Private ruling: Income Tax - Capital gains tax - discount capital gains
Date of advice: 23 June 2016
Published: August 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the discount capital gain treatment be denied in relation to the proposed CGT event by the operation of section 115-45 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: The Trust was carrying on a business for many years. The assets of the business owned by the Trust are all post CGT assets and had been held for more than 12 months before the first rollover transaction occurred. The business assets were transferred by the Trust to Subco a wholly owned subsidiary in a transaction that satisfied Subdivision 122-A in respect of the eligible assets and the Trust elected for replacement asset rollover to apply. The Trust has been approached by a potential purchaser (Bidco) to acquire Subco. Bidco requires a company (Holdco) to be inserted between the Trust and Subco to qualify for stamp duty relief as a "corporate consolidation" transaction as defined under Chapter 11 of the relevant state's Duties Act. The "second rollover" transaction will occur within 12 months of the first rollover transaction. The Trust will then sell its shares in Holdco to Bidco in a transaction that will be a CGT event.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 115-25 | Subsection 115-30(1) | Section 115-34 | Subsection 115-34(2) | Subsection 115-34(3) | Section 115-40 | Section 115-45 | Subsection 115-45(2) | Subsection 115-45(3) | Subsection 115-45(4) | Subsection 115-45(5) | Subsection 115-45(6) | Subsection 115-45(7) | Subdivision 122-A.

Reasons for decision: Summary: The discount capital gain treatment will be denied in relation to the proposed CGT event by the operation of section 115-45 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: Section 115-34 of the ITAA 1997 was introduced in response to concerns about the interaction of CGT rollovers and the CGT discount. Section 115-34 of the ITAA 1997 treats the taxpayer's shares acquired under a Subdivision 122-A replacement asset rollover as having been owned for at least 12 months for the purposes of section 115-25 and 115-40 of the ITAA 1997. The taxpayer does not need to establish an acquisition date for the shares under item 2 of the table to subsection 115-30(1) of the ITAA 1997 which is turned off for the purposes of section 115-34 of the ITAA 1997. Further subsection 115-34(3) of the ITAA 1997 allows for assets owned by the acquiring company to be taken to have been owned from the time the taxpayer originally acquired them for the purposes of subsections 115-45(4) and (6) of the ITAA 1997. Section 115-45 of the ITAA 1997 is concerned with the integrity of the CGT discount. Broadly, this section prevents a capital gain on a share from being a discount capital gain if the owner of the share, assuming they owned the assets underlying the share and had sold them rather than the share, would not have had discount capital gains on the majority of CGT assets (by cost and value) underlying the share. Specifically, subsection 115-45(2) of the ITAA 1997 provides that a capital gain made from a CGT event happening to a share in a company is not a discount capital gain if the following conditions are satisfied: • just before the CGT event the taxpayer and their associates beneficially owned at least 10% by value of the shares in the company (subsection 115-45(3) of the ITAA 1997); • the total of the cost bases of CGT assets that the company owned at the time of the CGT event and had acquired less than 12 months before then is more than half of the total of the cost bases of all the CGT assets that the company owned at the time of the CGT event (subsection 115-45(4) of the ITAA 1997); and • the notional net capital gain of the company worked out under subsection 115-45(6) is more than half of the notional capital gain worked out under subsection 115-45(7) of the ITAA 1997 (subsection 115-45(5) of the ITAA 1997). The notional net capital gain worked out under subsection 115-45(6) of the ITAA 1997 is calculated as if: • just before the CGT event, the company had disposed of all of the CGT assets that it owned then and had acquired less than 12 months before the CGT event; and • it had received the market value of those assets for the disposal; and • the company did not have any capital gains or losses from CGT events other than the disposal; and • the company did not have a net capital loss for an earlier income year. The notional net capital gain worked out under subsection 115-45(7) of the ITAA 1997 is calculated in a similar manner except that: • just before the CGT event, the company had disposed of all of the CGT assets that it owned then; and • all of the capital gains and capital losses from those assets were taken into account in working out the net capital gain, despite and rules providing that one or more of those capital gains or losses are not to be taken into account working out the net capital gain. | Detailed Reasoning - First rollover:: Pursuant to a replacement asset rollover under Subdivision 122-A of the ITAA 1997, the Trust transferred the business to Subco in exchange for an issue of shares. | Detailed Reasoning - Second rollover:: As part of the proposed sale of Subco to Bidco, the Trust has been requested to insert Holdco between itself and Subco. It is proposed that the Trust will exchange its shares in Subco for shares in Holdco. It has been assumed that the transaction will satisfy the conditions under Subdivision 122-A of the ITAA 1997 and the Trust will elect for rollover to apply. The second rollover is expected to take place within 12 months of the first rollover. | Detailed Reasoning - CGT event:: It is then proposed that the Trust will sell their shares in Holdco to Bidco within 12 months of acquiring these shares. The only asset that Holdco owns is the shares in Subco. | Detailed Reasoning - Application of section 115-34 of the ITAA 1997 to the sale of the Holdco shares: As the shares in Holdco are proposed to have been acquired pursuant to a replacement asset rollover under Subdivision122-A of the ITAA 1997, subsection 115-34(2) of the ITAA 1997 applies to treat the Trust as having held the shares in Holdco for 12 months for the purposes of sections 115-25 and 115-40 of the ITAA 1997. Subsection 115-34(3) of the ITAA 1997 also applies to treat Holdco as having acquired the shares in Subco when the Trust acquired them (being less than 12 months ago) for the purposes of the tests in subsections 115-45(4) and (6). | Detailed Reasoning - Application of subsections 115-45(3) to (5) of the ITAA 1997: First condition - Beneficial ownership of 10% or more of the value of the shares If the taxpayer and their associates beneficially own at least 10% by value of the shares in the company, just prior to the CGT event, the first condition of section 115-45 of the ITAA 1997 will be satisfied. At the time of the proposed CGT event, the Trust would own 100% of the shares in Holdco however, this is not beneficial ownership. The information provided in the private ruling application is insufficient to determine beneficial ownership of the shares in Holdco. Therefore the Commissioner can only advise that were the associates of the Trust to beneficially own at least 10% of the value of the Holdco shares then the first condition would be met. Second condition - Cost bases of new assets are more than 50% of all cost bases of entity's assets If the total of the costs bases of the CGT assets the company owns at the time of the CGT event and had acquired less than 12 months before the CGT event is more than 50% of the total cost bases of all the CGT assets that the company owned at the time of the CGT event, then the second condition will be satisfied. Holdco's only asset would be the shares in Subco. The shares in Subco would be deemed to have been acquired when the Trust acquired them, in accordance with section 115-34(3) of the ITAA 1997, which would be the date of the second rollover which will be within 12 months of the time of the proposed CGT event. Therefore, greater than 50% of Holdco's assets will have been held for less than 12 months at the time of the proposed CGT event. The second condition would be met. Third condition - Net capital gain on entity's new assets would be more than 50% of net capital gain on all the entity's assets Assume a disposal at market value of all the company's CGT assets just before the CGT event, if the net capital gain from the assets acquired less than 12 months before the CGT event is more than 50% of the net capital gain from the total assets owned by the company just before the CGT event, then the third condition would be satisfied. Holdco's only assets would be the shares in Subco. Assuming a notional sale of the shares just before the proposed CGT event, more than 50% of the net capital gain would be attributable to the shares which have been held for less than 12 months at the time of the proposed CGT event. The third condition would be met. | Detailed Reasoning - Conclusion: Therefore, on the basis that the three conditions in section 115-45 of the ITAA 1997 have been met the discount capital gain treatment will be denied in relation to the proposed CGT event by the operation of subsection 115-45 of the ITAA 1997.