Private ruling: Income tax - Capital gains tax - Rollovers - Transfer to wholly owned company
Date of advice: 17 December 2015
Published: March 2016
Ruling period: Year ending 30 June 20XX.
Date scheme commenced: During the year ended 30 June 20XX

Ruling: Q1: Is the applicant eligible for capital gains tax roll-over under Subdivision 122-A of the Income Assessment Act 1997 (ITAA 1997) on the transfer of his one share in Company AS Pty Ltd to a wholly owned company, Company A Pty Ltd? | A1: Yes.

Relevant facts and circumstances: Company AS Pty Ltd (Company AS) was incorporated in early 20XX. The applicant and their spouse each hold one ordinary share in Company AS. The applicant and their spouse are both directors of Company AS. The applicant and their spouse are currently married but have separated and are looking to separate their financial affairs. The applicant has established a new company, Company A Pty Ltd (Company A), of which they are the sole shareholder and director. It is proposed that the applicant will transfer their one ordinary share in Company AS to Company A. The applicant will receive no consideration for the transfer other than shares in Company A. The market value of the shares will be substantially the same. Company A will retain future dividend income from Company AS for future investment activities. Company A is not an exempt entity for income tax purposes. The applicant, Company A and Company AS are all Australian residents for tax purposes.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 104-10(1) | Subsection 104-10(2) | Subdivision 122-A | Section 122-15 | Section 122-20 | Subsection 122-20(1) | Subsection 122-20(2) | Subsection 122-20(3) | Section 122-25 | Subsection 122-25(1) | Subsection 122-25(2) | Subsection 122-25(4) | Subsection 122-25(5) | Subsection 122-25(6) | Section 122-35 | Section 122-40 | Subsection 122-40(1) | Subsection 122-40(2)

Reasons for decision: Summary: The applicant will be eligible for capital gains tax roll-over under Subdivision 122-A of the ITAA 1997 on the transfer of their share in Company AS to a wholly owned company, Company A. | Detailed Reasoning - Detailed reasoning: Generally, Subdivision 122-A of the ITAA 1997 provides that, if you are an individual or a trustee, you can choose to obtain a roll-over if you transfer a CGT asset, or all the assets of a business, to a company in which you own all the shares. Section 122-15 of the ITAA 1997 provides that you can choose to obtain a roll-over if one of the CGT events (trigger event) listed in the table of section 122-15 of the ITAA 1997 happens involving you and a company in the circumstances set out in sections 122-20 to 122-35 of the ITAA 1997. If an individual transfers their shares to a company, a change of ownership will occur, effecting a disposal of the shares and causing CGT event A1 to happen (subsections 104-10(1) and (2) of the ITAA 1997). CGT event A1 is a trigger event. | Detailed Reasoning - Requirements of section 122-20 of the ITAA 1997: Under section 122-20 of the ITAA 1997, the consideration you receive must be only: • shares in the company, or • shares in the company and the company undertaking to discharge one or more liabilities in respect of the asset or assets of the business (as appropriate). Furthermore, the shares cannot be redeemable shares (subsection 122-20(2) of the ITAA 1997), and the market value of the shares you receive must be substantially the same as the market value of the shares disposed of, less any liabilities the company undertakes to discharge in respect of those assets (subsection 122-20(3)of the ITAA 1997). The applicant has stated that the consideration that they will receive will be only shares in Company A, the ordinary share is not redeemable and the market value of the shares in Company A will be substantially the same as the market value of the share in Company AS, given that Company A has no other assets or liabilities. | Detailed Reasoning - Requirements of section 122-25 of the ITAA 1997: Subsection 122-25(1) of the ITAA 1997 provides that you must own all the shares in the company just after the time of the trigger event. The applicant has stated that they will own all the shares in Company A just after the disposal of their share in Company AS to Company A. The table in subsection 122-25(2) of the ITAA 1997 lists certain assets for which the roll-over is not available. None of the exceptions listed in the table apply to the share owned by the applicant. Subsection 122-25(4) od the ITAA 1997 will not apply to the share in Company AS, as it is not a right, option, convertible interest or exchangeable interest that would allow Company A to acquire another CGT asset. The ordinary income and statutory income of the company must not be exempt from income tax because it is an exempt entity for the income year that the roll-over occurred (subsection 122-25(5) of the ITAA 1997). The applicant has stated that Company A is not an exempt entity and its income is not exempt from income tax. The applicant has stated that in accordance with subsection 122-25(6) of the ITAA 1997 both they and Company A will all be Australian residents at the time of the disposal. | Detailed Reasoning - Requirements of section 122-35 of the ITAA 1997: As Company A is not discharging a liability in relation to the share of the company previously owned by the applicant, section 122-35 of the ITAA 1997 has not been considered. | Detailed Reasoning - Conclusion: As all of the relevant requirements of sections 122-20 to 122-30 of the ITAA 1997 have been satisfied, the applicant can choose to obtain a roll-over. If rollover is chosen any capital gain or capital loss made by the applicant as a result of the disposal is disregarded (subsection 122-40(1) of the ITAA 1997). Subsection 122-40(2) of the ITAA 1997 provides rules for determining the first element of cost base and reduced cost base of each share received as consideration for the disposal of the share.