Private ruling: CGT - Division 855
Date of advice: 27 May 2025
Published: 4 August 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the shares in AusCo held by ForeignCo1 taxable Australian property (TAP) as defined in section 855-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will any Australian capital gain on disposal of the shares in AusCo be disregarded by ForeignCo1 pursuant to subsection 855-10(1) of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: AusCo is an Australian tax resident company and the head company of an Australian income tax consolidated group consisting of AusCo and two subsidiary members, AusSub1 and AusSub2. The AusGroup consists of AusCo and its subsidiaries. AusCo holds shares in foreign companies (ForeignSubs). The ForeignSubs operate retail businesses in their respective countries. Each of the ForeignSubs are residents of the relevant foreign countries in which they were incorporated. The ForeignSubs do not carry on business through a permanent establishment situated in Australia. The shares held by AusCo in the ForeignSubs are all ordinary shares that carry the same voting, dividend, and capital rights. The ForeignSubs have not issued any other classes of shares. The ultimate majority shareholder of the AusGroup is HoldCo, a company incorporated in Country X. HoldCo ultimately holds XX% of the shares in AusCo, through a wholly owned subsidiary, MidCo which was incorporated in Country Y. MidCo in turn has two wholly owned subsidiaries, ForeignCo1 and ForeignCo2 (collectively the Foreign Shareholders). Both ForeignCo1 and ForeignCo2 were incorporated in Country W. HoldCo, MidCo (collectively the Majority Shareholder) and the Foreign Shareholders are residents in their respective jurisdictions of incorporation and are not Australian residents. Further, they do not carry on business through any permanent establishment situated in Australia. ForeignCo1 holds XX% of the shares in AusCo and ForeignCo2 holds XX% of the shares in AusCo. The remaining XX% of the shares in AusCo are held by an Australian resident company (the Minority Shareholder). All shares in AusCo are ordinary shares and the Foreign Shareholders hold their shares in AusCo on capital account. The market value of the Foreign Shareholder's shares in AusCo exceeds their cost base and reduced cost base as CGT assets. Proposed Restructure HoldCo intends to undertake a broad internal group restructure to establish a new Country Z company to serve as the new headquarters and group holding company (Proposed Restructure). MidCo2 was incorporated in Country Z in 20XX. Broadly, under the Proposed Restructure: • MidCo will acquire XX% of the interests in AusCo from ForeignCo1 and ForeignCo2. • MidCo2 (the new headquarters entity) will be interposed between AusCo and MidCo and the Minority Shareholder. The disposal of the shares in AusCo held by ForeignCo1 and ForeignCo2 to MidCo will occur at market value with the shares in the new interposed company (MidCo2) having the same value as the shares in AusCo. Following the Proposed Restructure, the Majority Shareholder and the Minority Shareholder will own interests in MidCo2 in line with their current ownership percentages in AusCo. Ultimately, the Proposed Restructure will not change the underlying economic ownership of AusCo. Financial Information As at 30 June 20XX, AusGroup held total assets with a combined book value of $XX. The book value of these assets is reflective of their market value, with the exception of real properties and unbooked goodwill. AusGroup holds a number of real properties in Australia. Market valuations for these properties have been obtained by AusGroup. These valuations have all been carried out independently on a full market value basis and there have been no events since the date of valuation which would materially impact the accuracy of these valuations. Apart from these properties, AusGroup does not have, nor hold any option/right to purchase, any other real property situated in Australia. AusGroup does not hold any mining, quarrying or prospecting rights, nor any option/right to purchase those types of assets.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 855-10(1) | Income Tax Assessment Act 1997 section 855-15

Reasons for decision: Summary: The shares in AusCo held by ForeignCo1 are not TAP as defined in section 855-15 of the ITAA 1997. | Detailed Reasoning - Taxable Australian Property: There are five categories of CGT assets that are TAP. These categories are set out in the table in section 855-15 of the ITAA 1997 as follows: Table 1: CGT assets that are taxable Australian property | Detailed Reasoning - Description: 1 Taxable Australian real property (see section 855-20) 2 A CGT asset that: (a) is an indirect Australian real property interest (see section 855-25); and (b) is not covered by item 5 of this table 3 A CGT asset that: (a) you have used at any time in carrying on a business through: (i) if you are a resident in a country that has entered into an international tax agreement with Australia containing a permanent establishment article--a permanent establishment (within the meaning of the relevant international tax agreement) in Australia; or (ii) otherwise--a permanent establishment in Australia; and (b) is not covered by item 1, 2 or 5 of this table 4 An option or right to acquire a CGT asset covered by item 1, 2 or 3 of this table 5 A CGT asset that is covered by subsection 104-165(3) (choosing to disregard a gain or loss on ceasing to be an Australian resident). With respect to ForeignCo's disposal of its shares in AusCo, Items 1, 3, 4 and 5 contained in the table in section 855-15 of the ITAA 1997 are not relevant as: • the shares do not represent a direct interest in Taxable Australian Real Property (TARP) (Item 1) • the shares are not used in carrying on a business through a permanent establishment in Australia (Item 3) • the shares do not represent an option or right to acquire a CGT asset (Item 4), and • section 104-165(3) of the ITAA 1997 only applies to individuals who choose to disregard a gain covered by CGT event I1 (Item 5). Item 2 contained in the table in section 855-15 of the ITAA 1997 is considered in detail below. | Detailed Reasoning - Item 2 - Indirect Australian real property interest: Subsection 855-25(1) of the ITAA 1997 states: (1) A membership interest held by an entity (the holding entity ) in another entity (the test entity ) at a time is an indirect Australian real property interest at that time if: (a) the interest passes the non-portfolio interest test (see section 960-195): (i) at that time; or (ii) throughout a 12 month period that began no earlier than 24 months before that time and ended no later than that time; and (b) the interest passes the principal asset test in section 855-30 at that time. Therefore, the membership interest held by ForeignCo1 in AusCo is an indirect Australian real property interest where it passes: • the non-portfolio interest test (per section 960-195 of the ITAA 1997), and • the principal asset test (per section 855-30 of the ITAA 1997). These are considered below. | Detailed Reasoning - Non-portfolio interest test: The non-portfolio interest test is outlined in section 960-195 of the ITAA 1997 and states: An interest held by an entity (the holding entity) in another entity (the test entity) passes the non-portfolio interest test at a time if the sum of the direct participation interests held by the holding entity and its associates in the test entity at that time is 10% or more. Associate is defined in section 995-1 of the ITAA 1997 as having the meaning given by section 318 of the ITAA 1936. Subsection 318(2) of the ITAA 1936 relevantly provides: (2) For the purposes of this Part, the following are associates of a company (in this subsection called the primary entity ): (a) a partner of the primary entity or a partnership in which the primary entity is a partner; (b) if a partner of the primary entity is a natural person otherwise than in the capacity of trustee-the spouse or a child of that partner; (c) a trustee of a trust where the primary entity, or another entity that is an associate of the primary entity because of another paragraph of this subsection, benefits under the trust; (d) another entity (in this paragraph called the controlling entity ) where: (i) the primary entity is sufficiently influenced by: (A) the controlling entity; or (B) the controlling entity and another entity or entities; or (ii) a majority voting interest in the primary entity is held by: (A) the controlling entity; or (B) the controlling entity and the entities that, if the controlling entity were the primary entity, would be associates of the controlling entity because of subsection (1), because of subparagraph (i) of this paragraph, because of another paragraph of this subsection or because of subsection (3); (e) another company (in this paragraph called the controlled company ) where: (i) the controlled company is sufficiently influenced by: (A) the primary entity; or (B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or (C) a company that is an associate of the primary entity because of another application of this paragraph; or (D) 2 or more entities covered by the preceding sub-subparagraphs; or (ii) a majority voting interest in the controlled company is held by: (A) the primary entity; or (B) the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection; or (C) the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection; (f) any other entity that, if a third entity that is an associate of the primary entity because of paragraph (d) of this subsection were the primary entity, would be an associate of that third entity because of subsection (1), because of another paragraph of this subsection or because of subsection (3). As MidCo holds the majority voting interest in both ForeignCo1 and ForeignCo2, paragraph 318(2)(f) of the ITAA 1936 applies such that ForeignCo1 and ForeignCo2 are associates of one another for the purposes of the non-portfolio interest test. In working out the direct participation interest that one entity holds in another entity, subsection 960-190(1) of the ITAA 1997 states that where the other entity is a company (within the meaning of Part X of the ITAA 1936) the direct participation interest that the first entity holds in the other entity is 'the direct control interest (within the meaning of section 350 of the Income Tax Assessment Act 1936 ) that the first entity holds in the other entity.' Section 350 of the ITAA 1936 states: (1) Subject to subsection (7), an entity holds a direct control interest in a company at a particular time equal to the percentage that the entity holds, or is entitled to acquire, at that time of: (a) the total paid-up share capital of the company; or (b) the total rights of shareholders to vote, or participate in any decision-making, concerning any of the following: (i) the making of distributions of capital or profits of the company to its shareholders; (ii) the constituent document of the company; (iii) any variation of the share capital of the company; or (c) the total rights to distributions of capital or profits of the company to its shareholders on winding-up; or (d) the total rights to distributions of capital or profits of the company to its shareholders, otherwise than on winding-up; or, if different percentages are applicable under the preceding paragraphs, the greater or greatest of those percentages. ForeignCo1 and ForeignCo2 respectively hold XX% and XX% of the share capital in AusCo (the test entity). As the sum of these direct participation interests in AusCo is greater than 10%, the non-portfolio interest test is satisfied. | Detailed Reasoning - Principal Asset Test (PAT): Section 855-30 of the ITAA 1997 outlines the PAT and states: (1) The purpose of this section is to define when an entity's underlying value is principally derived from Australian real property (see paragraph 855-5(2)(b)). (2) A *membership interest held by an entity (the holding entity) in another entity (the test entity) passes the principal asset test if the sum of the *market values of the test entity's assets that are *taxable Australian real property exceeds the sum of the *market values of its assets that are not taxable Australian real property. (3) For the purposes of subsection (2), treat an asset of an entity (the first entity ) that is a *membership interest in another entity (the other entity ) as if it were instead the following 2 assets: (a) an asset that is *taxable Australian real property (the TARP asset ); (b) an asset that is not taxable Australian real property (the non-TARP asset ) (4) For the purposes of subsection (2), treat the *market value of the TARP asset and the non-TARP asset according to the following table. | Detailed Reasoning - the market value of the non-TARP asset is:: 1 (a) the first entity's *direct participation interest in the other entity is less than 10%; or (b) the holding entity's *total participation interest in the other entity is less than 10% zero the *market value of the *membership interest mentioned in subsection (3) 2 item 1 does not apply the product of: (a) the sum of the *market values of all the assets of the other entity that are *taxable Australian real property; and (b) the first entity's *direct participation interest in the other entity the product of: (a) the sum of the market values of all the assets of the other entity that are not taxable Australian real property; and (b) the first entity's direct participation interest in the other entity Note 1: For the purposes of item 2 of the table, it is necessary to work out the market value of any TARP assets and non-TARP assets in relation to any membership interests held by the other entity before working out the value of the TARP asset and non-TARP asset held by the first entity. Note 2: The market value of an asset of the other entity that is not taxable Australian real property, and is duplicated within the other entity's corporate group, could be disregarded (see section 855-32). The membership interests held by ForeignCo1 in AusCo will pass the PAT where the sum of the market values of AusCo's assets (held either directly or indirectly through membership interests in other entities) that are TARP exceeds the sum of the market value of AusCo's assets that are not TARP. | Detailed Reasoning - TARP assets of the AusGroup: Section 855-20 of the ITAA 1997 states: A CGT asset is taxable Australian real property if it is: (a) real property situated in Australia (including a lease of land, if the land is situated in Australia); or (b) a mining, quarrying or prospecting right (to the extent that the right is not real property), if the minerals, petroleum or quarry materials are situated in Australia. 'Real property' is not defined in the ITAA 1997. The Explanatory Memorandum to the Tax Law Amendment (2006 Measures No.4) Act 2006 (the EM), which introduced Division 855, provides 'Taxable Australian real property generally refers to real property, within the ordinary meaning of that term, that is situated in Australia'. The Macquarie Dictionary online defines 'real property' as: ...tangible and immovable property such as land and houses, buildings or any such structures on the land, and any rights attached to the ownership of the land, such as mineral rights (but excluding leasehold interests). AusGroup owns real property in Australia totaling XX. For the purposes of section 855-30 of the ITAA 1997, AusCo has a total of $XX of TARP assets. | Detailed Reasoning - Non-TARP assets of the AusGroup: As of 30 June 20XX, AusGroup held non-TARP assets totaling $XX. For the purposes of section 855-30 of the ITAA 1997, AusCo has a total of $XX of non-TARP assets. The market valuation of the AusGroup's assets that are TARP for the purposes of section 855-30 of the ITAA 1997 is less than 50% of the market value of the AusGroup's total assets. | Detailed Reasoning - The PAT is not satisfied: Consequently, the PAT contained in section 855-30 of the ITAA 1997 is not passed and Item 2 of section 855-15 of the ITAA 1997 will not apply to limit the application of Division 855 in respect of the sale of shares in AusCo by ForeignCo1. | Detailed Reasoning - Conclusion: Based on the reasons above, the shares in AusCo held by ForeignCo1 are not TAP as defined in section 855-15 of the ITAA 1997. | Summary: The Australian capital gain which will arise from the disposal of the shares in AusCo will be disregarded by ForeignCo1 pursuant to subsection 855-10(1) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 855-10(1) of the ITAA 1997 provides that a foreign resident can disregard a capital gain or capital loss arising from a capital gains tax (CGT) event, provided that the CGT event happens in relation to a CGT asset that is not TAP. In order for ForeignCo1 to be eligible to disregard the capital gain arising from its disposal of shares in AusCo under subsection 855-10(1) of the ITAA 1997, it must be established that: • ForeignCo1 is a foreign resident • ForeignCo1's disposal of shares in AusCo will give rise to a CGT event, and • the shares in AusCo held by ForeignCo1 are not TAP. | Detailed Reasoning - ForeignCo1 is a foreign resident: 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. 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. ForeignCo1 is not incorporated in Australia, nor does it carry on business in Australia. Therefore, this requirement is satisfied. | Detailed Reasoning - ForeignCo1's disposal of shares in AusCo will give rise to a CGT event: 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. Therefore, the shares ForeignCo1 holds in AusCo are CGT assets. Section 100-20 of the ITAA 1997 provides: (1) You can make a capital gain or loss only if a CGT event happens. 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. ForeignCo1 will dispose of its shares in AusCo to MidCo. This 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 ForeignCo1 disposes of its shares in AusCo to MidCo. Therefore, this requirement is satisfied. | Detailed Reasoning - Shares in AusCo held by ForeignCo1 are not TAP: As concluded in Question 1 of this Ruling, the shares ForeignCo1 holds in AusCo are not TAP. Therefore, this requirement is satisfied. | Detailed Reasoning - Conclusion: The capital gain expected to arise on ForeignCo1's disposal of shares in AusCo will be disregarded pursuant to subsection 855-10(1) of the ITAA 1997.

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