Private ruling: Income Tax - Capital Gains Tax - Roll-over
Date of advice: 9 September 2016
Published: October 2016
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can the taxpayer choose roll-over relief under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) for disposing his ordinary share in the Original Company in exchange for ordinary shares in the Roll-over Company? | A1: Yes.

Relevant facts and circumstances: ORIGINAL COMPANY • The taxpayer is the legal and beneficial holder of one ordinary share in the Original Company. There is only one ordinary share on issue in the Original Company. • The taxpayer acquired the share after 19 September 1985. • The share is unencumbered and held by the taxpayer on capital account. • The taxpayer is an Australian tax resident at all times. ROLL-OVER COMPANY and the Transfer • The Roll-over Company is a company incorporated in Australia. Upon establishment, there was one 'J' class redeemable preference share (RPS) issued to the taxpayer only. The RPS was redeemed when the Transfer happened. • The 'Transfer' - the taxpayer transfers his ordinary share in the Original Company to the Roll-over Company. • The consideration the taxpayer received for transferring his ordinary share to the Roll-over Company is 1,000 ordinary shares in the Roll-over Company. • Immediately after the Transfer, the only shares on issue in the Roll-over Company are the 1,000 ordinary shares issued to the taxpayer. Similarly, the only asset held by the Roll-over Company is the one ordinary share in the Original Company. Therefore, the market value of the Roll-over Company shares received is substantially the same as the market value of the Original Company share disposed of at the time of Transfer. • The Roll-over Company is not an exempt entity in the income year the Transfer happened.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 122-A | Income Tax Assessment Act 1997 Section 122-15 | 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 Subsection 122-25(1) | Income Tax Assessment Act 1997 Subsection 122-25(2) | Income Tax Assessment Act 1997 Subsection 122-25(5) | Income Tax Assessment Act 1997 Subsection 122-25(6) | Income Tax Assessment Act 1997 Section 122-35

Reasons for decision: Summary: As all the necessary conditions outlined in Subdivision 122-A of the ITAA 1997 are satisfied. The taxpayer can choose roll-over relief under Subdivision 122-A of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The roll-over in Subdivision 122-A of the ITAA 1997 enables an individual or trustee to disregard a capital gain or loss if he disposes a CGT asset (or all the assets of a business), to a company in which he owns all of the shares after the CGT event. Subdivision 122-A of the ITAA 1997 contains a number of conditions for, and exceptions to, an individual or trustee being eligible to choose the roll-over. The main requirements that are relevant to this Transfer are: | Detailed Reasoning - Condition 1: Under section122-15 of the ITAA 1997 one of the following CGT events (the trigger event ) must happen involving the individual or trustee and a company: A1 - Dispose of a CGT asset or, all the assets of a business to the company D1 - Create contractual or other rights in the company D2 - Grant an option to the company D3 - Grant the company a right to income from mining F1 - Grant, renew or extend a lease to the company | Detailed Reasoning - Condition 2: Under subsection 122-20(1) of the ITAA 1997 the consideration the individual or trustee receives for the trigger event happening must only be: (a) Shares in the company; or (b) For a disposal of a CGT asset, or all the assets of a business to a company (a disposal case) - shares in the company and the company undertaking to discharge one or more liabilities in respect of the asset or assets of the business (as appropriate). | Detailed Reasoning - Condition 3: Under subsection 122-20(2) of the ITAA 1997 the shares cannot be redeemable shares. | Detailed Reasoning - Condition 4: Under subsection 122-20(3) of the ITAA 1997 the market value of the shares that the individual or trustee receives for the trigger event happening must be substantially the same as: (a) For a disposal case - the market value of the asset or assets you disposed of, less any liabilities of the company undertakes to discharge in respect of the asset or assets (as appropriate); or (b) For another trigger event happening (a creation case) - a market value of the CGT asset created in the company (the created asset). | Detailed Reasoning - Condition 5: Under subsection 122-25(1) of the ITAA 1997 the individual or trustee must own all of the shares in the company just after the time of the trigger event. | Detailed Reasoning - Condition 6: Under subsection 122-25(2) of the ITAA 1997 the disposal or creation of any of the assets must not be: a collectable; a personal use asset; a precluded asset; an asset that becomes trading stock of the company just after the disposal or creation; or an asset that becomes a registered emissions unit held by the company just after the disposal or creation. | Detailed Reasoning - Condition 7: Under subsection 122-25(5) of the ITAA 1997 the company must not be exempt from income tax on its ordinary and statutory income because it is an exempt entity for the income year of the trigger event. | Detailed Reasoning - Condition 8: One of these requirements in subsection 122-25(6) of the ITAA 1997 must be satisfied: (a) the individual and the company must be Australian residents at the time of the trigger event; or (b) each asset must be taxable Australian property at that time and, the shares in the company mentioned in subsection 122-20(1) must be taxable Australian property just after that time. | Detailed Reasoning - Application of the law to the taxpayer's circumstances: Condition 1 is satisfied as a CGT event A1 happens when the Transfer happens. Condition 2 is satisfied as the only consideration received for the disposal is ordinary shares in the Roll-over Company. Condition 3 is satisfied because the shares received in the Roll-over Company are not redeemable shares. Condition 4 is satisfied. The market value of the Roll-over Company shares received is substantially the same as the market value of the Original Company share disposed of at the time of Transfer. Condition 5 is satisfied as immediately after the trigger event the taxpayer owns all of the shares in the Roll-over Company. Condition 6 is satisfied. The asset does not fall within the categories listed in subsection 122-25(2) of the ITAA 1997. Condition 7 is satisfied as the Roll-over Company is not exempt from income tax on their ordinary or statutory income because it is an exempt entity for the income year of the trigger event. Condition 8 is satisfied as just after the trigger event both the taxpayer and the Roll-over Company are Australian residents. 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 shares, is not relevant for this ruling. As all the necessary conditions are satisfied- the taxpayer can choose roll-over relief under Subdivision 122-A of the ITAA 1997. If the taxpayer chooses roll-over relief under Subdivision 122-A of the ITAA 1997, the capital gain or capital loss made from the disposal of their ordinary share in the Original Company is disregarded. The first element of each share's cost base in the Roll-over Company acquired by the taxpayer is the original asset's cost base (worked out when the taxpayer disposes it) divided by the number of shares.