Private ruling: Scrip for scrip roll-over
Published: December 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the amount received from the Proposed Transaction be assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as ordinary income? | A1: No | Q2: Will capital gains tax rollover relief in Subdivision 124-G of the ITAA 1997 be available for OldCo to disregard any capital gain it makes as a result of exchanging its ordinary shares in Holdings for ordinary shares in NewCo? | A2: Yes | Q3: Will the CGT roll-over relief in Subdivision 124-M of the ITAA 1997 be available for OldCo to disregard any capital gain made as a result of exchanging its shares for shares in NewCo? | A3: Yes | Q4: Will the Commissioner accept, for the purposes of calculating the capital gain in relation to the transactions, and before any capital gain is disregarded under Subdivision 124-G or 125-M of the ITAA 1997, the market value of the NewCo shares based on the market value provided by OldCo? | A4: Yes

Relevant facts and circumstances: 1. OldCo is a discretionary trust which owns shares in two companies. 2. The entities in which OldCo own shares are part of a wider group. The various companies in the group trade under a common brand name but have different shareholders. 3. Each of the group of companies were incorporated in Australia. 4. Each company is a resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). 5. When originally established, the group of companies was structured into three structures. 6. As the group of companies continues to grow, the directors have decided it would be more efficient to restructure the group of companies into a single ownership structure. 7. The shareholders are residents of Australia under subsection 6(1) of the ITAA 1936. 8. The group have provided a market valuation as a whole and each respective subgroup. 9. The directors of have decided to restructure the group of companies into a single ownership and operational structure. The directors believe a number of operational synergies will be realised from the proposed restructure, including streamlining accounting systems and other administrative functions. 10. The merged group will have a consistent management team with significant industry knowledge and skill. The shareholders of the merged group also propose to enter into a Shareholders Agreement to ensure consistency across the group.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 6(1) | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 116-20 | Income Tax Assessment Act 1997 section 124-360 | Income Tax Assessment Act 1997 section 124-365 | Income Tax Assessment Act 1997 section 124-380 | Income Tax Assessment Act 1997 Subdivision 124-G | Income Tax Assessment Act 1997 Subdivision 124-M Other references | Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income

Reasons for decision: Summary: The amount received from the Proposed Transaction will not be assessable under section 6-5 of the ITAA 1997 as ordinary income. | Detailed Reasoning - Detailed reasoning: 11. Section 6-5 of the ITAA 1997 provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia. 12. Ordinary income is defined in section 6-5 of the ITAA 1997 to mean income according to ordinary concepts. The legislation does not provide any specific guidance on what is meant by income according to ordinary concepts. However, a substantial body of case law has evolved over time that identifies various factors that are taken into account in determining when an amount is income according to ordinary concepts. 13. Ordinary income includes income that arises in the normal scope of a taxpayers business. In addition, in limited circumstances, gains from isolated transactions, not within the ordinary scope of the taxpayers business may form part of ordinary income. 14. Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides guidance in determining whether profits from isolated transactions are income and therefore assessable under section 6-5 of the ITAA 1997. 15. Paragraph 6 of TR 92/3 explains that profit from an isolated transaction will be ordinary income when: • the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain; and • the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying on a business operation or commercial transaction. 16. When a transaction involves the sale of property (shares) as in the present case, for a profit or gain on the sale of the property to be categorised as ordinary income, it is usually necessary for a taxpayer to have a profit-making intention at the time the shares were acquired. 17. Any profit or gain on the sale of shares by OldCo to NewCo as part of the Proposed Transaction will not be ordinary income and instead will be capital in nature and subjection to the capital gains tax provisions of the ITAA 1997. | Summary: The capital gains tax rollover relief in Subdivision 124-G of the ITAA 1997 will be available for OldCo to disregard any capital gain it makes as a result of exchanging its ordinary shares in Holdings for ordinary shares in NewCo. | Detailed Reasoning - Detailed reasoning: 18. Subsection 104-10(1) of the ITAA 1997 states that CGT event A1 happens if you dispose of a CGT asset and according to subsection 104-10(2), you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. 19. A capital gain is made from CGT event A1 if the capital proceeds from the disposal are more than the assets cost base (subsection 104-10(4) of the ITAA 1997). A capital loss is made if the capital proceeds are less than the assets reduced cost base. 20. According to subsection 116-20(1) of the ITAA 1997, the capital proceeds from a CGT event are the total of: (a) the money received, or are entitled to receive in respect of the event happening; and (b) the market value of any other property received, or are entitled to receive, in respect of the CGT event happening (worked out as at the time of the event). 21. If OldCo makes a capital gain as a result of the disposal of its shares it will be able to choose to obtain a roll-over under Subdivision 124-G of the ITAA 1997 as it meets the requirements described in sections 124-360, 124-365 and 124-380 of the ITAA 1997. | Summary: The CGT roll-over relief in Subdivision 124-M of the ITAA 1997 will be available for OldCo to disregard any capital gain made as a result of exchanging its shares for shares in NewCo. | Detailed Reasoning - Detailed reasoning: 22. CGT event A1 will occur when OldCo disposes of its shares in exchange for NewCo Shares as part of the Proposed Transaction. 23. In this regard subsection 104-10(1) of the ITAA 1997 provides that CGT event A1 happens if a taxpayer disposes of a CGT asset. 24. Subsection 104-10(2) of the ITAA 1997 provides that a CGT asset is disposed of if a change of ownership occurs from one entity to another, whether because of some act or event or by operation of law. Presently, there will be a change of both legal and beneficial ownership when OldCo and the other owners dispose of their shares to NewCo for NewCo Shares. 25. Shareholders that make a capital gain as a result of the disposal of their shares for NewCo Shares will be able to jointly, with NewCo, choose to obtain a roll-over under Subdivision 124-M of the ITAA 1997. | Summary: The Commissioner accepts, for the purposes of calculating the capital gain in relation to the transactions, and before any capital gain is disregarded under Subdivision 124-G or 125-M of the ITAA 1997, the market value of the NewCo shares based on the market value provided. | Detailed Reasoning - Detailed reasoning: 26. On the basis that the parties have obtained a market valuation of the total group and provided there are no material changes before the Proposed Transaction is undertaken, the Commissioner accepts the valuation submitted.

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