Private ruling: Replacement asset roll-over conditions
Date of advice: 15 August 2018
Published: November 2018
Ruling period: 1 July 2018 to 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Will the replacement asset roll-over conditions within Subdivision 122-A of the ITAA 1997 be satisfied where the one A Class share in Company A owned by an individual (Taxpayer B) is transferred to Company Y in the manner described? | A1: Yes | Q2: Can the Commissioner confirm that by virtue of this roll-over: (a) any capital gain otherwise arising to Taxpayer B is disregarded, and (b) Taxpayer B will obtain an aggregated cost base in Company Y shares equal to Taxpayer B’s cost base for their one A Class share in Company A. | A2: (a) Yes (b) Yes | Q3: Can the Commissioner confirm that by virtue of this roll-over, Company Y will obtain a cost base in the one A Class share in Company A equal to Taxpayer B’s cost base for the one A Class share in Company A? | A3: Yes

Relevant facts and circumstances: 1. Taxpayer B owns one of the two C Class shares issued in Company A, a company limited by guarantee and by shares. The other share in Company A is owned by the individual’s sibling (Taxpayer A). 2. Company A is centrally managed and controlled in Australia, carries on business in Australia and is a resident of Australia for tax purposes. 3. Both A Class shares in Company A have been held post-CGT and are the only shares entitled to dividends and to a distribution of capital on a winding up of the company. The only other class of shares on issue in Company A are B Class shares that only entitle holders to voting rights. The two individual A Class shareholders hold more than 50% of the B Class shares. 4. Company A is the head entity of a consolidated tax group and has two members, Company B and Company C. Both individuals have been directors of these companies for a number of years. 5. Company A holds 50% of the shares in Company D. A large portion of the income of Company A comprises franked dividends received from Company D. 6. Company B currently has liabilities to other consolidated group members. 7. There are two key issues that have arisen in the context of the individuals’ shareholding in Company A. 8. The first issue is that the individuals’ have different views on the investment in Company B. Taxpayer B has a keen interest in the business of Company B and wishes to continue to maintain control and grow this business. However, Taxpayer A has a desire to no longer be involved with Company B, particularly given that the entity has been in a loss position for a period of time and that Company A has been required to effectively fund those losses. 9. It has therefore been agreed by both individuals that an entity owned by Taxpayer B should obtain ownership and control of the assets and business by way of acquisition of Company B from Company A. 10. The second issue is that the individuals wish to build wealth and investments principally outside of Company A and therefore do not wish to hold such investments directly, but rather through entities wholly owned by them as individuals. 11. To facilitate these objectives, Taxpayer B will establish Company Y and will own the one non-redeemable ordinary share on issue in this company. 12. It is intended that a company 100% owned by Taxpayer B will acquire the shares in Company B for an agreed market value and on a certain date. 13. Taxpayer B will remain the sole shareholder of Company B during their lifetime. Company B will in the future receive 50% of the dividends paid by Company A instead of Taxpayer B. 14. Following the restructure, it is contemplated that in the relatively short to medium term most of the retained earnings will be paid out of Company A to the A Class shareholders, with sufficient cash being retained to fund the working capital requirements of Company A’s businesses. This will serve two commercial objectives: to allow Company Y to purchase Company B from Company C and to enable investments to be made through companies controlled by them as individuals. Steps to be undertaken It is proposed that the following will take place: 15. The debts owed by Company B to the other entities within the tax consolidated group will be forgiven. 16. Taxpayer B will dispose of their one A Class share in Company A to Company Y, in consideration for the issue of 100 non-redeemable ordinary shares in Company Y. 17. The A Class share in Company A that will be disposed to Company Y will not become trading stock of Company Y just after the disposal. 18. Company Y will purchase from Company C all the shares in Company B for the agreed market value. 19. Company A will pay dividends to both A Class shareholders to meet the two commercial objectives set out in paragraph 17 above.

Relevant legislative provisions: Subdivision 122-A of the Income Tax Assessment Act 1997 Subsection 104-10(1) of the Income Tax Assessment Act 1997 | Subsection 104-10(2) of the Income Tax Assessment Act 1997 | Section 122-15 of the Income Tax Assessment Act 1997 | Section 122-20 of the Income Tax Assessment Act 1997 | Subsection 122-20(1) of the Income Tax Assessment Act 1997 | Subsection 122-20(2) of the Income Tax Assessment Act 1997 | Subsection 122-20(3) of the Income Tax Assessment Act 1997 | Section 122-25 of the Income Tax Assessment Act 1997 | Subsection 122-25(1)) of the Income Tax Assessment Act 1997 | Subsection 122-25(2) of the Income Tax Assessment Act 1997 | Subsection 122-25(5)) of the Income Tax Assessment Act 1997 | Subsection 122-25(6) of the Income Tax Assessment Act 1997 | Subsection 122-40(1) of the Income Tax Assessment Act 1997 | Subsection 122-40(2) of the Income Tax Assessment Act 1997 | Section 122-70 of the Income Tax Assessment Act 1997 | Subsection 122-70(2) of the Income Tax Assessment Act 1997

Reasons for decision: Summary: 21. The requirements within Subdivision 122-A will be satisfied where the one A Class share in Company A owned by Taxpayer B is transferred to Company Y in the manner described. | Detailed Reasoning - Detailed reasoning: 22. Subdivision 122-A allows an individual or trustee to choose to obtain a roll-over where they dispose of a CGT asset, or all the assets of a business, to a company under a trigger event listed in the table in section 122-15. 23. When Taxpayer B transfers their one A Class share in Company A to Company Y (a company wholly owned and controlled by Taxpayer B) CGT event A1 happens, as a change in ownership will occur due to Taxpayer B disposing of a CGT asset (being a share) to another entity (being Company Y). Therefore, the requirement in section 122-15 will be satisfied. 24. The consideration the individual receives for the disposal of the CGT asset must be only non-redeemable shares in the company and the market value of the shares received must be substantially the same as the market value of the shares disposed of, less any liabilities the company undertakes to discharge in respect of those assets. Company Y will issue 100 ordinary shares to Taxpayer B in consideration for transferring their one A Class share in Company A to it. The market value of the shares Taxpayer B will receive in Company Y will be ‘substantially the same’ as the market value of the Company A share disposed of by Taxpayer B to Company Y. Therefore, the requirements in section 122-20 have been satisfied. | Detailed Reasoning - Other requirements: 25. Section 122-25 sets out the following additional requirements: ● the transferor must own all the shares in the company just after the time of the relevant trigger event. ● the disposal of the asset is not listed in the table in subsection 122-25(2) ● the ordinary income and statutory income of the company must not be exempt from income tax because it is an exempt entity for the income year that the roll-over occurs ● the company and individual are Australian residents at the time of disposal. 26. The additional requirements have been met for the following reasons: ● for the purpose of the proposed scheme, Taxpayer B will legally and beneficially own all of the issued shares in Company Y. After the proposed transfer, Taxpayer B will be issued 100 shares in Company Y and will continue to legally and beneficially own all of the shares issued in that company. ● none of the exceptions listed in the table will apply, as the A Class share in Company A will not become trading stock of Company Y just after the share is transferred to the company. ● the ordinary or statutory income of Company Y will not be exempt from income tax. ● both Taxpayer B and Company Y will be Australian residents at the time of the disposal. 27. Taxpayer B can choose to obtain a roll-over under section 122-15, as all of the relevant roll-over requirements will be met where the one A Class share in Company A is transferred to Company Y in the manner described. | Detailed Reasoning - Question 2: Can the Commissioner confirm that by virtue of this roll-over: a) any capital gain otherwise arising to Taxpayer A is disregarded, and b) Taxpayer B will obtain an aggregated cost base for the 100 shares in Company Y equal to Taxpayer B’s cost base for their ‘A Class’ share in Company A? | Summary: 28. Any capital gain arising to Taxpayer B on disposal of their one C Class share in Company A to Company B will be disregarded. 29. Taxpayer B will obtain an aggregated cost base in their 100 shares in Company Y equal to Taxpayer B’s cost base for the one A Class share in Company A. | Detailed Reasoning - Detailed reasoning: 30. Where roll-over is chosen by the transferor for the transfer of a CGT asset to a company, any capital gain or loss arising from the transfer (i.e. trigger event) is disregarded. Therefore, if Taxpayer B chooses to apply this roll-over, any capital gain or loss made by Taxpayer B as a result of the disposal of the one A Class share in Company A to Company Y is disregarded. 31. Since Taxpayer B’s one A Class share in Company A has been held post CGT, subsection 122-40(2) would apply and Taxpayer B will obtain an aggregated cost base for the 100 shares in Company Y equal to Taxpayer B’s cost base for the one A Class share in Company A. | Detailed Reasoning - Question 3: Can the Commissioner confirm that by virtue of this roll-over, Company Y will obtain a cost base in the A Class share in Company A equal to Taxpayer A’s cost base for their one A Class share in Company A? | Summary: 32. The first element of the one A Class share in Company A share that Company B will acquire from Taxpayer B will equal the cost base of the share when Taxpayer B disposed of it to Company Y. | Detailed Reasoning - Detailed reasoning: 33. Section 122-70 sets out the consequences for the company where an individual or trustee chooses roll-over relief under section 122-15. The consequences depend on whether the asset is a post-CGT asset (i.e. acquired by the transferor on or after 20 September 1985) or a pre-CGT asset (i.e. acquired by the transferor before 20 September 1985). 34. Since Taxpayer B’s one A Class share in Company A is a post-CGT asset, the consequence to Company Y is that the first element of the share in the hands of Company Y is the share’s cost base when Taxpayer B disposes of the share to Company Y.

Does Part IVA apply to this ruling?: 20. Part IVA has not been considered as part of this ruling. | Reasons for decision: These reasons for decision accompany the Notice of private ruling for Taxpayer B. | While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated. | Question 1: Will the replacement asset roll-over conditions within Subdivision 122-A be satisfied where the A Class share in Company A owned by Taxpayer B is transferred to Company Y in the manner described?