Private ruling: Subdivision 124-G of the Income Tax Assessment Act 1997
Published: November 2013
Ruling period: The 2014 tax year
Date scheme commenced: During the 2014 tax year

Ruling: Q1: Will the Company A tax consolidated group continue in existence after the completion of the interposition with Company B as its head company pursuant to section 703-70 of the Income Tax Assessment Act 1997 and the choice made under subsection 124-380(5) of the Income Tax Assessment Act 1997? | A1: Yes

Relevant facts and circumstances: Company A is a resident of Australia and is the head company of a tax consolidated group. Under a scheme for restructuring its affairs it intends to interpose between itself and its shareholders a new head company (Company B). All the shareholders in Company A will exchange their shares in it for shares in Company B and nothing else. Immediately after the shareholders in Company A have exchanged their shares in it for shares in Company B (the completion time), Company B will be the head company of a consolidatable group consisting only of itself and the members of the group immediately before the completion time. Each of Company A's shareholders will hold shares in Company B in exactly the same ownership percentage as they held in Company A. These percentages also represent the portion of market value held by each shareholder in Company B. Each shareholder will hold a whole number of shares (i.e. no fractional shares) in Company B. All the shares in Company A are ordinary shares, and the shares to be issued in Company B will also be ordinary shares. Each of Company A's shareholders will receive shares in Company B with a market value equal to the market value of their original Company A shares. At the time that each of the shareholders of Company A dispose of all of their shares in Company A to Company B, and with effect from that same day, the name of Company B will be entered in Company A's share register in respect of all of Company A's shares. Company B will make the choice under subsection 124-380(7) of the Income Tax Assessment Act 1997 within 28 days after the completion of the interposition that the consolidated group is to continue in existence at and after the completion time.

Relevant legislative provisions: Income Tax Assessment Act 1997 subdivision 124-G | Income Tax Assessment Act 1997 subsection 124-360(1) | Income Tax Assessment Act 1997 section 124-365 | Income Tax Assessment Act 1997 subsection 124-365(1) | Income Tax Assessment Act 1997 subsection 124-365(2) | Income Tax Assessment Act 1997 subsection 124-365(3) | Income Tax Assessment Act 1997 subsection 124-365(4) | Income Tax Assessment Act 1997 section 124-380 | Income Tax Assessment Act 1997 subsection 124-380(1) | Income Tax Assessment Act 1997 paragraph 124-380(3)(a) | Income Tax Assessment Act 1997 subsection 124-380(5) | Income Tax Assessment Act 1997 subsection 124-380(7) | Income Tax Assessment Act 1997 section 703-70 | Income Tax Assessment Act 1997 subsection 703-70(1) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated. | Detailed Reasoning - The conditions for making the choice for the group to continue in existence: Pursuant to subsection 703-70(1) of the ITAA 1997 the consolidated group is taken not have ceased to exist if the interposed company makes a choice under subsection 124-380(5) of the ITAA 1997. The operation of subsection 703-70(1) requires that certain conditions be satisfied before the company can make the choice mentioned in subsection 124-380(5). The Explanatory Memorandum to the New Business Tax System (Consolidation and Other Measures) Bill (No.1) 2002 provides at paragraph 2.11 that: Before the interposed company can make a choice that the consolidated group is to continue in existence , the share exchange which results in the interposed company being interposed between the original company and its shareholders must also be in accordance with the conditions set out in Subdivision 124-G of the ITAA 1997. For example, the interposed company needs to be a shelf company. Also, the entities described as the interposed company and the original company in paragraph 2.8 must come within the existing meanings of those terms given by Subdivision 124-G. Broadly, the term original company means the existing resident company in which the shareholders originally held shares before the share exchange. The term interposed company broadly means a resident company that acquires all of the shares in a company whose shares are held by the original shareholders. ATO ID 2007/216 - Capital gains tax: Subdivision 124-G roll-over - requirements that must be met for interposed company to choose that the consolidated group continue in existence (ATO ID 2007/216) relevantly sets out the Commissioner's view as follows: …Accordingly, all of the conditions in Subdivision 124-G of the ITAA 1997 that relate to or refer to the conditions of the share exchange must be satisfied before the interposed company can make the choice under subsection 124-380(5) of the ITAA 1997. However, it is not necessary for the interposed company to demonstrate satisfaction with the conditions in subsections such as 124-365(4) of the ITAA 1997 that do not relate to or refer to the conditions of the share exchange in order for it to make the choice under subsection 124-380(5) of the ITAA 1997. It follows that Company B must be a shelf company, and must satisfy certain conditions under Subdivision 124-G before it can make the choice under subsection 124-380(5) for the consolidated group to continue in existence and for section 703-70 to apply. | Detailed Reasoning - The interposed company is a shelf company: The Addendum to Taxation Ruling TR 97/18 - Income tax: capital gains: roll-over relief following reorganisation of the affairs of a unit trust or company - sections 160ZZPA, 160ZZPB, 160ZZPC and 160ZZPD (TR 97/18) states at paragraphs 18 and 22: 18. Whilst not expressly stated, it is considered that the choice under subsection 124-380(5) of the ITAA 1997 can only be made by an interposed company that is a shelf company. This is because the choice is only available where the reorganisation qualifies for roll-over relief and, for the reasons set out in the Ruling, this requires a shelf company to be interposed. …. 22. The scope of sections 703-65 to 703-80 of the ITAA 1997 must therefore be read as applying only to those choices made under subsection 124-380(5) by an interposed company that is also a 'shelf company'. Paragraph 28 of the Addendum provides that a 'shelf company' means a company that has never commenced trading activities, has no significant assets other than a small amount of cash or debt and has no existing losses. Company B was incorporated on 19 September 2013 as a subsidiary of Company A with one ordinary share on issue. It has a nominal capital and asset of $1. Therefore, this requirement is satisfied. | Detailed Reasoning - The conditions in Subdivision 124-G: Broadly, Subdivision 124-G provides for CGT roll-over relief to shareholders on the disposal, cancellation or redemption of their shares in the former head company if those shares are exchanged for shares in the interposed company. Under the proposed transaction, Company A shares will be disposed of to Company B in exchange for shares in Company B and nothing else. Therefore, for the roll-over relief to be available, certain conditions under subsection 124-360(1), and sections 124-365 and 124-380 must be satisfied. These conditions are discussed below. The conditions in subsection 124-360(1) Subsection 124-360(1) provides: You can choose to obtain a roll-over if: (a) you are a *member of a company (the original company); and (b) you and at least one other entity (the exchanging members) own all the *shares in it; and (c) under a *scheme for reorganising its affairs, the exchanging members *dispose of all their shares in it to another company (the interposed company) in exchange for shares in the interposed company (and nothing else); and the requirements in sections 124-365 and 124-380 are satisfied. 'Member of a company' refers to an entity holding interests or right that give rise to membership of a company pursuant to subsection 960-130(1). For the purposes of paragraph 124-360(1)(a) the holders of the ordinary shares in Company A will be the members of Company A. The Company A shareholders (exchanging members) are owners of all Company A's issued shares for the purposes of paragraph 124-360(1)(b). TR 97/18 relevantly sets out the Commissioner's view on the meaning of the expression "a scheme for reorganising its affairs" as "the interposition of a company between the existing company and its shareholders". Under the proposed transaction, Company A will incorporate a new company, Company B, in Australia. The interposition will involve the shareholders of Company A disposing of their shares in consideration for the issue of Company B shares and nothing else. Accordingly the proposed transaction will constitute a "scheme for reorganising its affairs" for the purpose of paragraph 124-360(1)(c). All of the Company A ordinary shares owned by the Company A shareholders will participate in the exchange. The Company A shareholders will dispose all of their Company A shares to Company B in exchange for the shares in Company B. Accordingly, the condition in paragraph 124-360(1)(c) is met. The conditions in section 124-365 Subsection 124-365(1) requires that the interposed company own all the shares in the original company just after all the exchanging members have disposed of their shares in the original company ( the completion time ). The Commissioner's view on the meaning of the completion time is given in ATO ID 2007/106. It is the time when the interposed company owns all of the shares in the original company just after all the shareholders in the original company have transferred their shares in the original company. Under the proposed transaction, all of the Company A ordinary shares held by the exchanging members will be disposed of to Company B. Effective from the same day, Company B will be entered in Company A register as owner in respect of all Company A shares. Therefore, Company B will own all the shares in Company A just after the exchanging members have disposed of their shares in Company A (the completion time). Accordingly, the condition in subsection 124-365(1) is satisfied. Subsection 124-365(2) requires that just after the completion time, each exchanging member must own: (a) a whole number of shares in the interposed company; and (b) a percentage of the shares in the interposed company that were issued to all the exchanging members that is equal to the percentage of the shares in the original company (that were disposed of to the interposed company) that the member owned. Just after the completion time, each Company A shareholder (exchanging shareholder) will own a whole number of Company B shares, and the percentage of the shares in Company B that were issued to all the exchanging members will be equal to the percentage of the shares in Company A (that were disposed of to Company B) that each member owned. Accordingly, the conditions in subsection 124-365(2) are satisfied. Subsection 124-385(3) requires a comparison of two ratios, which must equal for the subsection to be satisfied. The first ratio is, in effect, the proportionate share of the market value of an exchanging member's interest in the interposed company compared to the market value of the shares in the interposed company issued to all of the exchanging members, worked out just after the completion time. The second ratio is, in effect, the proportionate share of the market value of that exchanging member's shares in the original company that were disposed of compared to the market value of all of the shares in the original company that were disposed of to the interposed company, worked out just after the completion time. As each of Company A's shareholders (exchanging members) will receive shares in Company B with a market value equal to the market value of their original Company A shares, and the assets of the group before and after the exchange will be maintained, the ratio of market value of the replacement shares in Company B will be equal to the market value of the shares in Company A. Accordingly, subsection 124-365(3) is satisfied. Consistent with ATO ID 2007/216, it is not be necessary for Company B, the interposed company, to demonstrate that it satisfies the conditions in subsections 124-365(4) that do not relate to or refer to the conditions of the share exchange in order for it to make the choice under subsection 124-380(5). It follows that the relevant conditions of section 124-365 are met for the purposes of Company B making the choice under subsection 124-380(5). The conditions in section 124-380 Section 124-380 states: 124-380(1) The *shares issued in the interposed company must not be *redeemable shares. 124-380(2) Each exchanging member who is issued *shares in the interposed company must own the shares from the time they are issued to the completion time. 124-380(3 ) Just after the completion time: (a) the exchanging members must own all the *shares in the interposed company; or (b) entities other than those members must own no more than 5 *shares in the interposed company and the *market value of those shares expressed as a percentage of the market value of all the shares in the interposed company is such that it is reasonable to treat the exchanging members as owning all the shares. 24-380(5) If: (a) immediately before the completion time, the original company is the *head company of a *consolidated group; and (b) immediately after the completion time, the interposed company is the head company of a *consolidatable group consisting only of itself and the *members of the group immediately before the completion time; the interposed company must choose that the consolidated group is to continue in existence at and after the completion time 124-380(7) In either case, the interposed company must make the choice within 28 days after the completion time, or within such further time as the Commissioner allows. The choice cannot be revoked Redeemable shares are defined in subsection 995-1(1) as shares that are liable to be redeemed, including at the option of the issuing company. The shares issued by Company B will be ordinary shares, not redeemable shares. The condition in subsection 124-380(1) is satisfied. The condition in subsection 124-380(2) is satisfied as each of the exchanging members will own the shares in Company B from the time they are issued to the completion time. Just after the completion time, the exchanging members will own all the Company B shares, satisfying the condition in paragraph 124-380(3)(a). In this case, subsection 124-380(5) and 124-380(7) apply as: · immediately before the completion time, Company A is the head company of a consolidated group · immediately after the completion time, Company B is the head company of the consolidatable group which will consist only of itself and the same members of the Company A group before the completion time, and · Company B is the interposed company which will choose within 28 days after the completion time that the Company A consolidated group is to continue in existence at and after the completion time. Therefore, the proposed transaction satisfies the conditions in respect of making the choice under subsection 124-380(5), and Company B must make that choice. As a result of Company B making that irrevocable choice within 28 days after the completion time, the Company A consolidated group is taken to continue in existence with Company B as the head company at and after the completion time, pursuant to section 703-70.