Private ruling: CGT - Subdivision 768-G
Date of advice: 27 March 2025
Published: 19 May 2025
Ruling period: Year ended XX XX 20XX
Date scheme commenced: XX XX 20XX

Ruling: Q1: Will the disposal of the shares in ForeignCo A and ForeignCo B by AusCo satisfy the preconditions for a reduction to the expected capital gains pursuant to subsection 768-505(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Will the active foreign business asset percentage (AFBAP) of ForeignCo A, as determined under the method statement in subsection 768-525(1) of the ITAA 1997, be 100%? | A2: Yes. | Q3: Will the AFBAP of ForeignCo B, as determined under the method statement in subsection 768-525(1) of the ITAA 1997, be 100%? | A3: Yes.

Relevant facts and circumstances: Group Structure AusCo is an Australian company and resident of Australia for income tax purposes. AusCo is a company engaged in production. AusCo currently directly holds 100% of the shares in ForeignCo A and ForeignCo B (the Disposal Companies). AusCo also holds 100% of the shares in Foreign HoldCo. Each of the Disposal Companies and Foreign HoldCo are residents of Country X for income tax purposes. Furthermore, they are not Australian resident companies and are not prescribed dual residents under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Each of these companies were incorporated and operate in Country X. The shares in each of the Disposal Companies are held by AusCo on capital account for Australian income tax purposes. The shares in each of the Disposal Companies are not eligible finance shares or widely distributed finance shares within the meaning in Part X of the ITAA 1936. Each of the Disposal Companies are not foreign life insurance companies nor are they foreign general insurance companies. Each of the Disposal Companies is a controlled foreign company of AusCo for Australian income tax purposes. Intended Restructure AusCo is currently undertaking a process to explore a potential restructure of its global group (the Intended Restructure). The majority of AusCo's business operations are currently undertaken in Country X. Whilst the directors of AusCo are located in a number of different countries, key executives of AusCo are located in Country X. The Intended Restructure will comprise the following steps: • AusCo will enter into contracts with Foreign HoldCo to dispose of its directly-held shares in the Disposal Companies in favour of Foreign HoldCo. • AusCo will receive, as consideration, additional shares in Foreign HoldCo which will represent the market value of the disposed shares in the Disposal Companies. Following the Intended Restructure, AusCo will continue to be the ultimate holding company of the Group (which includes each of the Disposal Companies, Foreign HoldCo and a number of other Country X tax resident subsidiary companies). The Intended Restructure is expected to complete in XX 20XX. The future date on which AusCo will dispose of its shares in the Disposal Companies is hereafter referred to as the Disposal Date (being the date on which Capital Gains Tax (CGT) event A1 will occur in respect of the disposals of shares in each of the Disposal Companies pursuant to the contract execution date). On the Disposal Date, AusCo will transfer to Foreign HoldCo: • XX common shares in ForeignCo B, being all of its shares held in the company, in exchange for consideration, being XX additional common shares in Foreign HoldCo, and • XX common shares in ForeignCo A, being all of its shares held in the company, in exchange for consideration, being XX additional common shares in Foreign HoldCo. The value of the additional shares in Foreign HoldCo that will issue to AusCo as consideration for its shares in the Disposal Companies will be equal to the market value of the shares in ForeignCo B and ForeignCo A, respectively, at the Disposal Date (referred to as the Consideration). The Consideration is expected to exceed AusCo's cost base in the shares of each of the Disposal Companies on the Disposal Date. As such, a capital gain is expected to arise with respect to the future disposal by AusCo of each of the Disposal Companies. Financial Information Relevant financial information for the Disposal Companies (the Accounts) are prepared in accordance with commercially accepted accounting principles and give a true and fair view of the financial position of each of the Disposal Companies as at XX XX 20XX and XX XX 20XX. The relevant financial information as at XX XX 20XX represents the most recent recognised company accounts of each of the Disposal Companies. ForeignCo A The current operations of ForeignCo A involve being the main operating entity of the Group. ForeignCo A owns shares in a single subsidiary company which is a tax resident of Country X; however, this subsidiary company owns no assets and has no value. On the Disposal Date, ForeignCo A will hold assets consistent with those that are listed in ForeignCo A's Accounts and comprise: Cash, cash equivalents and restricted cash Cash at bank, cash held in trust and term deposits with a maturity of less than three months. Income tax receivable Income tax receivable amounts from the tax authority of Country X. Receivables Accounts receivable from unrelated parties. Receivables from related parties Loans made to related parties. Receivables from ForeignCo C Prepaid rent to related party ForeignCo C for the use of its assets. Prepaid expenses Prepayments or deposit payments to suppliers for the purchase of goods or services for ForeignCo A's business operations, made in accordance with the agreed purchase order terms. Inventories Inventory held for sale. Advance payments Prepayments made by ForeignCo A. Intangible assets Intangible assets used by ForeignCo A in its business operations. Property, plant and equipment Tangible assets directly used by ForeignCo A in the course of its business. Rights used by ForeignCo A in the course of its business. X assets Capitalised X works. Other long-term assets Capitalised financing fees. ForeignCo B The current operations of ForeignCo B are in the early stages of development. ForeignCo B does not own shares in any subsidiary companies. On the Disposal Date, ForeignCo B will hold assets consistent with those in ForeignCo B's Accounts and comprise: Cash and cash equivalents Cash at bank, cash held in trust and term deposits with a maturity of less than three months. Receivables Sales tax receivables from the tax authority of Country X. Property, plant and equipment Tangible property used in ForeignCo B's mining exploration business. X rights X rights acquired by ForeignCo B. X assets Information provided.. Other Relevant Information AusCo has held its 100% shareholding in the Disposal Companies for greater than 12 months and will continue to hold 100% of the shares in the Disposal Companies until the Disposal Date. AusCo will make a choice under subsection 768-515(2) of the ITAA 1997 to use the book value method set out in section 768-525 of the ITAA 1997 to calculate the active assets of each of the Disposal Companies. AusCo will maintain transfer pricing documentation following the Intended Restructure to ensure that any dealings between AusCo and any of its Country X tax resident subsidiary companies continue to be undertaken under arm's length conditions. None of ForeignCo A's or ForeignCo B's assets are located in Australia or are derivatives.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 768-505(1) | Income Tax Assessment Act 1997 subsection 768-525(1)

Reasons for decision: Summary: The disposal of the shares in ForeignCo A and ForeignCo B by AusCo will satisfy the preconditions for a reduction to the expected capital gains pursuant to subsection 768-505(1) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subdivision 768-G of the ITAA 1997 (Participation Exemption) can apply to reduce a gain arising in respect of certain CGT events. Under this exemption, the capital gain (or loss) is reduced by a percentage which reflects the extent to which the foreign company carries on an 'active business'. Broadly, this percentage is determined by dividing the value of active foreign business assets of the foreign company by the value of the total assets of the foreign company. Section 768-505 of the ITAA 1997 contains the operative provisions and states: (1) The capital gain or capital loss a company (the holding company ) that is an Australian resident makes from a CGT event that happened at a particular time (the time of the CGT event ) to a share in a company (the foreign disposal company ) that is a foreign resident is reduced if: (a) the holding company held a direct voting percentage of 10% or more in the foreign disposal company throughout a 12 month period that: (i) began no earlier than 24 months before the time of the CGT event; and (ii) ended no later than that time; and (b) the share is not: (i) an eligible finance share (within the meaning of Part X of the Income Tax Assessment Act 1936 ); or (ii) a widely distributed finance share (within the meaning of that Part); and (c) the CGT event is CGT event A1, B1, C2, E1, E2, G3, J1, K4, K6, K10 or K11. (2) The gain or loss is reduced by the active foreign business asset percentage (see sections 768-510, 568-530 and 768-535) of the foreign disposal company in relation to the holding company at the time of the CGT event. In order for the Participation Exemption to apply to the disposal of shares in a non-resident company, the criteria in subsection 768-505(1) of the ITAA 1997 must be met. Accordingly, for AusCo to meet these requirements with respect to its disposal of shares in the Disposal Companies, it must be established that: • AusCo is an Australian resident company • the Disposal Companies are foreign resident companies • the disposed shares in each of the Disposal Companies are shares in a company • AusCo held a direct voting percentage of 10% or more in each of the Disposal Companies for a period of at least 12 months in the 24 months prior to the CGT event • the shares held by AusCo in the Disposal Companies are not eligible finance shares or widely distributed finance shares within the meaning of Part X of the ITAA 1936, and • the disposal of shares in each of the Disposal Companies by AusCo gave rise to one of the CGT events listed in paragraph 768-505(1)(c) of the ITAA 1997. These requirements are considered below. | Detailed Reasoning - AusCo is an Australian resident company: Subsection 995-1(1) of the ITAA 1997 defines 'Australian resident' as a resident of Australia for the purposes of the ITAA 1936. Subsection 6(1) of the ITAA 1936 provides the following definition of resident of Australia with respect to a company: resident or resident of Australia means: ... (b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia. AusCo was incorporated in Australia and the Commissioner accepts that at all relevant times, AusCo has been and continues to be an Australian tax resident. Therefore, this requirement is satisfied. | Detailed Reasoning - The Disposal Companies are foreign resident companies: Subsection 995-1(1) of the ITAA 1997 defines 'foreign resident' as a person who is not a resident of Australia for the purposes of the ITAA 1936. As outlined above, subsection 6(1) of the ITAA 1936 outlines when a company is a 'resident of Australia'. The Disposal Companies are not incorporated in Australia, nor do they carry on business in Australia. Therefore, this requirement is satisfied. | Detailed Reasoning - Disposed shares in the Disposal Companies are 'shares in a company': The term 'share in a company' for the purposes of subsection 768-505(1) of the ITAA 1997 is defined in subsection 995-1(1) of the ITAA 1997 to mean a 'share in the capital of the company, and includes stock'. The shares in the Disposal Companies held by AusCo are shares in a company for the purposes of subsection 768-505(1) of the ITAA 1997. Therefore, this requirement is satisfied. | Detailed Reasoning - Direct voting percentage of 10% or more: Paragraph 768-505(1)(a) of the ITAA 1997 requires AusCo to have held a direct voting percentage of 10% or more in each of the Disposal Companies throughout a 12 month period that began no earlier than 24 months before the time of the CGT event and ended no later than the time of the CGT event. The term 'direct voting percentage' is defined for the purposes of paragraph 768-505(1)(a) of the ITAA 1997 in section 768-550 of the ITAA 1997, which states: (1) An entity's direct voting percentage at a particular time in a company is: (a) if the entity has a voting interest (within the meaning of section 334A of the Income Tax Assessment Act 1936 ) in the foreign company at that time amounting to a percentage of the voting power of the company - that percentage; or (b) otherwise - zero. Subsection 334A(1) of the ITAA 1936 prescribes a 'voting interest' in a company as the following: (1) 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. AusCo has directly held 100% of the shares in the Disposal Companies for at least 12 months and will continue to hold 100% of the shares in the Disposal Companies until the Disposal Date. Accordingly, AusCo has continually held greater than 10% of the shares and direct voting percentage in the Disposal Companies for the period specified in Paragraph 768-505(1)(a) of the ITAA 1997. Therefore, this requirement is satisfied. | Detailed Reasoning - Shares not eligible finance shares or widely distributed finance shares: The shares held by AusCo in the Disposal Companies are neither eligible finance shares nor widely distributed finance shares, within the meaning of Part X of the ITAA 1936. Therefore, this requirement is satisfied. | Detailed Reasoning - CGT Event A1: The application of section 768-505 of the ITAA 1997 is limited to the CGT events listed in paragraph 768-505(1)(c) of the ITAA 1997. Subsection 108-5(1) of the ITAA 1997 states that: (1) A CGT asset is: (a) any kind of property; or (b) a legal or equitable right that is not property. Note 1 to section 108-5 of the ITAA 1997 provides that an example of a CGT asset is shares in a company. Accordingly, the shares held by AusCo in the Disposal Companies are CGT assets for the purposes of subsection 108-5(1) of the ITAA 1997. Section 104-10 of the ITAA 1997 states: (1) CGT event A1 happens if you dispose 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. (3) The time of the event is: (a) When you enter into the contract for the disposal; or (b) If there is no contract - when the change of ownership occurs. AusCo will dispose of its shares in the Disposal Companies to Foreign HoldCo in consideration for additional shares in Foreign HoldCo. The change of ownership will be a 'disposal' for the purposes of subsection 104-10(2) of the ITAA 1997. Consequently, CGT event A1 will occur when AusCo disposes of its shareholdings in the Disposal Companies to Foreign Holdco. CGT event A1 is one of the permitted events listed in paragraph 768-505(1)(c) of the ITAA 1997. Therefore, this requirement is satisfied. | Detailed Reasoning - Conclusion: As all of the requirements in subsection 768-505(1) of the ITAA 1997 have been satisfied, the disposal of the shares in the Disposal Companies by AusCo will satisfy the preconditions for a reduction to the expected capital gain amounts pursuant to subsection 768-505(1) of the ITAA 1997. | Summary: The AFBAP of ForeignCo A as determined under the method statement in subsection 768-525(1) of the ITAA 1997 will be 100%. | Detailed Reasoning - Detailed reasoning: The AFBAP is intended to reflect the degree to which the assets of the foreign subsidiary company are used in an active business. The AFBAP is worked out in accordance with section 768-510 of the ITAA 1997, which states: The active foreign business asset percentage of a company (the foreign company ) that is a foreign resident, in relation to the holding company mentioned in section 768-505, at the time of the CGT event mentioned in that section, is worked out in accordance with this section. | Detailed Reasoning - Market value method: Work out that percentage under section 768-520 if: (a) the holding company has made a choice under subsection 768-515(1) in relation to the foreign company for that time; and (b) there is sufficient evidence of the market value at that time of: (i) all assets included in the total assets of the foreign company at that time; and (ii) all active foreign business assets of the foreign company at that time. | Detailed Reasoning - Book value method: Work out that percentage under section 768-525 if: (a) the holding company has made a choice under subsection 768-515(2) in relation to the foreign company for that time; and (b) there are recognised company accounts of the foreign company for a period that ends no later than that time, but no more than 12 months before that time; and (c) if the foreign company was in existence before the start of the period mentioned in paragraph (b) - there are recognised company accounts of the foreign company for a period that ends at least 6 months, but no more than 18 months, before the end of the period mention in paragraph (b). | Detailed Reasoning - Default method: Otherwise, that percentage is: (a) 100% (if this section is being applied for the purposes of section 767-505 to reduce a capital loss of the holding company); or (b) zero (in any other case). Section 768-515 of the ITAA 1997 provides that a choice must be made by the holding company to apply either the market value or book value method and states: Choice for market value method (1) The holding company may choose to work out the active foreign business asset percentage of the foreign company for the time of the CGT event under section 768-520. Choice for book value method (2) The holding company may choose to work out the active foreign business asset percentage of the foreign company for the time of the CGT event under section 768-525. Method of making choice (3) The way an entity making a choice under subsection (1) or (2) prepares its income tax return is sufficient evidence of the making of the choice. Note: If an entity does not make a choice under subsection (1) or (2), it will work out the active foreign business asset percentage of the foreign company in accordance with the default method in subsection 768-510(4). Where the holding company does not make a choice to apply either the market value or book value method, the default method will automatically apply. AusCo will make a choice to use the book value method to calculate the AFBAP of ForeignCo A and has recognised company accounts for the periods ending XX XX 20XX and XX XX 20XX. | Detailed Reasoning - Book Value method: Subsection 768-525(1) of the ITAA 1997 contains the method statement for working out the AFBAP under the book value method and states: (1) The active foreign business asset percentage of the foreign company in relation to the holding company, at the time of the CGT event, is worked out under this section in this way. | Detailed Reasoning - Method Statement: Step 1. Work out the foreign company's average value of total assets at that time under subsection (2). Step 2. Work out the foreign company's average value of active foreign business assets at that time under subsection (3). Step 3. Divide the result of step 2 by the result of step 1. Step 4. Express the result of step 3 as a percentage, and round that percentage to the nearest whole percentage point (rounding a number ending in.5 upwards). Step 5. The active foreign business asset percentage is: (a) if the result of step 4 is less than 10% - zero; or (b) if the result of step 4 is 10% or more, but less than 90% - that result; or (c) if the result of step 4 is 90% or more - 100%. These steps are considered below. | Detailed Reasoning - Step 1 -Total Assets of ForeignCo A: Subsection 768-545(1) of the ITAA 1997 states: (1) At a particular time, an asset is an asset included in the total assets of a company (the foreign company ) that is a foreign resident if: (a) the asset is a CGT asset at that time; and (b) the foreign company owns the asset at that time; and (c) if at that time the foreign company is not an AFI subsidiary (within the meaning of Part X of the Income Tax Assessment Act 1936 ) whose sole or principal business is financial intermediary business (within the meaning of that Part) - the asset is not a foreign company derivative asset covered by subsection (2). Section 108-5 of the ITAA 1997 states that: (1) A CGT asset is: (a) any kind of property; or (b) a legal or equitable right that is not property. (2) To avoid doubt, these are CGT assets : (a) part of, or an interest in, an asset referred to in subsection (1); (b) goodwill or an interest in it; (c) an interest in an asset of a partnership; (d) an interest in a partnership that is not covered by paragraph (c). Note 1: Examples of CGT assets are: • land and buildings; • shares in a company and units in a unit trust; • options; • debts owed to you; • a right to enforce a contractual obligation; • foreign currency. The definition of CGT asset in subsection 108-5(1) of the ITAA 1997 clarifies that CGT assets include both assets of a proprietary nature and other rights otherwise enforceable by law. In summary, property can be the following: • Tangible property that has physical existence such as land and buildings. They are capable of possession, ownership may be transferred, and the right of ownership may be defended in a court. • Intangible property can be an idea if it is manifest either in a trademark, a copyright, or an application for patent. It has to be in the form of copyright, IP or patent as it is transferable and may be the subject of legal action. Legal and equitable rights that are not property, would include non-proprietary rights and enforceable contractual obligations. Paragraph 1.137 of the Explanatory Memorandum to the New International Tax Arrangements (Participation Exemptions and Other Measures) Bill 2004 (EM) notes that a foreign company is considered to own a CGT asset where it is both the legal and beneficial owner of the asset at that time. Under subsection 109-5(1) of the ITAA 1997, a taxpayer is considered to be the owner of a CGT asset when it acquires the CGT asset. ForeignCo A acquired the CGT assets recognised in its Accounts and is the legal and beneficial owner of those assets. Therefore, ForeignCo A will be the owner of these CGT assets for subsection 768-545(1) of the ITAA 1997 purposes. Subsection 768-545(1) of the ITAA 1997 applies to all assets included in ForeignCo A's statements of financial position as follows: | Detailed Reasoning - Cash, cash equivalents & restricted cash: Cash is a type of property and will be considered as a CGT asset. Further, a bank account represents a contractual arrangement between the depositor and the bank. The depositor lends their money to a bank by depositing money into an account. The balance of said account becomes a debt extended to the bank and payable to the depositor. | Detailed Reasoning - Income tax receivable: The right to income tax receivable in the form of a credit or refund is a legal right which meets the definition of a CGT asset. | Detailed Reasoning - Receivables: A trade debt (account receivable) is a contractual right to receive money from customers in respect of sales made on credit and as such is a CGT asset. | Detailed Reasoning - Receivable from ForeignCo C: Prepaid expenses represent a right to enforce a contractual obligation owed to ForeignCo A and will therefore be a CGT asset. | Detailed Reasoning - Receivables from related parties: These receivables consist of loans extended to related parties. Loans represent a debt owed by a debtor to the lender. Applied to the current circumstances, debts are owed by the related parties to ForeignCo A and are CGT assets of ForeignCo A. | Detailed Reasoning - Prepaid expenses and advances: Prepaid expenses and advances made to suppliers are a right to enforce a contractual obligation owed to ForeignCo A and will therefore be a CGT asset. | Detailed Reasoning - Inventories: Inventory is a type of property that a business acquires, produces or manufactures for the purpose of manufacturing, selling or exchanging. ForeignCo A owns inventory for the purpose of exchanging or selling. As a tangible form of property, inventory will be considered as a CGT asset. | Detailed Reasoning - Advance payments: Prepayments are in essence a right to enforce a contractual obligation owed to ForeignCo A and will therefore be CGT assets. | Detailed Reasoning - Intangible assets: Intangible assets are CGT assets. | Detailed Reasoning - Property, plant and equipment: Property, plant and equipment are generally assets characterised by physical existence or substance and thus meet the definition of a CGT asset. Further, mining rights are a CGT asset as they are a legally enforceable right. Therefore, paragraphs 768-545(1)(a) and (b) of the ITAA 1997 are satisfied for the above listed assets and each are included in the total assets of ForeignCo A. | Detailed Reasoning - X assets: This asset consist entirely of information provided, otherwise known as X information. This X information contributes to the intellectual capital or know-how associated with ForeignCo A's operations. As such, it does not constitute a CGT asset and therefore does not satisfy the requirements of subsection 768-545(1) of the ITAA 1997. | Detailed Reasoning - Other long-term assets: These assets are capitalised financing fees incurred by ForeignCo A. These fees do not represent property or a legal or equitable right. Consequently, they do not constitute CGT assets and therefore do not satisfy the requirements of subsection 768-545(1) of the ITAA 1997. | Detailed Reasoning - Conclusion: The total assets were $A as at XX XX 20XX and $B as at XX XX 20XX. Therefore, the result of Step 1 is $C (being the average of $A and $B). | Detailed Reasoning - Step 2 - Active Foreign Business Assets of ForeignCo A: Section 768-540 of the ITAA 1997 outlines when an asset is an active foreign business asset of a foreign company for the purposes of working out whether there is an entitlement to a reduction in capital gains upon the occurrence of a CGT event in relation to the shares in the foreign company. Subsection 768-540(1) of the ITAA 1997 states: (1) An asset is, at a particular time, an active foreign business asset of a company (the foreign company ) that is a foreign resident if, at that time: (a) the asset is an asset included in the total assets of the company; and (b) the asset satisfies any of these conditions: (i) the asset is used, or held ready for use, by the company in the course of carrying on a business; (ii) the asset is goodwill; (iii) the asset is a share; and (a) the asset is not any of the following: (i) taxable Australian property; (ii) a membership interest in a company that is an Australian resident; (iii) a membership interest in a resident trust for CGT purposes; (iv) an option or right to acquire a membership interest mentioned in subparagraph (ii) or (iii); and (b) the asset is not covered by subsection (2); and (c) if the foreign company is an AFI subsidiary (within the meaning of Part X of the Income Tax Assessment Act 1936 ) whose sole or principal business is financial intermediary business - the asset is not covered under subsection (4). Subsection 768-540(2) of the ITAA 1997 states that: (2) An asset is covered by this subsection if it is: (a) a financial instrument (other than a share or trade debt); or (b) either: (i) an eligible finance share (within the meaning of Part X of the Income Tax Assessment Act 1936 ); or (ii) a widely distributed finance share (within the meaning of that Part); or (c) an interest in a trust or partnership; or (d) a life insurance policy; or (e) a right or option in respect of: (i) a financial instrument; or (ii) an interest in a company, trust or partnership; or (iii) a life insurance policy; or (f) cash or cash equivalent; or (g) an asset whose main use in the course of carrying on the business mentioned in subparagraph (1)(b)(i) is to derive interest, an annuity, rent, royalties or foreign exchange gains unless: (i) the asset is an intangible asset and has been substantially developed, altered or improved by the foreign company so that its market value has been substantially enhanced; or (ii) its main use for deriving rent was only temporary. Subparagraph 768-540(1)(b)(i) of the ITAA 1997 requires that the asset must be one of three kinds of assets. Paragraph 1.106 of the EM notes that the purpose of this restriction is to ensure that only business assets have the opportunity to be classified as an active foreign business asset. Paragraph 1.104 of the EM states: ... the definition of active foreign business asset is broadly based on existing definitions in the income tax law of 'tainted asset' in section 317 of the ITAA 1936 and 'active asset' in section 152-40 of the ITAA 1997. The word 'used' takes its ordinary meaning, which in any particular case will depend on the context in which the word is employed and the purpose for which the asset is held ( Newcastle City Council v Royal Newcastle Hospital (1956) 96 CLR 493). For an asset to be used 'in' the course of carrying on a business, it is necessary for the use to have a direct functional relevance to the carrying on of the normal day-to-day activities of the business. In summary, subsection 768-540(1) of the ITAA 1997 sets out the rules for determining whether an asset will be an 'active foreign business asset' of a foreign company at a particular time. The asset must be included in the total assets of the company, and it must not be an asset of the kind covered by subsection 768-540(2) of the ITAA 1997. In applying subsection 768-540(1) of the ITAA 1997 to all assets included in ForeignCo A's total assets in step 1 above: | Detailed Reasoning - Income tax receivable: The income tax receivable will be an active foreign business asset as the income tax receivable is said to be used or held ready for use, in the course of carrying on a business and will therefore satisfy subparagraph 768-540(1)(b)(i) of the ITAA 1997. | Detailed Reasoning - Receivables: Trade debtors (accounts receivable) arise from unrelated parties where ForeignCo A has made sales on credit in the normal course of operations. Where a business makes sales on credit in the normal course of its operations, the resulting trade debtors are inherently connected with that business and satisfy subparagraph 768-540(1)(b)(i) of the ITAA 1997. Further trade debtors are specifically excluded from the operation of subparagraph 768-540(2)(a) of the ITAA 1997. | Detailed Reasoning - Receivable from ForeignCo C: This asset relates directly to ForeignCo A's business operations and as such this asset is used or held ready for use in the carrying on of ForeignCo A's business and as such satisfies subparagraph 768-540(1)(b)(i) of the ITAA 1997. | Detailed Reasoning - Prepaid expenses and advances: This asset consists of prepayments or deposit payments made to suppliers for the purchase of goods and services for ForeignCo A's business operations in accordance with agreed purchase order terms. As such these prepayments are used or held ready for use in the carrying on of ForeignCo A's business and therefore satisfy subparagraph 768-540(1)(b)(i) of the ITAA 1997. | Detailed Reasoning - Inventories: Inventory is one of the major assets for ForeignCo A and is held for the purpose of revenue production. As such, inventories will satisfy subparagraph 768-540(1)(b)(i) of the ITAA 1997. | Detailed Reasoning - Advance payments: These prepayments relate to ForeignCo A's business operations and as such are used or held ready for use by ForeignCo A in carrying on its business per subparagraph 768-540(1)(b)(i) of the ITAA 1997. | Detailed Reasoning - Intangible assets: As these intangible assets are directly used in ForeignCo A's mining and exploration business, they are active foreign business assets as they are used or held ready for use by ForeignCo A in carrying on its business per subparagraph 768-540(1)(b)(i) of the ITAA 1997. | Detailed Reasoning - Property, plant and equipment: Property, plant and equipment (including X rights) are assets used by ForeignCo A for the purpose of operating its business and are therefore active foreign business assets as they are used or held ready for use by ForeignCo A in carrying on business in accordance with subparagraph 768-540(1)(b)(i) of the ITAA 1997. | Detailed Reasoning - Cash, cash equivalents and restricted cash: Paragraph 768-540(1)(d) of the ITAA 1997 restricts active foreign business assets to those not covered by subsection 768-540(2) of the ITAA 1997. Paragraph 768-540(2)(f) of the ITAA 1997 includes cash or equivalent. As such, this asset is excluded from being an active foreign business asset. | Detailed Reasoning - Receivables from related parties: As these are not considered to be used or held ready for use by ForeignCo A in the course of carrying on ForeignCo A's business as a mining exploration company, they are not treated as active assets. | Detailed Reasoning - Conclusion: The active foreign business assets of ForeignCo A were $D as at XX XX 20XX and $E as at XX XX 20XX. Therefore, the result of Step 2 is $F (being the average of $D and $E). | Detailed Reasoning - Step 3 - Proportion of Active Foreign Business Assets to Total Assets of ForeignCo A: The proportion of active foreign business assets to total assets of ForeignCo A is acquired by dividing the result of Step 2 by the result of Step 1 as follows: >Figure 1: Proportion of Active Foreign Business Assets to Total Assets of ForeignCo A Therefore, the result of Step 3 is G. | Detailed Reasoning - Step 4 - Conversion to a Percentage: Step 4 requires the result of Step 3 to be expressed as a percentage which is rounded up to the nearest whole percentage point. Rounding the result of Step 3 to the nearest whole percentage point provides a result of H%. Therefore, the result of Step 4 is H%. | Detailed Reasoning - Step 5 - AFBAP of ForeignCo A: Step 5 states that where the result of Step 4 is more than 90% then the AFBAP will be 100%. As the result of Step 4 is above 90%, the result of Step 5 is 100%. | Detailed Reasoning - Conclusion: The AFBAP for ForeignCo A, as determined under the method statement in subsection 768-525(1) will be 100%. | Summary: The AFBAP of ForeignCo B as determined under the method statement in subsection 768-525(1) of the ITAA 1997 will be 100%. | Detailed Reasoning - Detailed reasoning: As outlined in Question 2 above, the AFBAP is intended to reflect the degree to which the assets of the foreign subsidiary company are used in an active business. The AFBAP is worked out in accordance with section 768-510 of the ITAA 1997. Section 768-515 of the ITAA 1997 provides that a choice must be made by the holding company to apply either the market value or book value method. Subsection 768-525(1) of the ITAA 1997 contains the method statement for working out the AFBAP under the book value method: These steps are considered below. | Detailed Reasoning - Step 1 - Total Assets of ForeignCo B: As outlined in Question 2 above, subsection 768-545(1) of the ITAA 1997 requires that an asset satisfy a list of criteria for it to be included in the total assets of a company. One of these requirements is that the asset is a CGT asset. In accordance with sections 108-5 and 109-5 of the ITAA 1997, ForeignCo B acquired the CGT assets recognised on its statements of financial position and is the legal and beneficial owner of those assets. Therefore, ForeignCo B will be the owner of these CGT assets for subsection 768-545(1) of the ITAA 1997 purposes. In applying subsection 768-545(1) of the ITAA 1997 to all assets included in ForeignCo B's statements of financial position: | Detailed Reasoning - Total Assets of ForeignCo B: Cash and cash equivalents Cash is a type of property and will be considered as a CGT asset. Further, a bank account represents a contractual arrangement between the depositor and the bank. The depositor lends their money to a bank by depositing money into an account. The balance of said account becomes a debt extended to the bank and payable to the depositor. Receivables The right to receive sales tax receivables from the tax authority of Country X in the form of a credit of refund is a legal right which meets the definition of a CGT asset. Property, plant and equipment Property, plant and equipment are tangible assets characterised by physical existence or substance and thus meet the definition of a CGT asset. Mining rights Mining rights are a CGT asset as they are a legally enforceable right. Therefore, paragraphs 768-545(1)(a) and (b) of the ITAA 1997 are satisfied for the above listed assets and each are included in the total assets of ForeignCo B. | Detailed Reasoning - Excluded Assets of ForeignCo B: Exploration assets This asset consist entirely of information provided, otherwise known as mining information. This mining information contributes to the intellectual capital or know-how associated with ForeignCo B's mining operations. As noted in ATO ID 2012/13, mining information is akin to 'know-how' and is not a CGT asset as it is not property or a legal or equitable right that is not property. As such, it does not constitute a CGT asset and therefore does not satisfy the requirements of subsection 768-545(1) of the ITAA 1997. | Detailed Reasoning - Conclusion: The total assets were $I as at XX XX 20XX and $J as at XX XX 20XX. Therefore, the result of Step 1 is $K (being the average of $I and $J). | Detailed Reasoning - Step 2 - Active Foreign Business Assets of ForeignCo B: Section 768-540 of the ITAA 1997 outlines when an asset is an active foreign business asset of a foreign company for the purposes of working out whether there is an entitlement to a reduction in capital gains upon the occurrence of a CGT event in relation to the shares in the foreign company. The key provisions of section 768-540 of the ITAA 1997 are outlined in Question 2 above. In applying subsection 768-540(1) of the ITAA 1997 to all assets included in ForeignCo B's total assets in step 1 above: | Detailed Reasoning - Active Foreign Business Assets of ForeignCo B: Receivables The sales tax receivable will be considered an active foreign business asset as the sales tax receivable is used or held ready for use, in the course of carrying on a business and will therefore satisfy subparagraph 768-540(1)(b)(i) of the ITAA 1997. | Detailed Reasoning - Property, plant and equipment: Property, plant and equipment are assets used by ForeignCo B for the purpose of operating its business and therefore are considered to be active assets as they are used or held ready for use by ForeignCo B in carrying on business in accordance with subparagraph 768-540(1)(b)(i) of the ITAA 1997. | Detailed Reasoning - X Rights: X rights are an asset that is directly used by ForeignCo B in the course of its business and as such satisfy subparagraph 768-540(1)(b)(i) of the ITAA 1997. | Detailed Reasoning - Cash and cash equivalents: Paragraph 768-540(1)(d) of the ITAA 1997 restricts active foreign business assets to those not covered by subsection 768-540(2). Paragraph 768-540(2)(f) of the ITAA 1997 includes cash or equivalent. As such, this asset is excluded from being an active foreign business asset. | Detailed Reasoning - Conclusion: The active foreign business assets of ForeignCo B were $L as at XX XX 20XX and $M as at XX XX 20XX. Therefore, the result of Step 2 is $N (being the average of $L and $M). | Detailed Reasoning - Step 3 - Proportion of Active Foreign Business Assets to Total Assets of ForeignCo B: The proportion of active foreign business assets to total assets of ForeignCo B is acquired by dividing the result of Step 2 by the result of Step 1. Figure 2: Proportion of Active Foreign Business Assets to Total Assets of ForeignCo B > Therefore, the result of Step 3 is P. | Detailed Reasoning - Step 4 - Conversion to a Percentage: Step 4 requires the result of Step 3 to be expressed as a percentage which is rounded up to the nearest whole percentage point. Rounding the result of Step 3 to the nearest whole percentage point provides a result of Q%. Therefore, the result of Step 4 is Q%. | Detailed Reasoning - Step 5 - AFBAP of ForeignCo B: Step 5 states that where the result of Step 4 is more than 90% then the AFBAP will be 100%. As the result of Step 4 is above 90%, the result of Step 5 is 100%. | Detailed Reasoning - Conclusion: The AFBAP for ForeignCo B, as determined under the method statement in subsection 768-525(1) of the ITAA 1997 will be 100%.

Does IVA apply to this private ruling?: Part IVA was not considered as part of this private ruling.