Private ruling: CGT roll-over and forming a consolidated group
Date of advice: 1 February 2019
Published: May 2019
Ruling period: Income year ending 30 June 2019
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will capital gains tax (CGT) roll-over relief be available to the Trustee for the A Family Trust in accordance with Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) for the transfer of its shares held in the subsidiary companies to Company X? | A1: Yes. Issue 2 Forming a consolidated group | Q2: Does Company X meet the requirements to be a head company of a consolidated group under section 703-15 of ITAA 1997? | A2: Yes. | Q3: Do the subsidiary companies meet the requirements to be a subsidiary member of a consolidated group or consolidatable group under section 703-15 of ITAA 1997? | A3: Yes. | Q4: Is a consolidated group able to be formed in accordance with section 703-5 of ITAA 1997? | A4: Yes. | Q5: Will any excess franking credits in the subsidiary members’ franking accounts be credited to the franking account of the head company under section 709-60 of the ITAA 1997? | A5: Yes. | Q6: Will a capital gain arise under CGT event L3 pursuant to section 104-510 of the ITAA 1997 on formation of the consolidated group? | A6: No.

Relevant facts and circumstances: A Family Trust holds 100% of the ordinary shares (ie, non-redeemable shares) in some private subsidiary companies. The A Family Trust also holds 100% of the ordinary shares on issue in Company X, a company which is incorporated in Australia. It is proposed that a tax consolidated group will be formed by transferring the shares in the subsidiary companies to a new head company, Company X, pursuant to a Subdivision 122-A of the ITAA 1997 roll-over. Under the arrangement, the A Family Trust will dispose of all of its shares in each subsidiary company in exchange for ordinary shares in Company X. The A Family Trust will own 100% of the shares in Company X just after the disposal of the shares. The newly acquired shares will be the consideration received by the A Family Trust for the disposal of its shares in the subsidiary companies. Company X will own 100% of the shares in each of the subsidiary companies. Company X will not undertake to discharge any liabilities in respect of the shares transferred to it from the Family Trust. Following this exchange, Company X will choose to form an income tax consolidated group comprising itself as the head company and the subsidiary members pursuant to section 703-50 the ITAA 1997. Company X will make this choice in writing by the time Company X lodges the group’s first consolidated income tax return or what would otherwise be the due date of such a return if Company X is not required to lodge for the income year and will notify the Commissioner in writing in the approved form that the choice has been made. None of the subsidiary companies have any retained profits as each of the companies will have paid out dividends prior to undertaking the restructure. It is not expected that there will be any tax losses in any of the subsidiary companies at the time of the formation of the tax consolidated group. There are currently credit balances in the individual franking accounts for each of the subsidiary companies. Due to this, it is expected that there will be a small franking account surplus on the consolidation date in some of the subsidiary companies.

Relevant legislative provisions: Income Tax Assessment Act 1997 s ubsection 104-510(1) | Income Tax Assessment Act 1997 subsection 104-510(2) | Income Tax Assessment Act 1997 subdivision 122-A | Income Tax Assessment Act 1997 section 122-15 | Income Tax Assessment Act 1997 section 122-20 | Income Tax Assessment Act 1997 section 122-25 | Income Tax Assessment Act 1997 subsection 122-25(1) | Income Tax Assessment Act 1997 subsection 122-25(2) | Income Tax Assessment Act 1997 subsection 122-25(5) | Income Tax Assessment Act 1997 subsection 122-25(7) | Income Tax Assessment Act 1997 section 122-35 | Income Tax Assessment Act 1997 section 122-40 | Income Tax Assessment Act 1997 subsection 122-40(1) | Income Tax Assessment Act 1997 section 703-5 | Income Tax Assessment Act 1997 section 703-10 | Income Tax Assessment Act 1997 section 703-15 | 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 703-50(2) | Income Tax Assessment Act 1997 subsection 703-50(3) | Income Tax Assessment Act 1997 section 705-25 | Income Tax Assessment Act 1997 subsection 705-25(2) | Income Tax Assessment Act 1997 subsection 705-25(5) | Income Tax Assessment Act 1997 section 705-60 | Income Tax Assessment Act 1997 section 709-55 | Income Tax Assessment Act 1997 section 709-60 | Income Tax Assessment Act 1997 section 709-65 | Income Tax Assessment Act 1997 section 709-70 | Income Tax Assessment Act 1997 section 709-75

Reasons for decision: Detailed Reasoning - Issue 1: CGT roll-over under Subdivision 122-A of the Income Tax Assessment Act 1997 | Summary: The A Family Trust will be eligible to choose the roll-over under Subdivision 122-A of the ITAA 1997 when the proposed share transfers occur. The A Family Trust will therefore be entitled to disregard any capital gain or capital loss arising from CGT event A1 happening on its disposal of the shares in the subsidiary companies.. | Detailed Reasoning - Detailed reasoning: Generally, Subdivision 122-A of the ITAA 1997 allows for the roll-over of a capital gain or loss where an individual or a trustee disposes of a CGT asset to a company in which, just after disposal, the individual or trustee owns all the shares. In order for a trustee to obtain roll-over relief under Subdivision 122-A of the ITAA 1997, the CGT event which triggers the capital gain or loss must be one listed in the table in section 122-15 of the ITAA 1997. In the present case, the transfer of the shares in the subsidiary companies to Company X will trigger CGT event A1, a CGT event listed in the table in section 122-15 and therefore this requirement is satisfied. In the situation where a CGT asset is disposed of, section 122-20 of the ITAA 1997 provides that any consideration the trustee receives for the disposal must be only non-redeemable shares in the company or in addition to the non-redeemable shares, the company undertaking to discharge any liabilities in respect of the asset. Additionally, the market value of the shares received must be substantially the same as the market value of the assets disposed of, less any liabilities the company undertakes to discharge in respect of those assets. Under the arrangement, the A Family Trust will receive shares in Company X in consideration for disposing all of the shares in the subsidiary companies to Company X. The shares A Family Trust will receive are non-redeemable shares. The A Family Trust will own 100% of the shares in Company X. The market value of the shares the A Family Trust will receive in Company X will be substantially the same as the market value of the shares that will be transferred to Company X. Therefore, the requirements in section 122-20 of the ITAA 1997 will be satisfied. Section 122-25 of the ITAA 1997 contains further relevant conditions that must also be satisfied before roll-over under Subdivision 122-A of the ITAA 1997 can be chosen. Relevantly these are: ● the trustee must own all the shares in the company just after the time of the relevant trigger event in the same capacity to that prior to the event (subsection 122-25(1) of the ITAA 1997); ● the disposal does not involve the disposal of an asset listed in the table in subsection 122-25(2) of the ITAA 1997; ● 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 (subsection 122-25(5) of the ITAA 1997); and either: ● the trust must be a resident trust for CGT purposes and the company must be an Australian resident (paragraph 122-25(7)(a) of the ITAA 1997); or ● the CGT asset that is disposed of, and the any shares received as consideration for the disposal, must be taxable Australian property (paragraph 122-25(7)(b) of the ITAA 1997). Under the arrangement, the relevant requirements of section 122-25 of the ITAA 1997 listed in the dot points above are met for the following reasons: ● the A Family Trust will own all the shares in the company (i.e. Company X) after the transfer of the shares and will continue to legally and beneficially own all of the shares issued in that company; ● none of the exceptions listed in the table in subsection 122-25(2) of the ITAA 1997 will apply; ● Company X is not an entity that is exempt from income tax under Division 50 of the ITAA 1997 so the ordinary and statutory income of Company X will not be exempt from income tax; ● the A Family Trust will be a resident trust for CGT purposes under section 995-1 of the ITAA 1997 at the time of disposal since the Trustee of the A Family Trust is incorporated in Australia and is therefore an Australian resident; and ● Company X is incorporated in Australia and therefore will be an Australian resident at the time of the disposal. The further conditions listed in section 122-35 of the ITAA 1997, which deal with the circumstances where a company undertakes to discharge one or more liabilities in respect of the CGT asset, are not relevant on the basis that Company X will only issue ordinary shares in consideration for the transfer of the shares in the subsidiary companies to it. Company X will not undertake to discharge any liabilities in respect of the assets in consideration for the trigger event. As the above requirements, where applicable, will be met, the A Family Trust will be entitled to choose the roll-over under Subdivision 122-A of the ITAA 1997. If roll-over is chosen, any capital gain or capital loss made by the trustee as a result of the disposal of the shares in each subsidiary company will be disregarded in accordance with subsection 122-40(1) of the ITAA 1997. | Detailed Reasoning - Issue 2: Forming a consolidated group | Summary: Company X meets the requirements to be a head company of a consolidated group under section 703-15 of ITAA 1997. | Detailed Reasoning - Detailed reasoning: Under subsection 703-15(2) of the ITAA 1997, an entity is a head company if it meets all the requirements in item 1 of the table in that subsection, comprising income tax treatment, Australian residence and ownership requirements. The table in subsection 703-15(2) of the ITAA 1997 provides that to be a head company, the entity must: ● be a company that has all or some of its taxable income taxed at a rate equal to the general company tax rate; ● be an Australian resident, but not a prescribed dual resident; and ● not be a wholly-owned subsidiary of another entity that satisfies the two dot points above, or if it is, it must not be a subsidiary member of a consolidatable group or a consolidated group. The definition of a wholly-owned subsidiary is contained in section 703-30 of the ITAA 1997. A subsidiary entity is wholly-owned by the head company if all the membership interests in that subsidiary are beneficially owned by the head company or its wholly-owned subsidiaries, or a combination of the head company and its wholly-owned subsidiaries. A consolidated group comes into existence when a head company makes a choice under section 703-50 of the ITAA 1997 to consolidate a consolidatable group. Under section 703-10 of the ITAA 1997, a consolidatable group consists of a single Australian resident head company and all the subsidiary members of the group (which may be a company, trust or partnership). Under the arrangement, Company X meets all the requirements to be a head company of a consolidated group in the table in subsection 703-15(2) of the ITAA 1997 listed above as it is a company that has its taxable income taxed at the general company tax rate, it is a Australian resident (but not a prescribed dual resident) and it is not a subsidiary member of a consolidatable or consolidated group. | Summary: The subsidiary companies will meet the requirements as subsidiary members of a consolidated group or consolidatable group under section 703-15 of ITAA 1997. | Detailed Reasoning - Detailed reasoning: Under subsection 703-15(2) of the ITAA 1997, an entity is a subsidiary member of a consolidated group if it meets all the requirements in item 2 of the table in that subsection, comprising income tax treatment, Australian residence and ownership requirements. The table in subsection 703-15(2) of the ITAA 1997 relevantly provides that to be a subsidiary member, the entity must: ● be a company, trust or partnership, and must not be an entity that is excluded from being a member of a consolidated group under section 703-20 of the ITAA 1997; ● if the entity is a company, have all or some of its taxable income taxed at a rate equal to the general company tax rate and not be a non-profit company; ● if the entity is a company, be an Australian resident (but not a prescribed dual resident); and ● be a wholly-owned subsidiary of the head company. Section 703-20 of the ITAA 1997 provides that certain types of companies are excluded from being a head company or subsidiary member and certain types of trusts cannot be a subsidiary member because of the way their income is treated for income tax purposes. None of these exclusions apply in this situation. Under the arrangement, all of the subsidiary companies meet the eligibility requirements of a subsidiary member under subsection 703-15(2) of the ITAA 1997 as the companies are not a type that is specifically excluded, they have all their income taxed at the general company tax rate, they are Australian resident companies and they will be wholly-owned subsidiaries of Company X once the shares are transferred from the A Family Trust to Company X. | Summary: A consolidated group will able to be formed in accordance with section 703-5 of ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 703-5(1) of the ITAA 1997 provides that a consolidated group comes into existence when a head company makes a choice under section 703-50 of the ITAA 1997 to consolidate a consolidatable group. Under section 703-10 of the ITAA 1997, a consolidatable group consists of a single Australian resident head company and all the subsidiary members of the group (which may be a company, trust or partnership). Section 703-50 of the ITAA 1997 provides that a head company may make a choice in writing that a consolidatable group is taken to be consolidated on and after the day that is specified in the choice. The choice is irrevocable pursuant to subsection 703-50(2) of the ITAA 1997. Subsection 703-50(3) of the ITAA 1997 provides that the choice must be made no later than the date of lodgement of the group's income tax return for the income year in which the day specified in the choice occurs, or if a return is not required for that income year, the date it would have otherwise been due. Section 703-58 of the ITAA 1997 requires the head company to give the Commissioner a notice in writing in the approved form containing information about the group by the same due date the choice must be made. Once the shares have been transferred, a choice to form a consolidated group will be made in writing by Company X, and a notice documenting this choice will be given to the Commissioner in an approved form by the time Company X lodges the group’s first consolidated income tax return or its due date. Consequently, a consolidated group will able to be formed in accordance with section 703-5 of ITAA 1997. | Summary: Any excess franking credits in the subsidiary companies’ franking accounts will be credited to the franking account of the head company under section 709-60 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 709-55 of the ITAA 1997 states that the object of Subdivision 709-A of the ITAA 1997 is for each consolidated group to operate a single franking account. Section 709-60 of the ITAA 1997 provides that if a joining entity's franking account is in surplus at the joining time, the franking surplus is transferred to the head company's franking account. This is achieved by debiting the joining entity's franking account and crediting the head company's account with an amount equal to the surplus. Alternatively, if the joining entity has a franking deficit, it becomes liable to pay franking deficit tax as if the joining time were the end of its income year. Section 709-65 of the ITAA 1997 renders the joining entity's franking account inoperable while it remains a subsidiary member of the group. Sections 709-70 and 709-75 of the ITAA 1997 have the effect that any franking credits or debits (respectively) that would (apart from section 709-65) have arisen in the entity's franking account arise in the head company's franking account instead. It is expected that there will be a small surplus in the franking accounts of some of the subsidiary companies at the time they join the consolidated group. Due to the application of section 709-60 of the ITAA 1997, any surplus in the subsidiary companies’ franking accounts will be transferred to the franking account of Company X at this time. | Summary: No capital gain will arise under CGT event L3 under section 104-510 of the ITAA 1997 on the formation of the consolidated group. | Detailed Reasoning - Detailed reasoning: Subsection 104-510(1) of the ITAA 1997 provides that CGT event L3 happens where an entity becomes a subsidiary member of a consolidated group and the sum of the tax cost-setting amounts for all of the retained cost base assets that become those of the head entity exceeds the group's allocable cost amount (ACA) for the entity. Subsection 104-510(2) of the ITAA 1997 states that the head company makes a capital gain equal to the excess of the sum of the tax cost setting amounts of the retained cost base assets over the ACA. No capital loss is made under CGT event L3. The time of CGT event L3 is just after the entity becomes a subsidiary member of the group. The main retained cost base assets that the subsidiary companies will hold are Australian currency, or the right to Australian currency in the form of receivables from related entities. Therefore, the tax cost setting amount of these assets will be equal to the Australian currency concerned. If the tax cost setting amount for the retained cost base assets for each of the subsidiary companies exceeds the group's ACA for the subsidiary companies, then CGT event L3 will occur and Company X will mak e a capital gain equal to the excess. The time of the event will be just after the subsidiary companies become subsidiary members of the tax consolidated group. Based on balance sheets provided for the subsidiary companies as at the date of the private ruling application, it is expected that the ACA for each subsidiary company will exceed the sum of the tax cost setting amounts for all retained cost base assets of each subsidiary company such that no capital gain under CGT event L3 will occur upon the subsidiary members forming the tax consolidated group.