Private ruling: Capital gains tax – division 615 roll-over – consolidatable group
Date of advice: 31 January 2018
Published: June 2018
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the capital gains tax asset roll-over relief be available pursuant to Division 615 of the Income Tax Assessment Act 1997 (ITAA 1997) when shareholders exchange their ordinary shares in the Company for ordinary shares in a new company, XYZ? | A1: Yes | Q2: Assuming the answer to question 1 is affirmative, will XYZ and its wholly owned subsidiaries – the Company and the Subsidiary - be considered a consolidatable group, pursuant to Section 703-10 of the ITAA 1997, immediately after XYZ is interposed? | A2: Yes

Relevant facts and circumstances: The Company The Company was incorporated in Australia and has a number of current shareholders. All shareholders are Australian residents for tax purposes and have continually held their shares on capital account. The Company operates a business. The current market value of the business is approximately $X million. This includes property assets of $Y million consisting of business premises. The Subsidiary was incorporated in Australia as a wholly owned subsidiary of the Company. The Company elected to form an income tax consolidated group, pursuant to Section 703-50 of the ITAA 1997 consisting of the Company as the head company and the Subsidiary as a subsidiary group member. Proposed Restructure For strategic and asset protection purposes, the directors and shareholders propose to restructure the business and separate the property assets from the trading business. A new Australian resident company, XYZ, will be incorporated. The company constitution will provide for shares of the same class with the same terms to be issued as the shares in the Company. It is proposed to interpose XYZ between the Company and its shareholders. XYZ will acquire 100% of the issued shares in the Company. XYZ will not own any other assets at the time it acquires the Company shares. The market value of XYZ will be the same as the Company. Each Company shareholder will exchange all of their shares in the Company for the same number of shares of the same class, with the same terms as their Company shares in XYZ (and nothing else). Each shareholder will have the same proportionate interest in XYZ as they did in the Company and their replacement shares in XYZ will have the same market value as their existing shares in the Company. No redeemable shares have been issued in the Company and no redeemable shares will be issued in XYZ under the restructure. Immediately after the acquisition of the Company shares, XYZ will choose that the existing tax consolidated group will continue to exist with XYZ as the head company and the Company as a wholly owned subsidiary. Following the completion of the restructure, a new subsidiary of XYZ will be incorporated. The property assets will then be transferred to the new subsidiary of XYZ. The properties will continue to be held by the group and an arm’s length rent will be charged to the trading business. There is no intention to sell the properties.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 615 | Income Tax Assessment Act 1997 section 615-1 | Income Tax Assessment Act 1997 subsection 615-5(1) | Income Tax Assessment Act 1997 subsection 615-5(2) | Income Tax Assessment Act 1997 Subdivision 615-B | Income Tax Assessment Act 1997 section 615-15 | Income Tax Assessment Act 1997 subsection 615-20(1) | Income Tax Assessment Act 1997 subsection 615-20(2) | Income Tax Assessment Act 1997 subsection 615-20(3) | Income Tax Assessment Act 1997 section 615-25 | Income Tax Assessment Act 1997 subsection 615-25(1) | Income Tax Assessment Act 1997 subsection 615-25(2) | Income Tax Assessment Act 1997 subsection 615-25(3) | Income Tax Assessment Act 1997 section 615-30 | Income Tax Assessment Act 1997 subsection 615-30(2) | Income Tax Assessment Act 1997 subsection 703-5(2) | Income Tax Assessment Act 1997 section 703-10 | Income Tax Assessment Act 1997 subsection 703-10(1) | Income Tax Assessment Act 1997 subsection 703-15(2) | Income Tax Assessment Act 1997 section 703-20 | Income Tax Assessment Act 1997 section 703-50 | Income Tax Assessment Act 1997 subsection 703-70(1) | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Act 1997 section 960-130

Reasons for decision: Summary: The capital gains tax asset roll-over relief is available pursuant to Division 615 of the ITAA 1997 when shareholders exchange their ordinary shares in the Company for ordinary shares in XYZ. | Detailed Reasoning - Detailed reasoning: Section 615-1 states that you can choose for transactions under a scheme to restructure a company’s business to be tax neutral if, under the scheme: (a) you cease to own shares in the company; and (b) in exchange, you become the owner of new shares in another company. Subsection 615-5(1) provides that you can choose to obtain the roll-over if: (a) you are a member of a company (the original entity); and (b) you and at least one other entity (the exchanging members) own all of the shares in it; and under the scheme for reorganising its affairs the exchanging members dispose of all their shares to an interposed company in exchange for shares in the interposed company (and nothing else); and (c) the requirements of Subdivision 615-B are satisfied. Subsection 995-1(1) states that a ‘member’, in relation to an entity, has the meaning given by section 960-130. Section 960-130 states that where an entity is a company, a stockholder is a member of the company. The shareholders (the exchanging members) are ordinary shareholders of the Company (the original entity), and they own all the shares in the Company, and therefore the conditions in paragraphs 615-5(1)(a) and (b) are satisfied. Paragraph 615-5(1)(c) requires that, under a scheme for reorganising its affairs, the exchanging members dispose of all their shares in the original company to another company (the interposed company) in exchange for shares in the interposed company (and nothing else). It is proposed that the exchanging members transfer all their Company shares to XYZ in exchange for XYZ shares (and nothing else). XYZ will acquire 100% of the shares held by the shareholders in the Company in exchange for issuing shares in XYZ in the same proportionate shareholdings as those previously owned by the exchanging members. Therefore, the requirement in paragraph 615-5(1)(c) is satisfied. Further requirements are imposed by Subdivision 615-B. They are: ● the interposed company must own all the original interests (section 615-15); ● there are special requirements relating to your interests in the original entity (subsections 615-20(1),(2) and (3)) ● there are special requirements relating to the interposed company (section 615-25), and ● the interposed company must make a particular choice (section 615-30). Section 615-15 states that the interposed company must own all of the shares in the original entity immediately after the time (the completion time) all the exchanging members have had their shares in the original entity disposed of, redeemed or cancelled under the scheme. This requirement is satisfied because XYZ will own all the shares in the Company immediately after the exchanging members dispose of their shares in the Company. Subsection 615-20(1) requires that immediately after the completion time, each exchanging member must own: ● a whole number of shares in the interposed company; and ● a percentage of the shares in the interposed company that were issued to all the exchanging members that is equal to the percentage of the shares in the original company (that were disposed of to the interposed company) that the member owned. These requirements are also satisfied because each original Company shareholder will own a whole number of shares in XYZ equal to the percentage of shares they originally held in the Company. Subsection 615-20(2) requires that the ratio of the market value of each exchanging member's shares in the interposed company to the market value of the shares in the interposed company issued to all the exchanging members (worked out immediately after the completion time) is equal to the ratio of the market value of that member's shares in the original company that were disposed of to the interposed company to the market value of all the shares in the original company that were disposed of to the interposed company (worked out immediately before the first disposal). This condition will be satisfied in this case. XYZ will be a newly incorporated entity and XYZ will issue new shares to each of the exchanging members equal to the number of shares that each of the exchanging members held immediately before the completion time. As the number of shares remains the same before and after the completion time and the market value of XYZ and the Company will be the same, the ratio of the market values remains unchanged. Paragraph 615-20(3)(a) will also be satisfied because in this scheme, all of the exchanging members are Australian residents. Section 615-25 imposes requirements specifically relating to the interposed company. Subsection 615-25(1) states that shares in the interposed company must not be redeemable shares. The shares that will be issued in XYZ will not be redeemable shares. Therefore this condition will be satisfied. Subsection 615-25(2) requires that each exchanging member who is issued shares in the interposed company must own the shares from the time they are issued to the completion time. This condition will be satisfied as each of the shareholders, being the exchanging members who will be issued XYZ shares, will have held those shares from the time they were issued until at least the completion time. Additionally, subsection 615-25(3) requires that just after the completion time: (a) the exchanging members must own all the shares in the interposed company; or (b) entities other than those members must own no more than 5 shares in the interposed company and the market value of those shares expressed as a percentage of the market value of all the shares in the interposed company is such that it is reasonable to treat the exchanging members as owning all the shares. Paragraph 615-25(3)(a) is satisfied in this case. Immediately after the completion time, the only members of XYZ will be the exchanging members. The requirement in subsection 615-30(2) will apply in this case as the Company is the head of a consolidated group immediately before the completion time. Under the proposed restructure, XYZ will choose that the tax consolidated group will continue at and after the completion time with XYZ as its head company and the Company and the Subsidiary as wholly owned subsidiary group members. As per paragraph 615-30(3)(b), this choice must be made within 28 days after the completion time. Accordingly, the requirement in section 615-30 is satisfied. Subsection 615-5(2) will also apply in this case. Subsection 615-5(2) states that you are taken to have chosen to obtain the roll-over relief if: (a) immediately before the completion time the original entity is the head company of a consolidated group; and (b) immediately after the completion time, the interposed company is the head company of the group. | Detailed Reasoning - Conclusion: The capital gains tax asset roll-over relief is available pursuant to Division 615 when shareholders exchange their ordinary shares in the Company for ordinary shares in XYZ. All of the requirements under Division 615 will be satisfied. | Summary: XYZ and its wholly owned subsidiaries – the Company and the Subsidiary – will be considered a consolidatable group under subsection 703-10(1) immediately after XYZ is interposed. | Detailed Reasoning - Detailed reasoning: Under subsection 703-10(1), a consolidatable group consists of a single head company and all the subsidiary members of the group. Subsection 703-15(2) lists the requirements for an entity to be a head company or subsidiary member of a consolidated group or consolidatable group: An entity is a head company if all of the following requirements are met: 1. The entity must be a company which is taxed at the corporate rate and is not excluded under section 703-20. 2. The entity must be an Australian resident (but not a prescribed dual resident). 3. The entity must not be a wholly-owned subsidiary of another entity (that meets the above two requirements) or if it is, must not be a subsidiary member of a consolidated group or consolidatable group. Where an entity is a company, the company is a subsidiary member of the group if all of the following requirements are met: 1. The entity must be a company which is taxed at the corporate rate and is not excluded under section 703-20. 2. The entity must be an Australian resident (but not a prescribed dual resident). 3. The entity must be a wholly-owned subsidiary of the head company of the group or if there is an interposed entity between them, then the requirements in section 703-45 must be met. Following the restructure, XYZ will be interposed between the Company and its shareholders, and the Company will become a wholly owned subsidiary of XYZ. The Subsidiary will remain a wholly owned subsidiary of the Company. Based on the facts, immediately after XYZ is interposed, XYZ will satisfy the requirements to be a head company and the Company and the Subsidiary will satisfy the requirements to be subsidiary members of a consolidatable group. As part of the restructure, the Company will therefore cease to be the head company of the group. Subsection 703-5(2) provides that a consolidated group continues to exist until the head company of the group ceases to be a head company. However, subsection 703-70(1) states that a consolidated group is taken not to have ceased to exist under subsection 703-5(2) because the company referred to in subsection 615-30(2) as the original entity, in this case the Company, ceases to be the head company of the group. As discussed in the detailed reasoning to question 1, XYZ will make the choice pursuant to subsection 615-30(2). Consequently, subsection 703-70(1) will apply and the consolidated group will continue in existence after XYZ is interposed, with XYZ as the head company of the tax consolidated group. | Detailed Reasoning - Conclusion: Immediately after XYZ is interposed, the consolidated group will continue in existence. XYZ as head company and the Company and the Subsidiary as subsidiary group members will be considered a consolidatable group under subsection 703-10(1).