Private ruling: Group restructure
Date of advice: 5 July 2016
Published: February 2017
Ruling period: End date: 30 June 20YY

Ruling: Q1: Will the dividends paid to XYZ be non-assessable non-exempt income under section 768-5 of the Income Tax Assessment Act 1997 (“ITAA 1997”)? | A1: Yes. | Q2: Will any capital gain or loss arising to Y and N upon the transfer of the shares in Z and T be disregarded under section 855-10 of ITAA 1997? | A2: Yes. | Q3: Will the proposed transaction result in any income being attributed from Y and N under the Controlled Foreign Company provisions contained in Part X of the Income Tax Assessment Act 1936? | A3: No

Relevant facts and circumstances: ● X is an Australian resident head company of a tax consolidated group. ● Last year, X successfully completed the acquisition of Y, a resident company of country A, with operating subsidiaries in Australia and country A, by acquiring 100% of its share capital. ● Y directly owns 100% of the share capital in Australian company Z, and indirectly via N 100% of the share capital of T, and country A companies, M and N. ● To date no dividends have been paid from Y to X. ● M and N have been carrying on business in country A (a listed country) at all times, and the companies have prepared and maintained accounts in accordance with commercially accepted accounting principles. ● A restructure is proposed to take place in 20YY so that after the restructure the Australian subsidiaries that are currently held directly and indirectly by Y will be transferred to a newly incorporated Australian resident company XYZ, through an in specie distribution. The transfers of shares of Z and T will be conducted at book values. ● All the Australian entities will then form a tax consolidated group with X as the head company (X consolidated group). ● The transfer of shares in Z and T will not be subject to country A tax. ● Z and T do not hold any direct or indirect real property interests situated in Australia. Assumption The gains that will accrue to Y and N in respect of the disposal of their shares in Z and T will be greater than 5% of the gross turnover of Y and N.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 126-B | Income Tax Assessment Act 1997 Section 768-5 | Income Tax Assessment Act 1997 Section 855-10 | Income Tax Assessment Act 1936 Section 317 | Income Tax Assessment Act 1936 Subsection 366(1) | Income Tax Assessment Act 1936 Section 369 | Income Tax Assessment Act 1936 Subsection 385(2) | Income Tax Assessment Act 1936 Section 419 | Income Tax Assessment Act 1936 Section 432 | Income Tax Assessment Act 1936 Section 433

Reasons for decision: Detailed Reasoning - Detailed reasoning: Subsection 768-5(1) of the ITAA 1997 states: A foreign equity distribution is not assessable income, and is not *exempt income, of the entity to which it is made if: (a) the entity is an Australian resident and a * corporate tax entity; and (b) at the time the distribution is made, the entity satisfies the participation test in section 768-15 in relation to the company that made the distribution; and (c) the entity: (i) does not receive the distribution in the capacity of a trustee; or (ii) receives the distribution in the capacity of a trustee of a * corporate unit trust or * public trading trust. The participation test referred to in paragraph (b) of subsection 768-5(1) is explained in section 768-15 of the ITAA 1997 which states: An entity satisfies the participation test in this section in relation to another entity at a time if, at that time, the sum of the following is at least 10%: (a) the * direct participation interest the entity would have in the other entity if rights on winding-up were disregarded; (b) the * indirect participation interest the entity would have in the other entity if: (i) rights on winding-up were disregarded; and (ii) section 960-185 only applied to intermediate entities that are not * corporate tax entities.” As a result of the proposed restructure, Y and N will pay XYZ a dividend represented by the shares that the country A companies, Y and N hold in the two Australian subsidiaries Z and T. As a result of the restructure, XYZ will own 100% of the shares in Y and N, and under the company constitutions of Y and N, XYZ will have 100% of the rights to vote, dividends and capital of Y and N. So, the participation test will be satisfied, and thus the dividend income received by X as head company from Y and N, should be non-assessable non-exempt income under subsection 768-5(1). | Detailed Reasoning - Detailed reasoning: Subsection 855-10(1) of the ITAA 1997 states: Disregard a * capital gain or * capital loss from a * CGT event if: (a) you are a foreign resident, or the trustee of a * foreign trust for CGT purposes, just before the CGT event happens; and (b) the CGT event happens in relation to a * CGT asset that is not * taxable Australian property. The table under section 855-15 of the ITAA 1997 outlines 5 categories/items of “taxable Australian property” as follows: 1. Taxable Australian real property (item 1); 2. A CGT asset that is an indirect Australian real property interest and is not covered by item 5 (item 2); 3. A CGT asset that you have used at any time in carrying on a business through if you are a resident in a country that has entered into an international tax agreement with Australia containing a permanent establishment article--a permanent establishment (within the meaning of the relevant international tax agreement) in Australia; or otherwise--a permanent establishment in Australia (item 3); 4. An option or right to acquire a CGT asset covered by item 1, 2 or 3 of this table (item 4); and 5. A CGT asset that is covered by subsection 104-165(3) (choosing to disregard a gain or loss on ceasing to be an Australian resident) (item 5). Items 1 to 5 under subsection 855-10(1) of the ITAA 1997 do not apply Y nor Z because: ● Y and N are residents of country A and do not conduct business in Australia through a permanent establishment. ● The relevant assets being disposed of are shares the Australian subsidiaries which do not hold any direct or indirect real property interests situated in Australia. ● Shares in the Australian companies are not assets that have been used in carrying on a business in Australia through a permanent establishment. Therefore, any capital gain or loss arising to Y and N from the transfer of shares in Z and T to XYZ should be disregarded under Division 855. | Detailed Reasoning - Detailed reasoning: After the proposed restructure, Y and N will be CFCs of the attributable taxpayer, XYZ in accordance to section 366(1) of the ITAA 1936, The transfer of shares in Z and T to XYZ would ordinarily result in assessable income being attributed to the X consolidated group from Y as the active income test will not be satisfied by Y and N according to the active income test in subsection 432(1) of the ITAA 1936. However, section 419 of the ITAA 1936 will apply (through the operation of subdivision 126-B of ITAA 1997) to disregard any capital gain or loss arising from the transfer of shares, therefore reducing any amounts attributable to the X tax consolidated group.