Private ruling: Capital gains and foreign companies
Published: December 2014
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: If 100% of the shares in an Australian company are transferred to an Australian Trust will the direct voting percentage rule contained in Division 768 of the ITAA 1997 be satisfied? | A1: Division 768 of the ITAA 1997 has no application to the arrangement.

Relevant facts and circumstances: An Australian resident intends to transfer their shares in an Australian company to an Australian Trust. The Australian resident company owns 100% of the shares in a foreign company.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-30 | Income Tax Assessment Act 1997 subdivision 768-G | Income Tax Assessment Act 1997 subsection 768-505(1) | Income Tax Assessment Act 1997 subsection 768-540(1) | Income Tax Assessment Act 1936 section 23AH

Reasons for decision: Detailed Reasoning - Capital gains tax: Section 102-30 of the Income Tax Assessment Act 1997 (ITAA 1997) contains special rules affecting capital gains and capital losses. Item 12 in the table in section 102-30 of the ITAA 1997 provides that a capital gain or capital loss that a company makes from a capital gains tax (CGT) event that happens to a share in a foreign resident company may be reduced. The arrangement that is contemplated and is the subject of this ruling involves an Australian resident disposing of their shareholding in an Australian company to another Australian company as trustee for an Australian trust. | Detailed Reasoning - Subdivision 768-G: Item 12 in the table in section 102-30 directs us to subdivision 768-G ITAA 1997 regarding this exception and modification. Subsection 768-505(1) of the ITAA 1997 provides that the capital gain or capital loss is reduced if, amongst other requirements, the holding company held a direct voting percentage of 10% or more in the foreign disposal company throughout a 12 month period that began no earlier than 24 months before the time of the CGT event and ended no later than that time. The measure applies where either an Australian company or a controlled foreign company owns shares in a foreign company. | Detailed Reasoning - Active foreign business assets of a foreign company: Subsection 768-540(1) of the ITAA 1997 sets out the rules for determining whether an asset will be an 'active foreign business asset' of a foreign company at a particular time. The asset must be included in the total assets of the company, and it must not be an asset of the kind covered by subsection 768-540(2). The service contracts proposed by the company are within the definition set out in subsection 768-540(1) and are not covered by subsection 768-540(2) of the ITAA 1997. Therefore they are considered 'active foreign business assets.'