Private ruling: CGT Rollovers (Transfer to wholly owned company) & Section 45B
Published: May 2015
Ruling period: Year ending 31 December 2015
Date scheme commenced: During the year ending 31 December 2015

Ruling: Q1: Is a replacement asset roll-over available under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) where shares in Company X owned by the taxpayer are transferred to a Company Y which is wholly owned by the taxpayer? | A1: Yes | Q2: If the answer to Question 1 is yes, does a portion of the taxpayers' shares in Company Y inherit the same pre-CGT status as the same portion of the original shares in Company X? | A2: Yes | Q3: In respect of the scheme which consists of only the Proposed Transaction, being the mere exchange of shares in Company X for shares in Company Y, would the Commissioner, taking into account the relevant facts and circumstances, make a determination under subsection 45B(3) of the In come Tax Assessment Act 1936 (ITAA 1936) that section 45C applies to the Proposed Transaction, deeming any capital benefit to be a dividend? | A3: No

Relevant facts and circumstances: Company X was incorporated in 19XX. Currently, fifty per cent of the shares in Company X are held by the taxpayer and the other fifty per cent are held by a company called Company Z. The taxpayer holds the shares on capital account. The taxpayer holds a few shares in Company X which were acquired prior to 20 September 1985. Company X owns a fifty per cent interest in a joint venture and the remaining fifty per cent is held by a third party. The taxpayer wishes to explore every opportunity to participate in the development of the joint venture whereas Company Z wishes to monetise their indirect interest in the joint venture. Capital Reserve In view of the shareholders' differing commercial objectives, in 20XX, the board of directors of Company X agreed to create a capital reserve from retained profits for the future development of the joint venture. To give effect to this intention, the directors resolved to credit a portion of Company X's profits that would ordinarily have been distributed to the taxpayer into the capital reserve, while continuing to distribute profits to Company Z. Subject to a director discretion, the taxpayer could be paid a dividend out of the reserve. The Proposed Transaction The taxpayer is seeking to establish a structure under which it can achieve its commercial intentions in relation to the development of the joint venture. As an initial step, the taxpayer will dispose of all of its shares in Company X to Company Y, a company wholly owned by the taxpayer. In consideration for the disposal of shares, Company Y will issue shares in itself to the taxpayer. The taxpayer's new shares in Company Y will not be redeemable. The market value of the taxpayer's new shares in Company Y will be substantially the same as the market value of its current shares in Company X. Company Y will not undertake to discharge any liabilities in respect of the Company X shares. There is no intention for Company X to declare a dividend in favour of the taxpayer prior to the interposition of Company Y. The taxpayer is taking the step to interpose Company Y between itself and Company X so that profits can be distributed from Company X to Company Y, with the intention that they will be used by Company Y for the development of the joint venture and other ventures.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 45B(2), | Income Tax Assessment Act 1936 Subsection 45B(5), | Income Tax Assessment Act 1936 Subsection 45B(8), | Income Tax Assessment Act 1936 Subsection 45B(9), | Income Tax Assessment Act 1997 Section 108-5 and | Income Tax Assessment Act 1997 Division 122-A.

Reasons for decision: Summary: Section 122-15 of the ITAA 1997 provides that you can choose to obtain a roll-over if one of the CGT events in the table in that section happens involving you and a company in the circumstances set out in sections 122-20 to 122-35. As these circumstances have been satisfied, the taxpayer is eligible to obtain a roll-over. | Detailed Reasoning - Detailed reasoning: The taxpayer may choose to obtain a replacement asset roll-over if one of the trigger events specified in section 122-15 of the ITAA 1997 occurs involving the taxpayer and a company wholly-owned by the taxpayer in the circumstances set out in sections 122-20 to 122-35 of the ITAA 1997. Section 108-5 of the ITAA 1997 broadly defines a CGT asset to include any kind of property or legal or equitable right that is not property. As such, the taxpayer's shares in Company X are CGT assets. As the proposed transaction involves the disposal of CGT assets, the relevant CGT event in the table in section 122-15 of the ITAA 1997 is CGT event A1. Section 122-20 of the ITAA 1997 will be satisfied as the consideration that the taxpayer will receive for the trigger event happening will be non-redeemable shares in Company Y. The market value of the shares the taxpayer receives for the trigger event happening will substantially be the same as the market value of the shares that the taxpayer disposed of to the company. Section 122-25 of the ITAA 1997 is satisfied as the taxpayer will own all of the shares in the company just after CGT event A1 happens. In accordance with subsection 122-25(6), the taxpayer and the company are both Australian residents. Section 122-35 of the ITAA 1997 is not relevant as Company Y will not undertake to discharge any liabilities in respect of the shares. Therefore, the replacement asset roll-over under Subdivision 122-A of the ITAA 1997 is available to the taxpayer. | Detailed Reasoning - Question 2: Subsection 122-40(3) of the ITAA 1997 provides that if the original CGT asset being disposed of was acquired before 20 September 1985, then the replacement asset is taken to have been acquired before that day. The taxpayer holds a mixture of pre-CGT and post-CGT shares in Company X. Therefore, the same portion of the taxpayer's shares in Company Y will be taken to be acquired before 20 September 1985 as the current portion of the taxpayer's pre-CGT shares in Company X. | Detailed Reasoning - Question 3: Section 45B of the ITAA 1936 is an anti-avoidance provision which ensures that relevant amounts are treated as dividends for tax purposes if certain distributions, including capital payments and allocations are made in substitution for dividends. Subsection 45B(2) of the ITAA 1936 provides that this section applies where: (a) there is a scheme under which a person is provided with a capital benefit by a company; (b) under the scheme, a taxpayer obtains a tax benefit; and (c) having regard to the relevant circumstances of the scheme, it would be concluded that the person entered into the scheme for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer to obtain a tax benefit. | Detailed Reasoning - Capital Benefit: The concept of being 'provided with a capital benefit' is explained in subsection 45B(5) of the ITAA 1936 which provides that a person is 'provided with a capital benefit' if they are either provided with an ownership interest in a company, distributed share capital or share premium, or something is done that increases the value of their ownership interest. Under the proposed transaction, the taxpayer will receive shares in Company Y, which will constitute the provision of a capital benefit as defined in paragraph 45B(5)(a) of the ITAA 1936. | Detailed Reasoning - Tax Benefit: Pursuant to subsection 45B(9) of the ITAA 1936, a taxpayer obtains a tax benefit if the amount of tax payable by the taxpayer is less than the tax that would have been payable if the capital benefit had been an assessable dividend. The capital benefit received by the taxpayer will not trigger a tax liability under the proposed transaction. However had the capital benefit been treated as an assessable dividend, the taxpayer would have been subject to tax on the dividend. Therefore, the receipt of a capital benefit instead of a dividend would result in the taxpayer obtaining a tax benefit (as defined in subsection 45B(9) of the ITAA 1936) under the scheme. | Detailed Reasoning - Purpose: As the threshold requirements in paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936 have been met, it is necessary to consider the remaining requirement in paragraph 45B(2)(c) of the ITAA 1936. In doing so, it is also helpful to consider the relevant policy underlying the provision in determining if the circumstances of the scheme were within the contemplation of the provisions. Section 45B of the ITAA 1936 is a specific anti-avoidance measure the purpose of which is to ensure that relevant amounts distributed to shareholders of a company are treated as dividends for tax purposes if certain payments, allocations and distributions are made in substitution for dividends. Section 45B is concerned with the taxpayer's objective purpose of entering into the scheme, rather than subjective motives ( Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404). After having regard to the relevant circumstances of the scheme, in particular those listed in subsection 45B(8) of the ITAA 1936, it cannot be concluded that the taxpayer entered into or carried out the scheme for a more than incidental purpose of enabling the relevant taxpayer to obtain a tax benefit. Accordingly, the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies in respect of the capital benefit provided.