Private ruling: Conversion of shares in a co-operative to shares in a proprietary limited company
Published: March 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: July 2012

Ruling: Q1: Has a CGT event occurred as a result of the conversion of shares in the co-operative to shares in the proprietary limited company under subdivision 104-G of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: If the answer to question 1 is yes, are the shareholders eligible for roll-over relief under subdivision 124-I of the ITAA 1997? | A2: Yes. Issue 2 Following the conversion of the Co-operative from an Incorporated Co-operative under the Co-operatives Act to a Proprietary Limited Company under the Corporations Act, will the pre-CGT status of certain assets owned by shareholders be retained? | Q3: Will the pre-CGT assets owned by shareholders prior to the incorporation under the Corporations Act retain the pre-CGT status under section 149-10 of the Income Tax Assessment Act 1997 (ITAA 1997) following the incorporation under the Corporations Act? | A3: Yes.

Relevant facts and circumstances: The Company (previously the Co-operative) Tax Agent submitted a request for a private ruling in early 2013. The Co-operative members, in mid 2012 accepted a proposal to change its status from an incorporated co-operative to a proprietary limited company. The change in status was effective from mid 2012, with the Company being registered with the Australian Securities and Investments Commission (ASIC) from that date as an Australian proprietary company limited by shares. Upon the change in status, the members of the co-operative received one fully paid share in the Company for each share held in the co-operative. No other consideration was provided in relation to the change in status and exchange in shares. All members of the co-operative received shares in the company. There were no other shares issued in the company other than those issued to the members of the co-operative in return for their shares in the co-operative. Upon conversion, all assets and liabilities of the co-operative were vested with the company. At the date of the change in status, there were some members of the co-operative who had purchased their shares in the co-operative prior to 19 September 1985, and some who had purchased their shares after that date. The Co-operative Disclosure Statement (the Statement) contained the Chairman's letter addressed to the members with the following extract: "Under the proposal, all of the assets and liabilities of the Co-operative will be transferred to the Company and your shares in the Co-operative will be replaced by shares in the Company." The Statement in Section 4 - Details of the proposal at paragraph 4.2 states the following: 4.2 Effects of Conversion 4.2.1 Upon the Co-operative being converted to a public company under the Corporations Act: (a) the Co-operative will cease to be registered as a co-operative under the Co-operative Act; (b) every member of the Co-operative will become a member of the Company and will hold the same number of fully paid ordinary shares in that company as the number of fully paid shares previously held by that person as a member of the Co-operative;

Relevant legislative provisions: Income Tax Assessment Act 1997 subdivision 104-G; | Income Tax Assessment Act 1997 section 104-25; | Income Tax Assessment Act 1997 subdivision 124-A; | Income Tax Assessment Act 1997 section 124-15; | Income Tax Assessment Act 1997 subdivision 124-I; | Income Tax Assessment Act 1997 section 124-520; | Income Tax Assessment Act 1997 section 149-10; | Income Tax Assessment Act 1997 section 149-30; | Income Tax Assessment Act 1936 division 20; | Income Tax Assessment Act 1936 section 160ZZS(1); | Co-operatives Act 1997; | Corporations Act 2001

Reasons for decision: Detailed Reasoning - Issue 1: Following the conversion of the Co-operative from an Incorporated Co-operative under the Co-operatives Act 1997 (Co-operatives Act) to a Proprietary Limited Company under the Corporations Act 2001 (Corporations Act), will this event be considered a CGT event and are the shareholders eligible for roll-over relief. | Detailed Reasoning - Question 1: Has a CGT event occurred as a result of the conversion of shares in the co-operative to shares in the proprietary limited company under subdivision 104-G of the Income Tax Assessment Act 1997 (ITAA 1997)? | Summary: A CGT C2 event occurred when the Co-operative converted from an Incorporated Co-operative to Proprietary Limited Company and all shares in the Co-operative were replaced by shares in the Company. | Detailed Reasoning - Detailed reasoning: Division 104 of the ITAA 1997 sets out the CGT events for which a capital gain or loss is made from. Subsection 104-25(1) of the ITAA 1997 states the following: CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset: (a) being redeemed or cancelled; or (b) being released, discharged or satisfied; or (c) expiring; or (d) being abandoned, surrendered or forfeited; or (e) if the asset is an option - being exercised; or (f) if the asset is a convertible interest - being converted. CGT event C2 will happen when a member's share in the Co-operative ends by cancellation on the conversion. The Company has undertaken a conversion from an Incorporated Co-operative to Proprietary Limited Company and all shares in the Co-operative have been replaced by shares in the Company. The Co-operative has ceased to be registered as a co-operative under the Co-operatives Act 1997 and is now incorporated under the Corporations Act and registered with Australian Securities and Investment Commission (ASIC). This is considered to be a CGT C2 event. | Detailed Reasoning - Question 2: If the answer to question 1 is yes, are the shareholders eligible for roll-over relief under subdivision 124-I of the ITAA 1997? | Summary: The shareholders will be eligible for roll-over relief under subdivision 124-I of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subdivision 124-I of the ITAA 1997 allows a member of a body that is incorporated under a law other than the Corporations Act or a similar foreign law (the Company Law) to choose roll-over relief for a CGT event that happens when the incorporated body converts to a company incorporated under the Company Law without creating a new legal entity. The conditions for roll-over are listed in subsection 124-520(1) of the ITAA 1997. These requirements are: This section applies if: (a) you are a member of a body that is incorporated under a law described in column 1 of an item of the table; and (b) the body is converted into a company incorporated under a law described in column 2 of the item, without creating a new legal entity and (c) it is reasonable to conclude that there is no significant difference: (i) between the ownership of the body, and of rights relating to the body held by entities that owned the body, just before the conversion and the ownership of the company just after the conversion; or (ii) between the mix of ownership of the body, and of rights relating to the body held by entities that owned the body, just before the conversion and the mix of the ownership of the company just after the conversion; and Subsection 124-520(2) states: You can choose to obtain a roll-over if: (a) as a result of the conversion you are issued with shares in the company and you receive nothing else; and (b) either you are an Australian resident at the time of the conversion or, if you are a foreign resident at that time: (i) each of your interest and other rights (if any) relating to the body was taxable Australian property just before that time; and (ii) the shares are taxable Australian property when they were issued. Paragraph 124-520(1)(a) of the ITAA 1997 requires that the member choosing roll-over is a member of a body that is incorporated under a law other than the Company Law. This requirement is satisfied as the Co-operative was incorporated under the Co-operatives Act 1997 . Paragraph 124-520(1)(b) of the ITAA 1997 requires that the body is converted into a company incorporated under the Company Law (without creating a new legal entity). This requirement is satisfied as the Co-operative has now been registered as a Company under the Corporations Act and registered as an Australian Proprietary Company limited by shares with ASIC. Under paragraph 601BM(1)(a) of the Corporations Act and subsection 307(1) of the Co-operatives Act 1997 , the Incorporation does not create a new legal entity. Paragraph 124-520(1)(c)(i) requires that there is no significant difference between the ownership of the body just before the conversion and the ownership of the company just after the conversion. Paragraph 124-520(1)(c)(ii) requires that there is no significant difference between in the mix of ownership just before the conversion and the mix just after the conversion This requirement of paragraph 124-520(1)(c)(i) has been satisfied based on the facts of this scheme. Just before the conversion the members who held shares in the Co-operative are the members who hold shares in the Company just after the conversion. The requirement of paragraph 124-520(1)(c)(ii) has been satisfied based on the facts of this scheme. The replacement Company shares have been issued to members of the Co-operative in the same number as those held in the Co-operative. Therefore there has been no change in either the ownership or the mix of ownership. The condition in paragraph 124-520(2) requires that a company issue shares to members (and nothing else) in substitution for their interest in the body just before the conversion. This condition has been satisfied as the Company has issued shares to the members of the Co-operative (and nothing else) in substitution for their interest in the Co-operative just before the conversion. Each member of the Co-operative received one share in the Company in return for each share held in the Co-operative. It is considered that all requirements are satisfied and as such the shareholders will be eligible for roll-over relief under subdivision 124-I of the ITAA 1997. | Detailed Reasoning - Issue 2: Following the conversion of the Co-operative from an Incorporated Co-operative under the Co-operatives Act to a Proprietary Limited Company under the Corporations Act, will the pre-CGT status of certain assets owned by shareholders be retained? | Detailed Reasoning - Question 1: Will the pre-CGT assets owned by shareholders prior to the incorporation under the Corporations Act retain the pre-CGT status under section 149-10 of the Income Tax Assessment Act 1997 (ITAA 1997) following the incorporation under the Corporations Act? | Summary: The pre-CGT assets owned by shareholders of the Co-operative prior to incorporation under the Corporations Act will retain their pre-CGT status under section 149-10 of the ITAA 1997 following the incorporation under the Corporations Act. | Detailed Reasoning - Detailed reasoning: Section 149-10 of the ITAA 1997 states: 'A CGT asset that an entity owns is a pre-CGT asset if, and only if: (a) the entity last acquired the asset before 20 September 1985; and (b) the entity was not, immediately before the start of the 1998-99 income year, taken under: (i) subsection 160ZZS(1) of the Income Tax Assessment Act 1936 ; or (ii) Subdivision C of Division 20 of Part IIIA of that Act; to have acquired the asset on or after 20 September 1985; and (c) the asset has not stopped being a pre-CGT asset of the entity because of this Division.' Essentially, a CGT asset acquired before 20 September1985 remains a pre-CGT asset if the majority underlying interests in the asset has not changed since 20 September 1985. Where a change in the majority underlying interests occurs the CGT asset is deemed to be acquired after 19 September 1985, under either Division 20 of the Income Tax Assessment Act 1936 (ITAA 1936) (pre 1998-99 income year) or Division 149 of the ITAA 1997. Under section 149-30 of the ITAA 1997 an asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by the ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985. In other words, the Commissioner has to be satisfied that the majority underlying interests in the asset has not changed. Otherwise the asset is deemed to have been acquired at the time that the change in the majority underlying interest in the asset happened. 'Majority underlying interests' is defined in section 149-15 of the ITAA 1997 as more than 50% of: (a) the beneficial interests that 'ultimate owners' hold (whether directly or indirectly) in the asset; and (b) the beneficial interests that 'ultimate owners' hold (whether directly or indirectly) in any income that may be derived from the asset. The expression 'beneficial interests' as used in the definition of 'majority underlying interests' is not defined. In general law, a shareholder does not have any legal or equitable interest in the assets of a company. Thus, it would be difficult to see how an asset of a company can satisfy the 'majority underlying interests' test and remain a pre-CGT asset. Assistance is provided in Taxation Ruling IT 2340 where the terms 'underlying interest' and 'majority underlying interest' and section 160ZZS of the ITAA 1936 are discussed. IT 2340 states in paragraph 2: The terms "underlying interest" and "majority underlying interests", on the basis of which the provision operates, have the same meanings as they have in Subdivision G of Division 3 of Part III of the Act - which deals with the income tax treatment of interest in relation to "negatively geared" investments in rental property. In both cases (and like provisions of the Act concerned with the measurement of ownership interests) underlying interests in relation to the assets concerned mean beneficial interests held by natural persons, whether directly or through one or more interposed companies, partnerships or trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be "looked through" in order to determine whether there has been a change in the effective interests of natural persons in the assets. For the purposes of section 149-15 of the ITAA 1997 in determining the majority underlying interest in a company the 'ultimate owners' of shares can hold the shares either directly or indirectly. An 'ultimate owner' indirectly has a beneficial interest if he, she or it would receive for his, her or its own benefit a distribution of capital or a dividend or distribution of income (Subsections 4 and 5 of section 149-15 of the ITAA 1997). Subsection 305(3) of the Co-operatives Act requires, in relation to the conversion of the Co-operative from a co-operative to a company, that the conversion must result in every member of the co-operative at the date of conversion who held shares in the co-operative being the holder of shares in the company equal in number and nominal value to the shares held by the member as a member of the co-operative. Each existing member of the co-operative upon the conversion will be issued with shares equal in number to the value of shares held by them in the Co-operative. The Commissioner is satisfied that as a result of the conversion of the Co-operative to a company that the majority underlying interests in the shares prior to the conversion will be the same as the majority underlying interests in the shares after the conversion. Therefore the pre-CGT assets would not stop being pre-CGT assets under section 149-30 of the ITAA 1997.