Private ruling: Domestic restructuring - subdivision 122A rollover availability
Date of advice: 2 September 2022
Published: November 2022
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the replacement roll-over relief requirements under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) satisfied if the shares owned by the Trustee for Trust in Company A are transferred to Company B? | A1: Yes

Relevant facts and circumstances: The Trust is a discretionary family trust settled in an Australian state on XX XX 20XX. The Trustee of the Trust is an Australian proprietary company incorporated in Australian state on XX XX 19XX. The Trustee does not carry on any business activities in its own right. The Trustee solely acts as a corporate trustee. Company A is an Australian proprietary company incorporated in Australian state on XX XX 20XX. Company A has XX ordinary shares at $XX per share on issue. Company A is owned entirely by the Trustee of the Trust. The shares in Company A are held on capital account as a CGT asset, and not as trading stock. Company B is an Australian proprietary company incorporated in Australian State on XX XX 20XX. Company B has XX ordinary share at $XX per share on issue. Company B is owned entirely by the Trustee of the Trust. All entities are Australian residents for income tax purposes. No entity is a tax-exempt entity. The proposed restructure is as follows: A share sale and share subscription transaction is to take place to interpose between Company B, the Trust and Company A. Under this proposed transaction, The Trustee will transfer all its shares in Company A to Company B. As consideration for the transfer, Company B will issue ordinary shares in itself to the Trustee. The market value of the shares that the Trustee receives in Company B will be the same as the market value of the shares in Company A. At the conclusion of the transaction, Company B will hold the shares in Company A on capital account as CGT assets.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 103-25 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 subdivision 122-A

Reasons for decision: Detailed Reasoning - CAPITAL GAINS TAX ROLL-OVER RELIEF: Generally, Subdivision 122-A of the ITAA 1997 allows for the roll-over of a capital gain or loss when an individual or trustee disposes of a capital gains tax (CGT) asset to a company in which, just after the disposal, the individual or trustee owns all the shares. | Detailed Reasoning - Disposal or creation of assets - wholly owned company: In order for an individual or trustee to obtain roll-over relief under Subdivision 122-A of the ITAA 1997, the CGT event which triggers the capital gain or loss must be one listed in the table of section 122-15. CGT event A1, being the disposal of a CGT asset, is one of the trigger events listed in the table. Under subsection 104-10(1) of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. Under subsection 104-10(2) you dispose of a CGT asset if a change of ownership occurs from you to another entity. Shares in a company are CGT assets (section 108-5 of the ITAA 1997). | Detailed Reasoning - Application in these circumstances: The proposed transfer of the Trustee's shares in Company A to the Trustee's wholly owned company, Company B, will trigger CGT event A1 as a change of ownership will occur, effecting a disposal of the shares. Therefore, this requirement is satisfied. | Detailed Reasoning - What is received for the trigger event: Under subsection 122-20(1) of the ITAA 1997, the consideration received (if any) for the disposal of the shares must be only shares in the wholly owned company or in addition to shares in the wholly owned company, the company undertaking to discharge any liabilities in respect of the shares. In addition, subsection 122-20(2) of the ITAA 1997 requires that the shares received in the wholly owned company cannot be redeemable shares. The market value of the shares must be substantially the same as the market value of the shares disposed of, less any liabilities the company undertakes to discharge. Under subsection 122-20(3) of the ITAA 1997, the market value of the shares you receive must be the same as the market value of the shares disposed of, less any liabilities the company undertakes to discharge. | Detailed Reasoning - Application in these circumstances: The number shares issued by Company B will be equal to the market value of the Company A shares transferred by the Trustee. Thus, section 122-20 of the ITAA 1997 is satisfied. | Detailed Reasoning - Other requirements that must be satisfied: Section 122-25 of the ITAA 1997 lists further requirements that must also be satisfied for roll-over relief to be available under Subdivision 122-A, relevantly being that: a. the individual must own all the shares in the company just after the time of the disposal of their shares to the company (subsection 122-25(1)) b. the disposal of the asset is not one listed in the table in subsection 122-25(2) c. the ordinary and statutory income of the recipient company must not be exempt from income tax because it is an exempt entity for the income year the roll-over occurs (subsection 122-25(5)), and d. the company and individual are Australian residents at the time of disposal (paragraph 122-25(6)(a)). | Detailed Reasoning - Application in these circumstances: The Trustee already owns all the shares in Company B. Just after the transfer of the Trustee's shares in Company A to Company B the Trustee will continue to own 100% of the shares in Company B. Therefore, the requirement in subsection 122-25(1) of the ITAA 1997 will be satisfied. None of the exceptions in the table in subsection 122-25(2) of the ITAA 1997, which lists certain assets for which the roll-over is not available, apply to these circumstances. Subsection 122-25(5) of the ITAA 1997 is satisfied as the ordinary or statutory income of Company B will not be exempt from income tax due to Company B being an exempt entity in the year the roll-over occurs. The residency requirement under paragraph 122-25(6)(a) of the ITAA 1997 will be satisfied as both the Trustee and Company B will be Australian residents at the time of the share transfer. | Detailed Reasoning - Company undertakes to discharge a liability: Section 122-35 of the ITAA 1997 provides additional requirements if a CGT asset has been disposed of and the company has undertaken to discharge a liability in respect of it. | Detailed Reasoning - Application in these circumstances: Section 122-35 of the ITAA 1997 does not apply in these circumstances as Company B is not discharging a liability in respect of the shares of Company A. | Detailed Reasoning - Conclusion: The transfer of the Company A shares from the Trustee to the Trustee's wholly owned company, Company B, in the proposed arrangement, will enable the Trustee to roll-over any capital gain or loss as specified in Subdivision 122-A of the ITAA 1997 should the Trustee so choose. The choice to obtain roll-over relief under Subdivision 122-A does not require a specific election. The way in which you prepare your income tax return is sufficient evidence of making the choice, as per subsection 103-25(2) of the ITAA 1997.