Private ruling: Income tax - CGT - Rollovers - Transfer to wholly owned company - Division 122
Date of advice: 30 June 2017
Published: October 2017
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: DDMMYY

Ruling: Q1: Will roll-over relief be available under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) where you transfer units owned personally to a company wholly owned by you, when that company is a newly established shelf company with no assets owned prior to the transfer of units? | A1: Yes. | Q2: Will the proposed transfer of units be subject to the anti-avoidance provisions contained in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: No.

Relevant facts and circumstances: Unit Trust was settled in 201X. Units you hold in Unit Trust make up 40% of total units issued by Unit Trust. Your spouse owns 40% of the units, and the remaining 20% are owned by unrelated parties. The units owned by you in Unit Trust are unencumbered and are held by you on capital account. You are concerned that you are unable to retain profits to enable reinvestment in future business opportunities. New Company will be incorporated in Australia. You will transfer 100% of your units in Unit Trust to New Company. New Company will issue 1 non-redeemable ordinary share to you as consideration for units in unit Trust. You will be the sole shareholder of the wholly owned company. The market value of the 1 ordinary share in New Company will be substantially the same as the market value of the units in Unit Trust transferred from you at the time of the transfer. After the transfer, New Company will receive 40% of all distributions made by Unit Trust. New Company will declare and pay dividends to you as required to meet personal cash demands. Any cash retained by New Company will be loaned to Unit Trust and/or other related parties, to fund new or existing business activities, in accordance with Division 7A. You and Unit Trust have been Australian tax residents at all times. Once incorporated New Company will be an Australian tax resident. New Company will obtain a tax file number and lodge annual income tax returns declaring assessable income derived and allowable deductions incurred during each financial year. New Company will not be an exempt entity for Australian income tax purposes. The proposed transactions are not part of a wider scheme and it is not anticipated any subsequent transactions will take place following the transactions outlined.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 177C(1) | Income Tax Assessment Act 1936 paragraph 177C(2)(a) | Income Tax Assessment Act 1936 section 177D | Income Tax Assessment Act 1936 section 177F | Income Tax Assessment Act 1936 subsection 177F(1) | Income Tax Assessment Act 1936 subsection 177A(1) | Income Tax Assessment Act 1997 section 122-15 | Income Tax Assessment Act 1997 section 122-20 | Income Tax Assessment Act 1997 subsection 122-20(1) | Income Tax Assessment Act 1997 subsection 122-20(2) | Income Tax Assessment Act 1997 subsection 122-20(3) | Income Tax Assessment Act 1997 section 122-25 | Income Tax Assessment Act 1997 subsection 122-25(1) | Income Tax Assessment Act 1997 subsection 122-25(2) | Income Tax Assessment Act 1997 subsection 122-25(3) | Income Tax Assessment Act 1997 subsection 122-25(4) | Income Tax Assessment Act 1997 subsection 122-25(6) | Income Tax Assessment Act 1997 section 122-35 | Income Tax Assessment Act 1997 subsection 122-40(2)

Reasons for decision: Summary: Roll-over relief will be available under Subdivision 122-A of the ITAA 1997 where you transfer units owed personally to a company wholly owned by you. | Detailed Reasoning - Detailed reasoning: Generally, Subdivision 122-A of the ITAA 1997 allows for the “roll-over” of a capital gain or loss where a taxpayer disposes of a CGT asset to a company in which, just after disposal, the taxpayer owns all the shares. In order for an individual 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 in section 122-15 of the ITAA 1997. In the present case, the transfer of the units held in your name to a wholly owned company will trigger CGT event A1 ( Trigger event ), a CGT event listed in the table in section 122-15 and therefore this requirement is satisfied. In addition, the circumstances of the transfer must also satisfy the conditions listed in sections 122-20 to 122-35 of the ITAA 1997. Subsection 122-20(1) of ITAA 1997 requires that the consideration received for the Trigger event must either be 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 asset. As consideration for the units in Unit Trust, New Company will issue you with 1 ordinary share in New Company. You will wholly own New Company. Subsection 122-20(2) of the ITAA 1997 requires that the shares received in the wholly owned company, as a result of the Trigger event, must not be redeemable shares. The shares issued by new Company to you as consideration will be non-redeemable shares. Subsection 122-20(3) of the ITAA 1997 requires that the market value of the shares received as consideration must be substantially the same as the market value of the assets disposed, less any liabilities the company undertakes to discharge in respect of the asset. The consideration received by you from New Company for the transfer of units in Unit Trust would be shares in New Company. New Company holds no other assets and has no liabilities, therefore, the market value of the shares in New Company after the transfer will be substantially the same as the market value of units in Unit Trust transferred by you. Your units in Unit Trust are unencumbered, and so New Company will not undertake to discharge any liabilities in respect of the shares. Subsection 122-25(1) of the ITAA 1997 requires that all the shares in the wholly owned company must be owned by the individual, immediately after the Trigger event. You will be the sole shareholder of New Company, and so will own 100% of the shares in the company just after the time of the transfer. Subsection 122-25(2) of the ITAA 1997 specifies that the assets being transferred must not be an asset listed in the table in subsection 122-25(2). Further, the asset being disposed of to the wholly owned company must not be a 'precluded asset’ a term given the meaning in subsection 122-25(3). None of these are relevant to Unit Trust. Subsection 122-25(5) of the ITAA1997 disallows the rollover for companies whose ordinary and statutory income is exempt from income tax because it is an exempt entity for the income year of the trigger event. New Company is not an exempt entity, and therefore not disallowed under this provision. Paragraph 122-25(6)(a) of the ITAA 1997 is satisfied if you and New Company are both Australian residents at the time of the trigger event. New Company will be incorporated in Australia. You and New Company are both Australian residents at the time of the CGT event. There are no circumstances that would result in these entities becoming non-residents for tax purposes. The further conditions listed in section 122-35 of the ITAA 1997, which deal with the circumstances where a company undertakes to discharge one or more liabilities in respect of the CGT asset, is not relevant for this ruling as the units are unencumbered. Accordingly, the transfer of the shares from you to a wholly owned company, in circumstances described in the facts, will enable you to roll-over any capital gain or loss as specified in subdivision 122-A of the ITAA 1997 should you so choose. If the rollover is chosen then in accordance with subsection 122-40(2) of the ITAA 1997 the first element of cost base of your share in New Company is the cost base of Unit Trust’s units previously held by you. The first element of the reduced cost base of your share in New Company is worked out similarly. | Detailed Reasoning - Question 2: Will the proposed transfer of units be subject to the anti-avoidance provisions contained in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936)? | Detailed Reasoning - Answer: No | Summary: The proposed transfer of units will not be subject to the anti-avoidance provisions contained in Part IVA of the ITAA 1936 | Detailed Reasoning - Detailed reasoning: Part IVA of the ITAA 1936 gives the Commissioner the discretion to cancel a 'tax benefit’ that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained by a taxpayer in connection with a scheme to which Part IVA applies. This discretion is found in subsection 177F(1) of the ITAA 1936. Before the Commissioner can exercise the discretion in subsection 177F(1) of the ITAA 1936, the requirements of Part IVA of the ITAA 1936 must be satisfied. These requirements are that: (i) a 'tax benefit’, as identified in section 177C of the ITAA 1936, was or would, but for subsection 177F(1) of the ITAA 1936, have been obtained; (ii) the tax benefit was or would have been obtained in connection with a 'scheme’ as defined in section 177A of the ITAA 1936; and (iii) having regard to section 177D of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies. | Detailed Reasoning - Scheme: The term 'scheme’ is defined in subsection 177A(1) of the ITAA 1936 as any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and any scheme, plan, proposal, action, course of action or course of conduct. It is considered that the proposed transaction to transfer units from you to a wholly owned company falls within this definition and is a scheme as described in subsection 177A(1) of the ITAA 1936. | Detailed Reasoning - Tax benefit: Part IVA cannot apply unless a taxpayer has obtained, or would but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with a scheme. Subsection 177C(1) of the ITAA 1936 defines four kinds of tax benefit including an amount not being included in the assessable income of the taxpayer of a year of income. In the present case, you will obtain a tax benefit, being the amount of capital gain not included in your assessable income in the income year in which the units are transferred to the wholly owned company and roll-over relief is chosen. However, paragraph 177C(2)(a) of the ITAA 1936 specifically notes that a reference to the obtaining a tax benefit by a taxpayer, in connection with a scheme shall be read as not including a reference to the assessable income of the taxpayer of a year of income not including an amount, that would have been included in the assessable income of the taxpayer of that year, if the scheme had not been entered into or carried out, where: the non-inclusion of the amount in the assessable income of the taxpayer is attributable to the making of a choice expressly provided for by the ITAA 1997; and the scheme was not entered into or carried out by any person for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable the choice to be made. In the present case there is nothing in the scheme that is being carried out for the purpose of creating any circumstances necessary to enable the choice to be made. No steps are required to be taken or circumstances created, to enable you to be able to choose for the roll-over, specifically provided for under Subdivision 122A of the ITAA 1997, to apply. Any steps taken are taken solely to ensure compliance with the specific steps required to apply Subdivision 122A. Therefore, in accordance with paragraph 177C(2)(a) of the ITAA 1936, the reference to a tax benefit being obtained shall be read such that it does not include the exclusion of assessable income that would otherwise have been included were it not for making a choice. This is confirmed in TD 95/4 Income Tax: does the simple disposition of an income producing asset by a natural person to a wholly owned private company constitute the carrying out of a scheme to which Part IVA of the Income Tax Assessment Act 1936 will be applied? Paragraph 1 of TD 95/4 answers: No. Of itself, the simple disposition of an income producing asset by a natural person to a wholly owned private company is not an arrangement to which the Commissioner will seek to apply Part IVA of the Income Tax Assessment Act 1936 (the Act). Accordingly, no tax benefit will arise and Part IVA of the ITAA 1936 will have no application.

Question 1: Will roll-over relief be available under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) where you transfers units owned personally to a company wholly owned by you, when that company is a newly established shelf company with no assets owned prior to the transfer of shares?