Private ruling: Consolidations – allocated cost amount (ACA)
Date of advice: 26 September 2017
Published: March 2018
Ruling period: Income year ending 30 June 2018 | Income year ending 30 June 2019
Date scheme commenced: During the year ending 30 June 2018

Ruling: Q1: Will the step 1 amount of the allocable cost amount (ACA) calculated by Coy B under section 705-65 of the Income Tax Assessment Act 1997 (ITAA 1997) include the sum of the following: ● the cost base of the original interests in Coy A held by the significant stakeholders (as defined in section 124-783 of the ITAA 1997), which are subject to a scrip for scrip roll-over election under Subdivision 124-M of the ITAA 1997; ● the market value of the Coy B shares issued in exchange for shares in Coy A to shareholders of Coy A that are not ‘significant stakeholders’; and ● the cash consideration paid by Coy B to Coy A shareholders who sell down their shares? | A1: Yes

Relevant facts and circumstances: The group associated with Coy A is preparing to restructure in preparation for an Initial Public Offering (IPO) of shares and listing on the Australian Securities Exchange (ASX). All entities associated with Coy A are Australian residents for income tax purposes. The following steps will be undertaken to facilitate this restructure. 1. A public company will be incorporated and will be used as a listing vehicle (Coy B). 2. Coy A’s share structure will be simplified. Certain shares will be converted into Ordinary Shares or performance shares as permitted by Coy A’s Constitution. 3. There will be a share split of the shares in Coy A to facilitate the listing process. 4. Certain non-core business interests will be divested from Coy A’s business group which may be finalised after the IPO and listing process. 5. Members of the public will subscribe for Ordinary Shares in Coy B. Capital raised under the IPO will fund the purchase of some shares from Coy A’s shareholders by Coy B. 6. Immediately or shortly after, Coy B will acquire 100% of the Ordinary Shares in Coy A and 100% shares of the performance shares in Coy A. Binding agreements between Coy A’s shareholders and Coy B will facilitate the sell down of Ordinary Shares in Coy A and the scrip for scrip acquisition on a 1:1 basis for the remaining Ordinary Shares and performance shares. 7. Shortly after, the Ordinary Shares in Coy B will be admitted to the official list of the ASX and will commence to be publicly traded. 8. Once the simplification of the group is complete, it is proposed that Coy B will elect to form a tax consolidated group under section 703-50 of the ITAA 1997. The shareholders of Coy A, the Trusts, will elect to apply for scrip for scrip roll-over relief in relation to their exchange of their Ordinary Shares in Coy A for Ordinary Shares in Coy B. The Trusts (including associates) hold more than 30% of Ordinary Shares in Coy A. All shares were acquired after 20 September 1985. It is expected that the Trusts will make a capital gain from the sale of their shares in Coy A to Coy B. Assumption(s) 1. Coy B will offer to acquire all the Ordinary Shares in Coy A for cash and scrip (on a 1:1 basis). 2. The offer from Coy B will be made available to each holder of Ordinary Shares in Coy A and will enable each shareholder to dispose of each Ordinary Share for either cash or one share in Coy B. 3. The minority holders of Ordinary Shares in Coy A will exchange their shares for Ordinary Shares in Coy B on a 1:1 basis. 4. Coy B will acquire all Platinum Shares in Coy A in exchange for performance shares in Coy B on a 1:1 basis. 5. Prior to the exchange of shares, the majority shareholders and their associates will collectively hold shares in Coy A with approximately 93% of the voting, dividend and capital rights. 6. At the conclusion of the issue of shares to the public under the IPO: (a) Coy A shareholders and their associates (as defined in section 318 of the ITAA 1936) will hold less than 80% of the voting rights and rights to receive a distribution of dividends and capital; (b) Coy B will have at least XXX members; and (c) the spread of holders of Coy B Ordinary Shares will be such that section 124-810 of ITAA 1997 will not apply to deem Coy B to have less than XXX members. 7. All shareholders of Coy A are residents of Australia for income tax purposes. 8. Coy B will not make a choice referred to under paragraph 124-795(4)(a) of the ITAA 1997. 9. Coy B, along with all ‘significant stakeholders’ (as defined in section 124-783 of ITAA 1997) in Coy B/Coy A, will jointly choose to obtain roll-over relief, pursuant to paragraph 124-780(3)(d) of ITAA 1997. 10. Any and all significant stakeholders in Coy B/Coy A will provide to Coy B in writing the details of their respective cost bases of their shares held in Coy A before the sale of their Coy A shares to Coy B. 11. Prior to their conversion to Ordinary Shares, the market value of an A Class Share and a Foundation Share in Coy A is identical (in each case) to the market value of an Ordinary Share. 12. Any valuations of entities or businesses will be undertaken in accordance with the ATO's 'Market valuation for tax purposes' guidelines. 13. For the purposes of Question 1 of this ruling: a. Coy B will make an election to form a tax consolidated group as soon as practicable, having regard to proposed Group simplification. b. At the time that the election is made by Coy B to form a tax consolidated group: i. the market value of the shares held by Coy B in Coy A will be equal to or greater than their cost base; and ii. the only cost base that Coy B will have in Coy A shares after it acquires the Coy A shares relates to the first element of the cost base, pursuant to iii. subsection 110-25(2) of the ITAA 1997. c. No adjustment to the ‘step 1’ amount will be required under subsections 705-65(2) to (6) of ITAA 1997. d. With the exception of item 14A in the table in section 112-115 of ITAA 1997, none of the cost base modifications in Division 112 apply to modify the cost base of Coy B’s shares in Coy A subsequent to its acquisition of those shares.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 318 | Income Tax Assessment Act 1997 | Income Tax Assessment Act 1997 subsection 110-25(2) | Income Tax Assessment Act 1997 paragraph 110-25(2)(a) | Income Tax Assessment Act 1997 paragraph 110-25(2)(b) | Income Tax Assessment Act 1997 Division 112 | Income Tax Assessment Act 1997 item 14A in the table in section 112-115 | Income Tax Assessment Act 1997 Subdivision 124-M | Income Tax Assessment Act 1997 paragraph 124-780(3)(d) | Income Tax Assessment Act 1997 section 124-782 | Income Tax Assessment Act 1997 subsection 124-782(1) | Income Tax Assessment Act 1997 section 124-783 | Income Tax Assessment Act 1997 subsection 124-783(3) | Income Tax Assessment Act 1997 subsection 124-783(6) | Income Tax Assessment Act 1997 subsection 124-783(9) | Income Tax Assessment Act 1997 section 124-784A | Income Tax Assessment Act 1997 section 124-784B | Income Tax Assessment Act 1997 paragraph 124-795(4)(a) | Income Tax Assessment Act 1997 section 124-810 | Income Tax Assessment Act 1997 Subdivision 705-A | Income Tax Assessment Act 1997 section 703-50 | Income Tax Assessment Act 1997 Section 705-60 | Income Tax Assessment Act 1997 section 705-65 | Income Tax Assessment Act 1997 subsection 705-65(1) | Income Tax Assessment Act 1997 subsection 705-65(2) | Income Tax Assessment Act 1997 subsection 705-65(3) | Income Tax Assessment Act 1997 subsection 705-65(4) | Income Tax Assessment Act 1997 subsection 705-65(5) | Income Tax Assessment Act 1997 subsection 705-65(6) | Income Tax Assessment Act 1997 Subdivision 705-B | Income Tax Assessment Act 1997 section 705-140

Reasons for decision: Summary: 1. At the formation time of a consolidated group, the head company of the group works out the ACA for each entity (joining entity) that becomes a subsidiary member of the group. The ACA is then allocated to the assets of the joining entity to align the cost of acquiring the joining entity with the cost of the assets of the joining entity. 2. Subdivision 705-A of the ITAA 1997 contains the general rules setting out how the cost is allocated where an entity joins a consolidated group. Section 705-140 ensures that the rules in Subdivision 705-A have effect in the case of group formation, subject to the modifications set out in Subdivision 705-B. 3. Determining the ACA for an entity is the starting point for determining the tax cost of assets of an entity within the context of a tax consolidated group. Section 705-60 sets out a table of steps that are required to be followed in determining the ACA for an entity that joins or forms part of a tax consolidated group. 4. The first step in the process prescribed by section 705-60 is the determination of the ‘step 1’ amount worked out under section 705-65. Step 1 under section 705-65 is to determine a ‘cost’ of membership interest in the relevant joining entity. Subsection 705-65(1) contains a table as to how the step 1 amount is to be determined, although this itself is potentially subject to further adjustments. This table is reproduced below: | Detailed Reasoning - The amount is ...: 1 equal to or greater than its *cost base its cost base 2 less than its *cost base but greater than its *reduced cost base its *market value 3 less than or equal to its *reduced cost base its reduced cost base 5. Based on the above table, at the relevant ‘joining time’ (being the time at which the relevant member joined the tax consolidated group or the group was formed): ● if the market value of the membership interest is greater than or equal to its cost base - the step 1 amount in respect of a particular membership interest is the cost base of that interest; and ● if the cost base of the membership interest is less than market value - the step 1 amount is instead the greater of: ● the market value of the interest; or ● the reduced cost base of the interest. 6. Based on the above and having regard to the assumptions upon which this ruling is based, the step 1 amount for the membership interests (shares) held by Coy B in Coy A will be Coy B’s cost base in the Coy A shares held. | Detailed Reasoning - Cost base rules: 7. Based on the assumption in this ruling, the only cost base element applicable to Coy B’s holding of Coy A shares will be the first element of the cost base. 8. The first element of the cost base of a CGT asset is determined under 9. subsection 110-25(2), being the aggregate of: 10. the money the taxpayer paid or is required to pay, in respect of acquiring it; and 11. the market value of any other property the taxpayer gave, or is required to give, in respect of acquiring it (worked out as at the time of the acquisition). 12. There are also a number of modifications that can be made to the cost base of an asset. These modifications are contained in Division 112. 13. Based on the assumption in this ruling the only modification in Division 112 that is relevant is item 14A in the table in section 112-115, which applies when scrip for scrip roll-over is obtained under Subdivision 124-M. | Detailed Reasoning - Scrip for scrip (Subdivision 124-M) cost base modifications: 14. Where the scrip for scrip CGT roll-over provisions apply under Subdivision 124-M, subsection 124-782(1) can modify the cost base of the shares acquired by the ‘acquiring entity. Specifically, an original interest acquired by an acquiring entity from an original interest holder becomes the first element of the cost base and reduced cost base of the acquiring entity for the interest if: ● the original interest holder obtains a roll-over; and ● the holder is a significant stakeholder or a common stakeholder for the arrangement. 15. In addition, in the event that there was to be a common stakeholder (as defined in subsection 124-783(3)) in relation to an arrangement, other cost base adjustment rules that apply to restructures, as per the operation of section 124-784A and section 124-784B, may apply. | Detailed Reasoning - Significant stakeholders: 16. A shareholder in Coy A will be a 'significant stakeholder' (as defined in section 124-783) in respect of the arrangement if the shareholder has: ● a 'significant stake' in Coy A (the original entity) just before the arrangement starts; and ● a 'significant stake' in Coy B (the replacement entity) just after the arrangement is completed. 17. A shareholder in Coy A will have a 'significant stake' in that company at the relevant times under subsection 124-783(6) if the shareholder participating in the arrangement, together with its associates have between them: ● shares carrying 30% or more of the voting rights in Coy A just before the completion of the relevant share exchange and shares carrying 30% or more of the voting rights in Coy B just after the completion of the relevant share exchange; or ● the right to receive 30% or more of any dividends from Coy A just before completion of the relevant share exchange and the right to receive 30% or more of any dividends from Coy B just after completion of the relevant share exchange; or ● the right to receive 30% or more of any distribution of capital from Coy A just before completion of the relevant share exchange and the right to receive 30% or more of any distribution of capital from Coy B just after completion of the relevant share exchange. 18. Just before the completion of the share exchange Shareholder A and its associates will have more than 30% of the voting rights and more than 30% of the rights to participate in dividends and capital distributions relating to Coy A. 19. After the completion of the share exchange Shareholder A and its associates will have more than 30% of the voting rights and more than 30% of the rights to participate in dividends and capital distributions relating to Coy B. 20. Accordingly, Shareholder A and its associates will be regarded as significant stakeholders for the purpose of Subdivision 124-M. 21. On the basis of the assumption that the various shareholder entities associated with Shareholder A will, along with Coy B, make a joint election under paragraph 124-780(3)(d), the first element of the cost base of certain Ordinary Shares in Coy A acquired by Coy B will be determined under subsection 124-782(1). Specifically, the first element of the cost base of the Ordinary Shares (original interest) in Coy A (original entity) acquired by Coy B (acquiring entity) from the original interest holders will be the former cost base of those shares in the hands of the transferors. That is, the cost base of the Ordinary Shares in Coy A held by Shareholder A and its associates will be inherited by Coy B, by virtue of the operation of subsection 124-782(1). | Detailed Reasoning - No common stakeholders: 22. Similarly, a shareholder in Coy A will be a 'common stakeholder' for the arrangement if the shareholder has: ● a ‘common stake' in Coy A (the original entity) just before the arrangement starts; and ● a 'common stake' in Coy B (the replacement entity) just after the arrangement is completed. 23. A shareholder in Coy A will have a 'common stake' in that company at the relevant times under subsection 124-783(9) if the shareholder participating in the arrangement, together with its associates, have between them: ● shares carrying 80% or more of the voting rights in Coy A just before completion of the relevant share exchange and shares carrying 80% or more of the voting rights in Coy B just after completion of the relevant share exchange; ● the right to receive 80% or more of any dividends from Coy A just before completion of the relevant share exchange and the right to receive 80% or more of any dividends from Coy B just after completion of the relevant share exchange; or ● the right to receive 80% or more of any distribution of capital from Coy A just before completion of the relevant share exchange and the right to receive 80% or more of any distribution of capital from Coy B just after completion of the relevant share exchange. 24. According to the relevant facts and circumstances and based on the assumption in the ruling there will be no common stakeholder in relation to the arrangement. This means that immediately after the arrangement less than 80% of the holders of Ordinary Shares in Coy B would have held Ordinary Shares in Coy A prior to the share exchange. 25. On this basis: ● the cost base rules in section 124-782 would not apply to the Coy A shares acquired by Coy B from entities not associated with Shareholder A; and ● the cost base rules in section 124-784B would not apply to the proposed restructure. | Detailed Reasoning - Coy B’s cost base in Coy A shares: 26. Under the proposed restructure, Coy B will acquire 100% of the shares in Coy A in exchange for a combination of : ● cash raised from new external investors; and ● new replacement shares in Coy B. 27. The cost base of the Coy A shares acquired by Coy B (including both Ordinary Shares and Performance Shares) will be determined as follows: ● in relation to Coy A shares acquired from significant stakeholders (i.e. Shareholder A and its associates) exchanged for Coy B shares, subsection 124-782(1) will apply. The effect of subsection 124-782(1) is that Coy B will inherit as the first element of the cost base of the applicable Coy A shares the former cost base of those shares in the hands of Shareholder A and its associates. ● in relation to the Coy A shares acquired by Coy B under a scrip for scrip exchange from shareholders that are not significant stakeholders in relation to the arrangement, paragraph 110-25(2)(b) will apply. Therefore the first element of the cost base of the applicable Coy A shares acquired will be equivalent to the market value of the Coy B shares exchanged as consideration. On this basis, the first element of the cost base of shares acquired by Coy B from all shareholders in Coy A that are not associates of Shareholder A will be the market value of the Coy B shares; and ● in relation to Coy A shares acquired by Coy B for cash, paragraph 110-25(2)(a) will apply such that the first element of the cost base of those shares will be equal to the cash consideration paid by Coy B.