CGT Roll-Over Relief

Does a 'legal merger' of two companies carried out under the law of a foreign country prevent those companies from choosing roll-over under paragraph 126-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) on the basis that the companies are not members of the same wholly-owned group at the time required by subsection 126-50(1) of the ITAA 1997?

No. Both companies are considered to be members of the same wholly-owned group at the time that the CGT event happened to the company transferring the asset (the originating company). Therefore, the originating company and the company to which the asset was transferred (the recipient company) can choose under paragraph 126-55(1)(b) of the ITAA 1997 to obtain roll-over under Subdivision 126-B of the ITAA 1997.

Holding Company is a listed foreign public company which owns 100 per cent of the share capital in the originating company and the recipient company.

Both the originating and recipient companies are non-resident companies.

The originating company owns 100 per cent of the share capital in two companies incorporated and resident in Australia.

A 'legal merger' is to be carried out between the originating and recipient companies in accordance with a foreign country's Civil Code. The legal effect of the merger is as follows: • All of the assets and liabilities of the originating company (ie including its shareholding in the Australian companies) will be transferred to the recipient company by operation of law. • The recipient company will assume the same shareholders and creditors as the originating company but it will not issue new shares to the Holding Company. • The originating company will immediately cease to exist following and consequent upon the legal merger process.

Subdivision 126-B of the ITAA 1997 provides for roll-over for asset transfers between two companies that are members of the same wholly-owned group of companies. Where the originating or recipient company is a non-resident, the asset for which roll-over is sought must have the necessary connection with Australia just before and after the CGT event happens to the asset (subsection 126-50(5) of the ITAA 1997). This requirement is satisfied because the assets to be transferred (shares in a company that is an Australian resident for the income year the CGT event happens) will have that necessary connection: category number 3 in the table in section 136-25 of the ITAA 1997.

Subsection 126-50(1) of the ITAA 1997 requires that both the originating and recipient companies must be members of the same wholly-owned group at the time that the CGT event happens to the originating company.

It is considered that only after the shares have been transferred does the recipient company 'step into the shoes of the originating company'. Accordingly, it is considered that the originating company and the recipient company are members of the same wholly-owned group of companies at the time of the disposal of the shares in the Australian companies.

It is considered that the 'legal merger' carried out between the originating company and the recipient company does not prevent them from both choosing roll-over under paragraph 126-55(1)(b) of the ITAA 1997. Note: For CGT events occurring on or after 12 December 2006 the asset for which rollover is sought must be taxable Australian property. Section 855-15 explains the categories of CGT assets that are taxable Australian property.