Private ruling: Amalgamation - CGT event A1
Published: November 2013
Ruling period: Year ending 30 June 2014.
Date scheme commenced: October 2013.

Ruling: Q1: Will the proposed amalgamation of OverseasCo 1 and OverseasCo 2 result in the disposal of a CGT asset by OverseasCo 1, pursuant to section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?. | A1: No. The proposed amalgamation of OverseasCo 1 and OverseasCo 2 will not result in the disposal of a CGT asset by OverseaCo 1, pursuant to section 104-10 of the ITAA 1997.

Relevant facts and circumstances: OverseasCo 1 is a foreign country resident entity, governed by the relevant foreign country Act OverseasCo 1 is proposing to "amalgamate" with its wholly-owned subsidiary OverseasCo 2 under the provisions of the foreign country Act. The concept of "amalgamation" under the foreign country Act involves two entities continuing as one entity. Each entity continues to exist in the new amalgamated company (Amalco). OverseasCo 1 also owns 100% of the shares in OverseasCo 3. OverseasCo 3, through a chain of wholly owned entities, has a 100% interest in Ausco, an Australian resident company, which owns an asset in Australia. The shares that OverseasCo 1 owns in OverseasCo 3 are an "indirect Australian real property interest", and hence "taxable Australian property" under Division 855 of the ITAA 1997 (based on the assumption by OverseasCo 1 in their Private Ruling application that their shares in OverseasCo 3 would pass the principal asset test in section 855-30 of the ITAA 1997).

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10; | Income Tax Assessment Act 1997 section 108-5; | Income Tax Assessment Act 1997 section 855-30.

Reasons for decision: Summary: For the purposes of CGT event A1 in section 104-10 of the ITAA 1997, the issue is whether the proposed amalgamation gives rise to a disposal of OverseasCo 1's CGT assets, such as its shares in OverseasCo 3. A disposal would occur if a CGT asset of OverseasCo 1 was disposed of to another entity, such as Amalco. | Detailed Reasoning - CGT event A1: Section 104-10 of the ITAA 1997 states: (1) CG T event A1 happens if you *dispo se of a *CGT asset. (2) You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. Accordingly, for CGT event A1 to happen, there must be a change in the ownership of a CGT asset from one entity to another entity. | Detailed Reasoning - The role of the foreign country Act.: The consideration of the foreign country Act is relevant because it directly governs the status of the companies and the ownership of their property, which informs the Australian legal issue of whether there is a "disposal" under CGT event A1. In Gold and Resource Developments NL v Australian Stock Exchange Ltd & Anor (1998) 30 ACSR 105, the Supreme Court of Western Australia stated (at 107) that: where foreign law creates a transaction or procedure which has no Australian counterpart, it is necessary to look to the foreign law for the meaning and effect of that transaction or procedure. Once that is understood, the procedure or transaction is then to be tested against [the Australian legal definition]. That case concerned an amalgamation under the Companies Act 1993 (New Zealand), and how it affected compliance with the listing rules of the Australian Stock Exchange in relation to the meaning of "disposes". Wheeler J's judgment demonstrates that a New Zealand amalgamation was identical in effect to an amalgamation under the foreign country Act. An amalgamation under the foreign country Act (just like under the New Zealand statute) has no Australian counterpart. Therefore, to resolve the Australian legal question of whether a "disposal" under section 104-10 of the ITAA 1997 will happen, it is necessary to consider the effect of an amalgamation under the foreign country Act on whether there is a disposal of assets by either or both of the amalgamating companies to Amalco. | Detailed Reasoning - Amalgamation provisions of the foreign country Act: The effect of certain provisions of the foreign country Act is that OverseasCo 1 and OverseasCo 2 will continue to exist in Amalco after the amalgamation. For a "disposal" to happen under CGT event A1, the ownership of a CGT asset must change from one entity to another entity. If an entity continues to exist, and continues to own its CGT assets, there can be no disposal. The foreign country Act states that the property, rights and interests of each amalgamating corporation continue to be the property, rights and interests of the amalgamated company. Property, or a legal or equitable right that is not property, is a CGT asset under subsection 108-5(1) of the ITAA 1997. Certain section of the foreign country Act supports the conclusion that there is no "disposal" of a CGT asset by an amalgamating corporation (such as OverseasCo 1) to the amalgamated company (Amalco). This is because there is no assignment, transfer or any other disposition of property or rights. This essentially covers every kind of disposal of CGT assets under CGT event A1. Without a disposal, CGT event A1 cannot happen. As the foreign country Act provides that OverseasCo 1 continues to exist as Amalco, and continues to own its property and rights, despite the amalgamation, there is no disposal of property or rights (encompassing all types of CGT asset under section 108-5 of the ITAA 1997) by OverseaCo 1, pursuant to section 104-10 of the ITAA 1997. Hence, where two companies choose to amalgamate under the foreign country Act, there is no change in the ownership of their CGT assets from the amalgamating corporation to the amalgamated company. Therefore, the proposed amalgamation of OverseasCo 1 and OverseasCo 2 will not result in the disposal of a CGT asset by OverseasCo 1, pursuant to section 104-10 of the ITAA 1997.