reasoning - Question 4: Will the Group continue to exist without a deconsolidation and reconsolidation event pursuant to section 703-70? | Summary: Yes. Section 703-70 will apply so that the Group will continue to exist without a deconsolidation and reconsolidation event. | Detailed Reasoning - Detailed reasoning: Broadly, Part 3-90 contains rules about consolidated groups. Under a general rule in subsection 703-5(2), a consolidated group will cease to exist when its head company ceases to be a head company. However, the combined effect of several provisions, including sections 703-70 and 615-30, is that a consolidated group will not cease to exist where this happened simply because of an interposition, where: • a Division 615 rollover was chosen, and • the interposed company chooses for the consolidated group to continue. We describe and apply the effect of relevant provisions in Table 7. | Detailed Reasoning - Application: 1 Subsection 703-5(2) The consolidated group [13] continues to exist until the * head company [14] of the group: (a) ceases to be a head company; or (b) becomes a member of a * MEC group. The consolidated group ceases to exist when one of those events happens to the head company Note: The group does not cease to exist in some cases where a shelf company is interposed between the head company and its former members: see subsection 615-30(2) and section 703-70. Under the general rule, Company A will cease to be the head company of the group, so the consolidated group would cease to exist under normal rule in subsection 703-5(2). However, broadly, this general rule doesn't apply where the arrangement interposing a head company is eligible for Div 615 rollover. See discussion of subsections 703-70(1) and 615-30(2) in rows 2 and 3 of this table. 2 Subsection 703-70(1) The * consolidated group is taken not to have ceased to exist under subsection 703-5(2) because the company referred to in subsection 615-30(2) as the original entity ceases to be the * head company of the group. This is met. The consolidated group formed by the Group will not be taken to cease to exist, just because Company A ceases to become the head company. This is because subsection 615-30(2) will apply. See rows 3 through 5 in this table. 3 Subsection 615-30(2) The interposed company must choose that a *consolidated group continues in existence at and after the completion time with the interposed company as its *head company, if: We assume that the relevant 'completion time' is the time that Company A's original ordinary shareholders disposed of their shares under the scheme, that is, during Step 3. We do not consider it relevant that Company A will leave the consolidated group shortly after that time, under Step 5. 4 (a) immediately before the completion time, the consolidated group consisted of the original entity as head company and one or more other members (the other group members ); and Paragraph (a) is met. Company A was the original entity, and the head company of the group (with Company C as the subsidiary). 5 (b) immediately after the completion time, the interposed company is the head company of a *consolidatable group [15] consisting only of itself and the other group members Paragraph (b) is met. Immediately after the completion time, the interposed company (Company B) will be the head company of a group with other group members. 6 Subsection 615-30(3) A choice under subsection (1) or (2) must be made: (a) within 2 months after the completion time, if the choice is under subsection (1); or (b) within 28 days after the completion time, if the choice is under subsection (2); or (c) within such further time as the Commissioner allows. The choice cannot be revoked. This will be met. Company B will make the choice in subsection 615-30(2) within 28 days. 7 Subsection 615-30(4) The way the interposed company prepares its *income tax returns is sufficient evidence of the making of the choice 8 Subsection 703-70(2) To avoid doubt, the interposed company is taken to have become the * head company of the * consolidated group at the completion time, and the original entity is taken to have ceased to be the head company at that time. Note: A further result is that the original entity is taken to have become a subsidiary member of the group at that time. Section 703-80 deals with the original entity's tax position for the income year that includes the completion time. Company B will be taken to have become the head company of the Group when it acquires the shares in Company A. Company A will be taken to have ceased to be the head company at that time. 9 Subsection 703-70(3) A provision of this Part that applies on an entity becoming a * subsidiary member of a * consolidated group does not apply to an entity being taken to have become such a member as a result of this section, unless the provision is expressed to apply despite this subsection. Note: An example of the effect of this subsection is that there is no resetting under section 701-10 of the tax cost of assets of the original entity that become assets of the interposed company because of subsection 701-1(1) (the single entity rule). Under general consolidation rules, the head company would allocate the cost of acquiring its membership interests in a joining subsidiary, to the assets held by that subsidiary, under a 'cost setting' process: see section 701-10 and Division 705. This process would not be required for the Group when Company B become the head company. 10 Subsection 703-70(4) To avoid doubt, subsection (3) does not affect the application of subsection 701-1(1) (the single entity rule). The Group will still be treated as a single entity under section 701-1. | Detailed Reasoning - Conclusion: The Group meets the requirements of section 703-70. Therefore, the consolidated group will not cease to exist simply because of the interposition under Step 3. [1] By 'transactions covered by this private ruling' we mean the 'Transactions' described at paragraphs 9 to 11, and Table 3. [2] Before any steps planned as part of this private ruling request took place. [3] The terms of issue of the Preference Shares authorise redemption. [4] The 'current' loan to Shareholder F had been repaid by the time this ruling issued. [5] Section 995-1 says an Australian resident means a person who is a resident of Australia for the purposes of the ITAA 1936. The definition of 'resident of Australia' in subsection 6(1) of the ITAA 1936 does not contain specific rules for trust estates, only companies and persons other than companies. While the term 'resident trust estate' is defined in subsection 95(2) of the ITAA 1936, that meaning is confined to Division 6 of the ITAA 1936. Therefore, the residency of a trust, for the purposes of Division 615, would be determined by the trustee's residency, rather than the residency rule for a 'trust estate.' [6] This condition is discussed in Table 7 in Question 4. [7] An alternative interpretation could be that it is enough if the exchanging members own all the shares in the original entity at any time before the exchange, because there is no explicit requirement that this condition be met at the beginning of the 'scheme for reorganising.' [8] In response, it could be argued that shares in a dormant company still have some value for the recipients because, for example, it spares them the time and effort of setting up or acquiring a new company by undertaking certain regulatory or administrative steps, or engaging professionals to undertake those tasks ('convenience value'), and the associated professional, administrative and regulatory costs. For similar reasons, the shares might have a notional market value (perhaps roughly equal to those saved administrative costs, or the price of a 'shelf company'). This value, while very small, is still 'something', and might be enough to cause the 'nothing else' requirement to be failed. [9] See subsection 615-25(1). [10] Conceivably, Shareholder F could exchange redeemable preference shares in Company A in exchange for non-redeemable preference shares in Company B. However, the change in character from 'redeemable' to 'non-redeemable' shares may affect the market value ratio requirements. [11] Most Australian states and territories have limitation of actions legislation, which prevents legal proceedings being commenced after the limitation period (generally six years). See generally, Jackson S and George C (2020) The Laws of Australia , Thomson Reuters, at [5.10] - 'Civil Procedure, Limitation of Actions.' Accessed online at www.westlaw.com.au on 2 July 2021. [12] To clarify, we do not imply that Part IVA necessarily would apply to this particular arrangement, merely that this ruling does not address the question. Broadly, some of the discussion about the purpose behind certain transactions in paragraphs 49 to 66 may be relevant to determining whether any scheme has the dominant purpose of obtaining a tax benefit, namely, the non-inclusion of an amount in a relevant taxpayer's assessable income through claiming rollover relief under Division 615. Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules contains instructions and guidance for ATO officers in applying Part IVA. [13] A consolidated group consists of the head company and any of its subsidiary members: see subsection 703-10(1). [14] A 'head company' in the context of a consolidated group, means a company that meets the requirements in item 1 in the table in section 703-15: broadly, that the entity is an Australian resident company, with at least some income taxed at the corporate rate, is not a wholly-owned subsidiary, and doesn't fit within exclusions in section 703-20. [15] A 'consolidatable group' consists of a single head company and all the subsidiary members of the group. It cannot consist of a head company alone: section 703-10.

Subject: CGT consequences of a restructure, including eligibility for rollover relief: All legislative references are to the Income Tax Assessment Act 1997 where no other Act is mentioned. | This ruling applies for the following period: