Private ruling: Transfer of shares to wholly owned companies
Date of advice: 7 September 2018
Published: October 2018
Ruling period: Year ended 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Is X eligible for capital gains tax rollover under subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) on the transfer of his one share in A-Co to a wholly owned company, X-Co? | A1: Yes. | Q2: Is Y eligible for capital gains tax rollover under subdivision 122-A of the ITAA 1997 on the transfer of his one share in A-Co to a wholly owned company, Y-Co? | A2: Yes. | Q3: Is Z eligible for capital gains tax rollover under subdivision 122-A of the ITAA 1997 on the transfer of her one share in A-Co to a wholly owned company, Z-Co? | A3: Yes. | Q4: Should A-Co declare a fully franked dividend to X-Co, Y-Co and Z-Co, will section 177EA of the Income Tax Assessment Act 1936 (ITAA 1936) have any application to the proposed arrangement? | A4: No.

Relevant facts and circumstances: X, Y and Z are siblings and their parent was W. Over recent years W developed dementia, their health declined and they passed away a short time ago. A-Co was incorporated during the 1970s. Since inception, X, Y and Z have each held one ordinary share in A-Co. X and Z are directors of A-Co. W was also a director until their death. A-Co is a passive investment vehicle. Until recent years W made the investment decisions, after which decisions were made by their X children. The wealth within the company was always intended to benefit the X siblings as the ordinary shareholders. Over recent months the siblings had determined that A-Co was no longer an appropriate long term investment vehicle given W’s age and loss of capacity and the siblings’ differing investment strategies. Now that W has passed away, this view has been affirmed. A-Co has investments including cash and listed shares. It also has retained earnings and a franking account balance. As part of the separation of the siblings’ financial affairs, it is proposed that A-Co will begin to declare and pay fully franked dividends to its shareholders. It is anticipated that initially A-Co will pay franked dividends from its existing cash reserves. Over time as the listed shares are sold and company tax paid on any gains, it is anticipated that franked dividends will also be paid using the sale proceeds. Eventually it is anticipated that A-Co will be wound up, but this may not occur for a number of years. Prior to the fully franked dividend distributions, X, Y and Z wish to transfer their shareholdings in A-Co to respective wholly owned companies, so that the dividend distribution by A-Co will be retained in the wholly owned companies for future investment activities. X, Y and Z have no financial need to receive the dividends personally. To achieve this objective X has established a new company, X-Co, of which they are the sole shareholder and director. It is proposed that X will transfer their one ordinary share in A-Co to X-Co. They will receive no consideration for the transfer other than shares in X-Co. Similarly, Y has established a new company, Y-Co, of which they are the sole shareholder and director. It is proposed that Y will transfer their one ordinary share in A-Co to Y-Co. They will receive no consideration for the transfer other than shares in Y-Co. Similarly, Z has established a new company, Z-Co, of which they are the sole shareholder and director. It is proposed that Z will transfer their one ordinary share in A-Co to Z-Co. They will receive no consideration for the transfer other than shares in Z-Co. X-Co, Y-Co and Z-Co (‘the New Companies’) are newly established, have nominal assets and no revenue or capital losses. X, Y, Z, the New Companies and A-Co are all Australian residents for tax purposes.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 122-15 | Income Tax Assessment Act 1997 Section 122-20 | Income Tax Assessment Act 1997 Section 122-25 | Income Tax Assessment Act 1997 Section 122-40 | Income Tax Assessment Act 1997 Section 122-70 | Income Tax Assessment Act 1936 Section 177EA

Reasons for decision: Detailed Reasoning - Subdivision 122-A rollover: Summary X, Y and Z will each be entitled to choose to obtain a rollover pursuant to Subdivision 122-A of the ITAA 1997 as the requirements to access the rollover will be met under the proposed share transfers. Detailed reasoning Under section 122-15 of the ITAA 1997, where an individual disposes of a CGT asset (and a CGT event A1 happens to the individual as a result), the individual can choose to obtain a roll-over in the circumstances set out in sections 122-20 to 122-35 of the ITAA 1997. If the individual receives consideration for the disposal of the asset (or assets) to the company that consideration must be only shares in the company, or shares in the company and that company undertaking to discharge one or more liabilities in respect of the shares (subsection 122-20(1) of the ITAA 1997). The shares received as consideration cannot be redeemable shares (subsection 122-20(2) of the ITAA 1997) and must be substantially the same market value as those disposed of, less any liabilities the company undertakes to discharge in respect of the shares (paragraph 122-20(3)(a) of the ITAA 1997). Pursuant to section 122-25 of the ITAA 1997: ● the individual must own all of the shares in the company just after the disposal of the asset (subsection 122-25(1)); ● the CGT asset disposed of cannot be an asset excluded under subsections 122-25(2) to (4) – such as collectables, personal use assets, trading stock, registered emissions units, rights, options, convertible interests or exchangeable interests; ● the company must not be an exempt entity (subsection 122-25(5)); and ● either the individual and the company must be Australian residents, or the asset must be a CGT asset that is taxable Australian property and the shares in the company mentioned in subsection 122-20(1) must be taxable Australian property (subsection 122-25(6)). X, Y and Z will each be entitled to choose to obtain a rollover pursuant to Subdivision 122-A of the ITAA 1997 in relation to each proposed share transfer as: ● each transfer will constitute a disposal of a CGT asset by an individual, resulting in a CGT event A1; ● the consideration to be received for the A1 event happening will only be shares in the transferee company; ● the shares received as consideration will not be redeemable shares and will have substantially the same market value as the share disposed of to the transferee company as the transferee company is newly created with nominal assets and no liabilities; ● immediately following the proposed share transfer, each individual transferor will hold all of the shares in their respective transferee company; ● the shares disposed of by the individuals are not excluded under subsections 122-25(2) to (4) of the ITAA 1997; ● the New Companies are not exempt entities; and ● X, Y, Z, the New Companies and A-Co are all Australian residents for tax purposes. If the individual transferees choose the rollover, the capital gain or loss from the transfer of their A-Co shares is disregarded. Also, as they acquired their A-Co shares before 20 September 1985, the shares in their respective New Company that they received as consideration for the transfer are taken to have been acquired before 20 September 1985 (section 122-40 of the ITAA 1997). If the rollover is chosen by the individual transferees, each New Company is taken to have acquired the A-Co share transferred to it before 20 September 1985 (section 122-70 of the ITAA 1997). Although CGT event K6 will not occur on the transfers of the siblings’ shares to the New Companies due to a rollover applying, CGT event K6 may occur in the future on a transfer/disposal of an A-Co share by a New Company or a transfer/disposal of a New Company share by one of the siblings. Consequently, CGT event K6 should be considered if an A-Co share or a New Company share is transferred or disposed of in the future. | Detailed Reasoning - Section 177EA: Section 177EA of the ITAA 1936 is a general anti-avoidance provision that applies to schemes to obtain a tax advantage in relation to imputation benefits. It is primarily directed to prevent: ● Franking credit trading – this occurs when under a scheme franked distributions are diverted from the real owners of interests in companies, who have no use or a relatively limited use for franking benefits, to a person who has a relatively greater use for them, but who is not in substance the owner of an interest in the company. ● Dividend streaming - the selective direction of franked dividends to only those shareholders, or holders of interests in shares, who have the greatest use for franking benefits, for example, where franked dividends are only paid to resident shareholders and not non-resident shareholders. The proposed arrangement does not constitute franking credit trading or dividend streaming. Also, it is not considered that the proposed arrangement is being entered into for more than merely an incidental purpose of conferring an imputation benefit. Therefore, section 177EA of the ITAA 1936 is not considered to apply to the proposed arrangement.