Private ruling: CGT rollover relief and company residency
Published: May 2013
Ruling period: · Year ending 30 June 2012 | · Year ending 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Is Capital Gains Tax (CGT) rollover relief available under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the proposed corporate reorganisation? | A1: Yes | Q2: If CGT rollover relief is not available under Subdivision 122-A, then is CGT rollover relief available under Subdivision 124-M of the ITAA 1997 in respect of the share exchange? | A2: Not applicable | Q3: Is Company A an Australian resident for tax purposes? | A3: Yes | Q4: Is Company A a 'prescribed dual resident' for the purpose of subsection 703-15(2) of the ITAA 1997? | A4: No

Relevant facts and circumstances: Background At the date of his death, the deceased beneficially owned all of the shares in Company A, a company incorporated outside of Australia prior to 1985. The will of the deceased has been duly administered and a will trust of the Estate (the Estate) was established following administration. The shares in Company A form part of that Estate. The shares in Company A were acquired by the deceased prior to 20 September 1985 and at a time when he was a non-resident of Australia. Subsequent to this, and prior to his death, the deceased became a resident of Australia for tax purposes. The widow of the deceased, a son of the deceased and a third individual are the present trustees of the trusts under the will of the deceased (the Trustees). All of the Trustees are, and will remain, residents of Australia at all relevant times and therefore the will trusts forming the Estate will at all relevant times be Australian resident trusts. The will trusts (comprising the Estate) on which the Trustees hold the shares in Company A are as follows: (a) a bare trust for the adult beneficiaries of the Estates; and (b) on separate testamentary trusts for the beneficiaries of the Estate: The post death entitlements to the shares are determined under the percentages for residue in the will of the deceased. There is no agreement or understanding on the part of the Trustees or beneficiaries that any one beneficiary is entitled to a specific fraction or part of the shares in Company A. Company A holds all except one of the shares in Company B, an Australian resident company. The other share in Company B is held by a third party on trust for Company A. Therefore, Company A beneficially owns all the shares in Company B. Company B currently owns two commercial buildings in Australia which are both leased. Company B also owns share market investments, securities and bonds. Company B owns 100% of the shares in: · Company C, an investment company, and · Company D, which had been engaged in a business. It ceased all business operations when its trading business ceased. This company currently holds no assets. Company C and Company D were both incorporated in Australia and do not own any land or land assets. Proposed restructure In order to finalise the Estate, the Trustees intend to move to Australia all of the offshore assets of the Estate, namely Company A's shareholding in Company B. In order to move the offshore assets of the Estate to Australia in preparation for finalising the Estate, the Trustees propose to: (a) establish an Australian registered company (New Co) which will be interposed between the Trustees and Company A; (b) exchange their shares in Company A for shares in New Co (the share exchange); The exchange will be on a scrip-for-scrip basis, with each share in Company A being exchanged for an ordinary share in New Co with the result that: (i) all the shares in Company A will be owned by New Co; and (ii) all the shares in New Co will be held by the Trustees; (c) consolidate the group of companies comprising New Co, Company A, Company B, Company C and Company D for tax purposes (collectively the Group); (d) wind up Company A in accordance with the company law of the Turks and Caicos Islands; and (e) distribute Company A's assets (shares in Company B) to New Co on the winding up of Company A. New Co will not be an exempt entity for the purposes of the ITAA 1997 and the ordinary income and statutory income of New Co will not be exempt from income tax.

Relevant legislative provisions: subsection 6(1) of the Income Tax Assessment Act 1936 | Subdivision 122-A of the Income Tax Assessment Act 1997 | Subdivision 124-M of the Income Tax Assessment Act 1997 subsection 703-15(2) of the Income Tax Assessment Act 1997

Reasons for decision: Summary: CGT rollover relief will be available under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the proposed corporate reorganisation. | Detailed Reasoning - Detailed reasoning: Subdivision 122-A of the ITAA 1997 allows a roll-over where a disposal or creation of an asset is chosen by an individual or trustee to a wholly-owned company provided that one of the trigger events happens and the conditions of the Subdivision are met. If a trustee 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). Under Subdivision 122-A of the ITAA 1997 the trustees can choose a roll-over when they dispose of their shares to a wholly-owned company, provided the conditions in sections 122-20 to 122-35 of the ITAA 1997 are met (section 122-15 of the ITAA 1997). | Detailed Reasoning - Requirements of section 122-20: 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 shares in the company. Furthermore, the shares cannot be redeemable shares (subsection 122-20(2) of the ITAA 1997), and the market value of the shares the trustee receives 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). Under the proposed restructure, New Co will own no other assets apart from the shares in Company A, therefore it is accepted that the market value of the shares in New Co will be the same as or substantially the same as the market value of the shares in Company A. Accordingly this requirement is satisfied. | Detailed Reasoning - Requirements of section 122-25: Under section 122-25 of the ITAA 1997, the Trustees must own all the shares in the company just after the time of the disposal of the shares to the company (subsection 122-25(1) of the ITAA 1997). Immediately after the proposed disposal of the shares in Company A to New Co, the Trustees will own all the shares in New Co in the same capacity as that which the Trustees owned all the shares in 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 shares owned by the Trustees. 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 (122-25(5) of the ITAA 1997). You have advised that this requirement is met. The Trust Estate must be a resident trust for CGT purposes and the company must be an Australian resident at the time of the disposal. New Co will be an Australian registered company therefore will be an Australian resident for tax purposes (subsection 6(1) of the ITAA 1936). | Detailed Reasoning - Requirements of section 122-35: As the company will not be discharging a liability in relation to the shares of the company previously owned by the Trustees, section 122-35 of the ITAA 1997 has not been considered. | Detailed Reasoning - Conclusion: All of the relevant requirements of sections 122-20 to 122-30 of the ITAA 1997 will be satisfied. Therefore, the Trustees can choose to obtain a roll-over under section 122-15 of the ITAA 1997. If rollover is chosen any capital gain or capital loss made by the Trustees as a result of the disposal is disregarded (subsection 122-40(1) of the ITAA 1997). Because the original shares were acquired prior to 20 September 1985, subsection 122-40(3) of the ITAA 1997 provides that the Trustees will be taken to have acquired the new shares before the 20 September 1985. | Summary: As CGT rollover relief is available under Division 122, it is not necessary to consider the application of Subdivision 124-M of the ITAA 1997 in respect of the share exchange. | Summary: Company A is an Australian resident for tax purposes. | Detailed Reasoning - Detailed reasoning: The definition of resident in subsection 6(1) of the ITAA 1936 provides that, in order to be a 'resident' or 'resident of Australia', a company that is not incorporated in Australia must be carrying on business in Australia and either have its central management and control in Australia or have its voting power controlled by shareholders who are residents of Australia. The Taxation Ruling TR 2004/15 discusses the issue of residency in relation to companies that are not incorporated in Australia. As discussed in TR 2004/15, the question of where a business is carried on is one of fact. However, in TR 2004/15 the Commissioner recognises a distinction between a company with operational activities (for example trading, service provision, manufacturing or mining activities) and a company which is more passive in its dealings. TR 2004/15 states that where a company's income earning activities are in relation to passive investments a company will carry on its business where these decisions are made, which will often be where its central management and control is located (paragraph 11 of TR 2004/15). TR 2004/15 further states that a company may be carrying on a business even if its only activity is the management of its investment assets. (paragraph 12 of TR 2004/15). Company A is a holding company and the sole shareholder of Company B. Company A undertakes activities in relation to its investment in Company B. The director of Company A resides in Australia and all investment decisions of Company A are made in Australia. All the shares of Company A are held by the Trustees who are Australian residents and located in Australia. There is no-one located outside Australia with any involvement in the management decisions or the day-to-day running of Company A. As all the shares in Company A are held by the Trustees who are located in Australia, the voting power in Company A is controlled by Australian resident shareholders. Accordingly Company A is a resident of Australia for tax purposes because it is carrying on a business in Australia and its central management and control is in Australia. | Summary: Company A is not a 'prescribed dual resident' of Australia for the purposes of subsection 703-15(2) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: A 'prescribed dual resident' is defined in subsection 6(1) of the ITAA 1936 and essentially means a company that qualifies as an Australian resident but: · is treated as being a resident solely of any other country under tie-breaker rules in an agreement (within the meaning of the International Tax Agreements Act 1953), or · qualifies as an Australian resident solely because its central management and control is in Australia and it carries on business here, but is also regarded as a resident of another country with its central management and control in another country. Australia does not have an agreement (within the meaning of the International Tax Agreements Act 1953 ) with the country in which Company A is incorporated. The central management and control of Company A is located in Australia and not in the other country. Therefore Company A does not satisfy either of the conditions of a 'prescribed dual resident' in subsection 6(1) of the ITAA 1936.