Private ruling: Proposed merger of two wholly owned foreign subsidiaries
Published: September 2013
Ruling period: 2014 year of income | 2015 year of income
Date scheme commenced: During the 2014 year of income

Ruling: Q6: If the answer to Question 5 is Yes, will the transfer by B Co of assets to A Co for no consideration under the Scheme of Amalgamation, to the extent that it is a dividend, constitute a dividend to which either section 23AJ of the Income Tax Assessment Act 1936 or section 404 of the Income Tax Assessment Act 1936 applies for purposes of calculating the attributable income of A Co? Advice/Answer Yes

Relevant facts and circumstances: The taxpayer, a resident company, wholly owns a non-resident subsidiary (A Co). A Co wholly owns another non-resident subsidiary (B Co). A Co and B Co are each a controlled foreign company (CFC). A Co and B Co amalgamate in accordance with a Scheme of Amalgamation ('scheme') and legislation in the jurisdiction in which they both reside (the merger). A Co will then continue as the amalgamated company. B Co holds assets on capital account and on revenue account that comprise tainted assets within the meaning of section 317 of the Income Tax Assessment Act 1936 (ITAA 1936). The scheme provides that A Co succeeds to all the assets, liabilities and obligations of B Co on a stated date. It further provides that at a later date, subsequent to the fulfilment of legislative and judicial requirements, the shares of B Co will be cancelled without payment or other consideration. B Co did not acquire the CGT assets because of a single CGT event or a series of CGT events that have given rise to a roll-over under a previous application of Subdivision 126-B of the ITAA 1997. A Co is not an exempt entity as defined in subsection 995-1(1) of the ITAA 1997. Both A Co and B Co will choose to obtain the roll-over under Subdivision 126-B of the ITAA 1997. None of the assets for which roll-over relief is sought constitute trading stock of A Co just after the time of the trigger event. None of the assets for which roll-over will be jointly chosen are: · a right or convertible interest referred to in Division 130 of the ITAA 1997 · exchangeable interests as defined in subsection 995-1(1) of the ITAA 1997, or · options referred to in Division 134 of the ITAA 1997. A Co contemplates the subsequent disposal of all or at least most of the assets it acquires from B Co as part of the merger.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 section 23AJ | Income Tax Assessment Act 1936 section 317 | Income Tax Assessment Act 1936 section 319 | Income Tax Assessment Act 1936 section 333 | Income Tax Assessment Act 1936 subsection 334A(3) | Income Tax Assessment Act 1936 section 340 | Income Tax Assessment Act 1936 section 362 | Income Tax Assessment Act 1936 section 404 | Income Tax Assessment Act 1936 section 419 | Income Tax Assessment Act 1936 subsection 419(1) | Income Tax Assessment Act 1936 section 432 | Income Tax Assessment Act 1936 section 438 | Income Tax Assessment Act 1936 subsection 438(2) | Income Tax Assessment Act 1936 section 445 | Income Tax Assessment Act 1 936 subsection 445(1) | Income Tax Assessment Act 1936 paragraph 446(1)(k) | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 subsection 104-10(3) | Income Tax Assessment Act 1997 subsection 116-20(1) | Income Tax Assessment Act 1997 section 116-30 | Income Tax Assessment Act 1997 Subdivision 126-B | Income Tax Assessment Act 1997 subsection 126-45(1) | Income Tax Assessment Act 1997 subsection 126-45(2) | Income Tax Assessment Act 1997 section 126-50 | Income Tax Assessment Act 1997 subsection 126-50(1) | Income Tax Assessment Act 1997 subsection 126-50(2) | Income Tax Assessment Act 1997 subsection 126-50(3) | Income Tax Assessment Act 1997 subsection 126-50(3A) | Income Tax Assessment Act 1997 subsection 126-50(4) | Income Tax Assessment Act 1997 subsection 126-50(5) | Income Tax Assessment Act 1997 subsection 126-50(6) | Income Tax Assessment Act 1997 subsection 126-50(7) | Income Tax Assessment Act 1997 subsection 126-50(8) | Income Tax Assessment Act 1997 subsection 126-50(9) | Income Tax Assessment Act 1997 section 727-615 | Income Tax Assessment Act 1997 section 975-500 | Income Tax Assessment Act 1997 section 975-505 | Income Tax Assessment Act 1997 subsection 975-505(1) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: As the requirements of Subdivision 126-B of the Income Tax Assessment Act 1997 (ITAA 1997) are satisfied, the taxpayer is entitled to claim the roll-over under that Subdivision in respect of the tainted assets held on capital account and on revenue account to be transferred as part of the merger. | Detailed Reasoning - Detailed reasoning: The assets held on revenue account consist of assets that are used by B Co in the ordinary course of carrying on its business. They include cash, debentures, security deposits, term deposits, loans and advances. Notwithstanding that the assets are held on revenue account, they satisfy the definition of CGT assets in section 108-5 of the ITAA 1997, which states: A CGT asset is: (a) any kind of property; or (b) a legal or equitable right that is not property. As the assets held on revenue account are CGT assets the eligibility for roll-over relief in respect of those assets is the same as for assets held on capital account. Subdivision 126-B of the ITAA 1997 provides a roll-over that may be available for the transfer of a CGT asset between two companies, or the creation of a CGT asset by one company in another, if: (a) both companies are members of the same wholly-owned group; and (b) at least one of the companies is a foreign resident. Subsection 126-45(1) of the ITAA 1997 states that there may be a roll-over if a CGT event (the trigger event ) happens involving a company (the originating company ) and another company (the recipient company ) in the circumstances set out in section 126-50 of the ITAA 1997. Subsection 126-45(2) of the ITAA 1997 identifies the only CGT events that are relevant to this roll-over, including CGT event A1. In this case, CGT event A1 will happen as there will be a change of ownership of the transferred assets from B Co (the originating company) to A Co (the recipient company). The time of the event is determined in accordance with subsection 104-10(3) of the ITAA 1997. As CGT event A1 is a relevant event in paragraph 126-45(2)(a) of the ITAA 1997 it is necessary to consider the requirements for roll-over in section 126-50 of the ITAA 1997. In this case, the requirements of section 126-50 of the ITAA 1997 are considered only in relation to the tainted assets of B Co which are transferred to A Co as part of the merger. | Detailed Reasoning - Subsection 126-50(1) of the ITAA 1997: Are B Co and A Co members of the same wholly-owned group at the time of the trigger event?: Section 975-500 of the ITAA 1997 provides that two companies are members of the same wholly-owned group if: (a) one of the companies is a 100% subsidiary of the other company; or (b) each of the companies is a 100% subsidiary of the same third company. Section 975-505 of the ITAA 1997 sets out when an entity is a 100% subsidiary. Relevantly, subsection 975-505(1) provides that a subsidiary company is a 100% subsidiary of the holding company if all the shares in the subsidiary company are beneficially owned by: (a) the holding company; or (b) one or more 100% subsidiaries of the holding company; or (c) the holding company and one or more 100% subsidiaries of the holding company. In this case: · 100% of the shares in A Co are held by two wholly owned subsidiaries of the taxpayer therefore A Co is a 100% subsidiary of the taxpayer pursuant to paragraph 975-505(1)(b) of the ITAA 1997; and · 100% of the shares in B Co are beneficially owned by A Co where A Co is a 100% subsidiary of the taxpayer, meaning B Co is a 100% subsidiary of the taxpayer pursuant to paragraph 975-505(1)(b). Accordingly, B Co and A Co are both members of the same wholly-owned group at the time of the trigger event. | Detailed Reasoning - Subsection 126-50(2) of the ITAA 1997: Will the CGT asset be trading stock of the A Co just after the time of the trigger event?: On the facts, the tainted assets are not trading stock of B Co. | Detailed Reasoning - Subsections 126-50(3)-(3A) of the ITAA 1997: Subsections 126-50(3) and (3A) of the ITAA 1997 do no apply as none of the tainted assets are: · a right or convertible interest referred to in Division 130 of the ITAA 1997 · exchangeable interests as defined under section 995-1 of the ITAA 1997, or · options referred to in Division 134 of the ITAA 1997 Subsection 126-50(4) of the ITAA 1997: Will the ordinary income and statutory income of A Co be exempt from income tax because it is an exempt entity for the income year of the trigger event? An exempt entity is defined in section 995-1 of the ITAA 1997 to mean: (a) an entity all of whose *ordinary income and *statutory income is exempt from income tax because of this Act or because of another *Commonwealth law, no matter what kind of ordinary income or statutory income the entity might have; or (b) an *untaxable Commonwealth entity. A Co is subject to income tax in Australia in respect of its Australian sourced ordinary income and would also be subject to tax in Australia if it derived statutory income. It is not exempt from income tax no matter what kind of ordinary income or statutory income the entity might have. Therefore A Co is not an exempt entity for the income year of the trigger event for the purposes of subsection 126-50(4) of the ITAA 1997. | Detailed Reasoning - Subsection 126-50(5) of the ITAA 1997, as modified by section 419 of the Income Tax Assessment Act 1936 (ITAA 1936): Section 419 of the ITAA 1936 states that the table in subsection 126-50(5) of the ITAA 1997 is replaced by the table in subsection 419(1) of the ITAA 1936 for the purposes of applying the Subdivision 126-B of the ITAA 1997 roll-over to a CFC. Item 3 of the table in section 419 of the ITAA 1936 is satisfied as B Co and A Co are residents of an unlisted country at the time of the CGT event. Under item 3 of the table in section 419 of the ITAA 1936 it does not matter what the roll-over asset is. | Detailed Reasoning - Subsection 126-50(6) of the ITAA 1997: Subsection 126-50(6) of the ITAA 1997 does not apply as neither B Co nor A Co are Australian residents at the time of the trigger event. | Detailed Reasoning - Subsections 126-50(7)-(9) of the ITAA 1997:: Subsection 126-50(7) of the ITAA 1997 provides that if the originating company is a foreign resident, the company must not have acquired the CGT asset described in subsection 126-50(8) of the ITAA 1997 because of a previous single roll-over event or series of roll-over events. On the facts, B Co has not acquired the CGT assets because of a previous roll-over event. As the requirements of Subdivision 126-B of the ITAA 1997 are satisfied, the taxpayer is entitled to claim roll-over relief in respect of the tainted assets which are transferred as part of the merger. | Summary: Capital proceeds of nil will be received by A Co under Division 116 as a result of CGT event C2 happening upon cancellation of the shares in B Co. | Detailed Reasoning - Detailed reasoning: CGT event C2 will happen upon the cancellation of the B Co shares (section 104-25). The capital proceeds from a CGT event are, generally, the total of the money received (or entitled to be received) and the market value of any other property received (or entitled to be received) in respect of the event happening (subsection 116-20(1) of the ITAA 1997). The scheme provides that the assets, liabilities and obligations of B Co are deemed to be transferred to A Co as at a stated date. The date of cancellation of the shares in B Co is expected to be at a later date after the anticipated approval legal and other regulatory approvals. On the facts, it is accepted that the transfer of assets, liabilities and obligations of B Co to A Co and the cancellation of shares in B Co are separate and distinct steps. As such, the transfer of assets, liabilities and obligations of B Co to A Co is not in respect of the CGT event C2 and the property transferred to A Co from B Co is not considered to be received in respect of the CGT event C2 happening. As a result, there will be no capital proceeds from the CGT event C2. Generally, if no capital proceeds are received from a CGT event, the market value substitution rule in subsection 116-30(1) applies to substitute the market value of the CGT asset that is the subject of the event (worked out at the time of the event) as the capital proceeds. As the CGT event that happens on the cancellation of the B Co shares is CGT event C2, the market value of the shares is worked out as if the share cancellation had not occurred and was never proposed to occur (subsection 116-30(3A) of the ITAA 1997). As all the assets, liabilities and obligations of B Co will have been transferred by a separate step prior to the cancellation of the B Co shares, it is accepted that the market value of the shares in B Co at the time of CGT event C2 will be nil. The market value substitution rule in subsection 116-30(1) of the ITAA 1997 will apply to treat A Co as having received nil capital proceeds from the CGT event C2. | Summary: For the purpose of paragraph 446(1)(k) of the Income Tax Assessment Act 1936 , where A Co acquires a tainted asset from B Co as part of the merger, and subsequently disposes of the asset, any resulting net gain accrued to A Co will take into account the consideration (if any) paid or payable by B Co to acquire the asset. | Detailed Reasoning - Detailed reasoning: Paragraph 446(1)(k) of the ITAA 1936 includes in passive income "net gains that accrued to the company in the statutory accounting period in respect of the disposal of tainted assets". For the purpose of calculating net gains referred to in paragraph 446(1)(k) of the ITAA 1936 it is necessary to refer to subsection 445(1) of the ITAA 1936 that deals with when net gains accrue. Subsection 445(1) states: For the purposes of this Part: (a) net gains are to be taken to have accrued to a company in a statutory accounting period in relation to the disposal of tainted assets owned by the company if, and only if, the sum of the gains of the company in relation to the disposal of tainted assets during the statutory accounting period exceeds the sum of the losses (if any) of the company in relation to the disposal of tainted assets during the statutory accounting period; and (b) the amount of the net gains is equal to the amount of the excess. To calculate the gains and losses under subsection 445(1) of the ITAA 1936 it is necessary to have regard to section 438 of the ITAA 1936, which affects the calculation of a net gain under section 445 of the ITAA 1936 in circumstances where a taxpayer acquired an asset that is not taxable Australian property pursuant to a rollover. Subsection 438(2) of the ITAA 1936 provides: If a CGT roll-over provision applies to: (a) the disposal of the asset by an entity (in this section called the transferor) to the company (in this section called the transferee); or (b) the disposal of the asset by the company (in this section also called the transferor) to another entity (in this section also called the transferee); the following provisions have effect: (c) the transferee is taken to have paid, as consideration to acquire the asset, the sum of: (i) the consideration (if any) paid or payable by the transferor to acquire the asset; and (ii) the expenditure (if any) incurred by the transferor in making capital improvements to the asset; and (d) the transferor is not taken to have: (i) derived any gains; or (ii) incurred any loss; in respect of the disposal of the asset. Division 126 of the ITAA 1997 is a CGT roll-over provision (subsection 317(1) of the ITA 1936) and the title to Division 126 of the ITAA 1997 is "Same asset roll-overs". It is accepted that the Division is a CGT roll-over provision. As per Questions 1 and 2, Subdivision 126-B of the ITAA 1997 roll-over will apply in respect of the transferred CGT assets of B Co. The result is that for the purposes of paragraph 446(1)(k) of the ITAA 1936 the net gains accrued on the disposal of assets transferred to A Co by B Co will be calculated with reference to the consideration (if any) paid by B Co (the transferor) to acquire the assets. | Summary: The transfer of assets (being property) by B Co to A Co under the scheme of amalgamation will constitute a 'dividend' as defined in subsection 6(1) of the ITAA 1936. However, where the amount of the value of any of those assets (being property) is debited against an amount standing to the credit of B Co's share premium account, that amount will not constitute a dividend, pursuant to paragraph (d) of the definition of a 'dividend' in subsection 6(1) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: The Taxation Laws Amendment (Company Law Review) Act 1998 (Company Law Review Act 1998) made amendments to the ITAA 1936, including altering the definition of a 'dividend' in subsection 6(1) and repealing the definition of a 'share premium account' in subsection 6(1). These amendments were associated with the abolition of par value shares and share premium accounts in Australia. The current definition of a 'dividend' in subsection 6(1) of the ITAA 1936 only applies to those companies that have shares without par value and therefore no share premium account. Item 8 of Schedule 3 to the Company Law Review Act 1998 states that: The amendments made by this Schedule apply to dividends paid after the commencement of this item by a company with shares with no par value. In this case, B Co and A Co are both incorporated in a foreign jurisdiction which requires companies to have par value shares. Hence, the definition of a 'dividend' in subsection 6(1) of the ITAA 1936 prior to the amendments made by the Company Law Review Act 1998 is applicable. The definition of a 'dividend' prior to the amendments made by the Company Law Review Act 1998 states: "Dividend" includes: (a) any distribution made by a company to any of its shareholders, whether in money or other property; (b) any amount credited by a company to any of its shareholders as shareholders; and (c) the paid up value of shares issued by a company to any of its shareholders to the extent to which the paid-up value represents a capitalization of profits; but does not include: (d) moneys paid or credited by a company to a shareholders or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply) where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of a share premium account of the company; (e) moneys paid or credited, or property distributed, by a company by way of repayment by the company of moneys paid up on a share except to the extent that: (i) if the share is cancelled or redeemed- the amount of those moneys or the value of that property, as the case may be, if greater than the amount to which the share was paid up immediately before the cancellation or redemption; or (ii) in any other case- the amount of those moneys or the value of that property, as the case may be, is greater than the amount by which the amount to which the share was paid up immediately before the repayment exceeds the amount to which the share is paid up immediately after the repayment; or (f) a reversionary bonus on a policy of life-assurance | Detailed Reasoning - Distribution: Paragraph (a) of the definition of a 'dividend' requires that a 'distribution' be made by a company to any of its shareholders, whether in money or other property. The term 'distribution' is not defined in the ITAA 1936 and takes its ordinary meaning. The Macquarie Dictionary Online [Macmillan Publishers Australia: 2013] defines 'distribution' as: 1. the act of distributing 2. the state or manner of being distributed 3. arrangement; classification 4. that which is distributed…etc In Deputy Commissioner of Taxation v Black (1990) 25 FCR 274; 101 ALR 535; 90 ATC 4699; 21 ATR 701, the Federal Court considered whether the forgiveness of a debt amounted to a distribution to a shareholder, and thus a dividend pursuant to subsection 6(1) of the ITAA 1936. Sweeney J held that ((1990) 101 ALR 535 at 542): The word "distribution" involves, at the least, a dealing out or bestowal. In Federal Commissioner of Taxation v Blakely (1951) 82 CLR 388; 9 ATD 239 at 242, Latham CJ when considering the word "distribution" held that: In my opinion the word "distribution" in s.6 should not be construed in this narrow manner. If the money or assets are passed out by a company to a shareholder or shareholders they should in my opinion be regarded as distributed by the company. Hence, in this instance, there will be a distribution from B Co to A Co, being a distribution of the assets which will be transferred pursuant to the Scheme of Amalgamation. | Detailed Reasoning - Distribution to a shareholder: Secondly, paragraph (a) of the definition of a 'dividend' requires that the distribution be made by a company to any of its shareholders. This means that the recipient of the distribution must be receiving the distribution in the capacity of a shareholder, not as a creditor or because of any other type of relationship to the distributing company. A Co beneficially owns 100% of the issued shares in B Co. To identify whether the assets will be transferred from B Co to A Co in A Co's capacity as a shareholder, one must look at the terms of the Scheme of Amalgamation. Those terms stipulated that the Scheme of Amalgamation was made pursuant to the companies law of the foreign jurisdiction. Where an arrangement is entered into between a company and its members/shareholders, (specifically including where there is an amalgamation of companies), the companies law of the foreign jurisdiction stipulates the requirements that must be satisfied by the amalgamation, and the effect of the amalgamation. It is true that the companies law of the foreign jurisdiction does not require the transfer of assets from the transferor company to its shareholders (or members). However, in this case, the transferee company (A Co) is the sole shareholder of B Co. There is no evidence or assertion that A Co will receive the assets in satisfaction of a debt or other claim owed to it by B Co. The Scheme of Amalgamation involves the transfer of B Co's assets to A Co. This is a distribution of property to the shareholder of B Co. Therefore, the transfer of assets by B Co to A Co will satisfy paragraph (a) of the definition of a 'dividend'. By virtue of paragraph (d) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936, where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of a share premium account of the company, that amount is not a dividend except to the extent that subsection 6(4) of the ITAA 1936 excludes paragraph (d) of the definition from applying to that amount. In this instance, subsection 6(4) of the ITAA 1936 has no application to negate the effect of paragraph (d) of the definition of 'dividend' in subsection 6(1) of the ITAA 1936. Therefore, the transfer of assets (being property) by B Co to A Co under the Scheme of Amalgamation will constitute a 'dividend' as defined in subsection 6(1) of the ITAA 1936. However, to the extent that the amount of the value of any of those assets (being property) is debited against an amount standing to the credit of B Co's share premium account, that amount will not constitute a dividend, pursuant to paragraph (d) of the definition of a 'dividend' in subsection 6(1) of the ITAA 1936. | Summary: For the purposes of calculating the attributable income of A Co, to the extent that the transfer of the assets by B Co to A Co is a dividend, the transfer will constitute a dividend to which section 23AJ of the ITAA 1936 applies and it will also be notional exempt income under section 404 of the ITAA 1936. | Detailed Reasoning - Section 23AJ of the ITAA 1936: Under subsection 456(1) of the ITAA 1936, where a CFC has "attributable income" for a statutory accounting period in respect of an attributable taxpayer, the attributable taxpayer's attribution percentage of the attributable income is included in the assessable income of the taxpayer of the year of income in which the end of the statutory accounting period occurs. "Attributable income" is defined in section 382 of the ITAA 1936: (1) The attributable income is the amount that would be the eligible CFC's taxable income for the eligible period if certain assumptions were made. (2) For the purposes of describing those assumptions, amounts of assessable income, allowable deductions and exempt income that are to be taken into account in calculating the taxable income are referred to respectively as notional assessable income, notional allowable deductions and notional exempt income. The basic assumptions that are to be made pursuant to subsection 382(1) of the ITAA 1936 are listed in section 383 of the ITAA 1936: The assumptions are: a) that the eligible CFC is a taxpayer and a resident, within the meaning of section 6, during the whole of the eligible period; and b) that the eligible period is a year of income, being the year of income of the eligible taxpayer in which the eligible period ends; and c) that this Act is modified in accordance with Subdivisions B to E; and d) whichever of the assumptions in section 384 or 385 applies. The effect of subsection 382(1) of the ITAA 1936 and paragraph 383(a) of the ITAA 1936 is that when calculating the attributable income of an eligible CFC, the CFC is treated as if it was an Australian resident taxpayer that was calculating its taxable income. | Detailed Reasoning - Non-portfolio dividend: For the purposes of calculating the attributable income of A Co, it is necessary to consider section 23AJ of the ITAA 1936. Section 23AJ of the ITAA 1936 states: A non-portfolio dividend (as defined in section 317) paid to a company is not assessable income, and is not exempt income, of the company if: (a) the company is an Australian resident and does not receive the dividend in the capacity of a trustee; and (b) the company that paid the dividend is not a Part X Australian resident (as defined in that section). In broad terms, section 23AJ of the ITAA 1936 makes a dividend that is a "non-portfolio dividend" received by an Australian company from a foreign company non-assessable non-exempt income. A "non-portfolio dividend" is defined in subsection 317(1) of the ITAA 1936 to mean: a dividend (other than an eligible finance share dividend or a widely distributed finance share dividend) paid to a company where that company has a voting interest, within the meaning of section 334A, amounting to at least 10% of the voting power, within the meaning of that section, in the company paying the dividend Subsection 334A(1) of the ITAA 1936 states: For the purposes of this section, a company is taken to have a voting interest in another company if: (a) the first-mentioned company is the beneficial owner of shares (other than eligible finance shares or widely distributed finance shares) in the other company that carry the right to exercise any of the voting power in the other company; and (b) there is no arrangement in force at the relevant time by virtue of which any person is in a position, or may become in a position, to affect that right; and the extent of the voting interest is taken to be the total number of votes that, by virtue of that right, can be cast on a poll at, or arising out of, a general meeting of the other company as regards all questions that could be submitted to such a poll. Subsection 334A(2) of the ITAA 1936 explains what it means to be in 'a position to affect a right' as follows: For the purposes of paragraph (1)(b), a person is taken to be in a position to affect a right of a company if that person has a right, power or option (whether by virtue of any provision in the constituent document of any company or by virtue of any agreement or instrument or otherwise) to acquire that right or do an act or thing that would prevent the first-mentioned company from exercising that right or receiving any benefits accruing by reason of that right. Subsection 334A(3) of the ITAA 1936 provides that an appointment of a liquidator is to be disregarded. It states: Despite paragraph (1)(b) and subsection (2), in determining for the purposes of this section: (a) whether a company has a voting interest in another company; and (b) the extent of that interest; any appointment of a liquidator in respect of the other company is to be disregarded. Subsection 334A(4) of the ITAA 1936 defines the meaning of voting power in a company as follows: For the purposes of this section, the voting power in a company is the maximum number of votes that can be cast on a poll at, or arising out of, a general meeting of a company as regards all questions that can be submitted to such a poll. | Detailed Reasoning - Beneficial owner of shares: A Co beneficially owns 100% of the shares in B Co. A Co legally owns all but one share in B Co. Legal title to this one share is held by a nominee on behalf of A Co. All beneficial rights with respect to this one share are held by A Co. Under the relevant clause of the Scheme of Amalgamation, it is provided that the Transferor Company (B Co) is a wholly owned subsidiary of the Transferee Company (A Co) and all the shares of the Transferor Company are presently held by the Transferee Company and its nominee. There is nothing in the facts to indicate that these shares are eligible finance shares or widely distributed finance shares. These facts establish that A Co satisfies the requirement under paragraph 334A(1)(a) of the ITAA 1936. | Detailed Reasoning - No change in the voting interest in B Co: The Scheme of Amalgamation would not cause A Co to cease to have a voting interest in B Co at any time prior to its dissolution. In particular, A Co would not cease to be the beneficial owner of the shares in B Co at any time. The scheme is instigated by A Co and could be cancelled by A Co at any time. The effect of the scheme is to give effect to the beneficial ownership of the shares in B Co through the transfer of B Co's assets to its shareholder. Furthermore, no person becomes in a position to affect A Co's right to vote in respect of its shares in B Co. The scheme does not create such a position since there is no third party that commences to be in a position to affect A Co's rights in B Co. Under these conditions, paragraph 334A(1)(b) of the ITAA 1936 is satisfied at the time of the transfer and A Co has a voting interest in B Co for the purposes of section 334A of the ITAA 1936 amounting to at least 10% of the voting power in B Co. As the Commissioner has ruled in Question 5 that the transfer of assets is a dividend, it is a non-portfolio dividend for the purposes of the definition in subsection 317(1) of the ITAA 1936. | Detailed Reasoning - Paragraphs 23AJ(a) and 23AJ(b) of the ITAA 1936: Under paragraph 23AJ(a) of the ITAA 1936, the company to whom the dividend is paid must be an Australian resident, and must not receive the dividend in the capacity of a trustee. The company receiving the dividend will be A Co. On the facts, A Co is a CFC within the meaning of section 340 of the ITAA 1936. A Co will be treated as an Australian resident during the whole of the eligible period under the basic assumptions made in paragraph 383(a) of the ITAA 1936. Furthermore, A Co will not receive the dividend in the capacity of a trustee. The requirements of paragraph 23AJ(a) of the ITAA 1936 will be satisfied. Under paragraph 23AJ(b) of the ITAA 1936, the company that paid the dividend must not be a "Part X Australian resident" (as defined in section 317 of the ITAA 1936). The company paying the dividend will be B Co. B Co is a resident of a foreign jurisdiction; it is not a Part X Australian resident. The requirement in paragraph 23AJ(b) of the ITAA 1936 will be satisfied. Accordingly, the dividend, being a non-portfolio dividend, will be non-assessable non-exempt income. As it is not assessable income, it is not taken into account in calculating the taxable income of A Co as provided under subsection 382(2) of the ITAA 1936. As a result, subsection 382(1) of the ITAA 1936 ensures that the non-portfolio dividend does not form part of the "attributable income" of A Co. | Detailed Reasoning - Section 404 of the ITAA 1936: Section 404 of the ITAA 1936 applies to the calculation of attributable income of a CFC and provides that: Where the eligible CFC is a resident of a listed country or a section 404 country at the end of the eligible period, a dividend paid to it in the eligible period by a company that is a resident of a listed country or a section 404 country is notional exempt income. 'Section 404 countries' are those listed as 'section 404 countries' in Part 2 of Schedule 10 of the Income Tax Regulations 1936 . The list includes the foreign jurisdiction. Both A Co and B Co are residents of the foreign jurisdiction and are therefore residents of a section 404 country. A Co will be a resident of a section 404 country at the end of the eligible period and if it is paid a dividend by B Co, which is also a resident of a section 404 country, that dividend will be notional exempt income under section 404 of the ITAA 1936. | Detailed Reasoning - Further issues for you to consider: Division 727 of the ITAA 1997 may apply to reduce a capital loss realised by A Co on the cancellation of the B Co shares. We have not ruled in this ruling on the application or otherwise of Division 727 of the ITAA 1997.

Question 1: Will the taxpayer be entitled to claim roll-over relief under Subdivision 126-B of the Income Tax Assessment Act 1997 (as modified by section 419 of the Income Tax Assessment Act 1936 ) in respect of the tainted assets held on capital account by B Co which are transferred as part of the merger? | Question 2: Will the taxpayer be entitled to claim roll-over relief under Subdivision 126-B of the Income Tax Assessment Act 1997 (as modified by section 419 of the Income Tax Assessment Act 1936 ) in respect of the tainted assets held on revenue account by B Co which are transferred as part of the merger? | Question 3: Will capital proceeds of nil be received by A Co under Division 116 of the Income Tax Assessment Act 1997 as a result of CGT event C2 happening on the cancellation of the shares in B Co? | • A Co subsequently disposes of the asset, | should any resulting net gain accrued to A Co take into account the consideration (if any) paid or payable by B Co to acquire the asset? | Will the transfer by B Co of assets to A Co for no consideration under the Scheme of Amalgamation constitute a 'dividend' as defined in subsection 6(1) of the Income Tax Assessment Act 1936 ?