Issue
Can rollover relief under Subdivision 126-B of the Income Tax Assessment Act 1997 (ITAA 1997) be chosen in relation to the transfer of an asset from an Australian resident company (the originating company) to another Australian resident company (the recipient company) that is a member of the same wholly-owned group of companies if: • the transfer happened after 30 June 2003 but before 1 October 2003 being the first day of the first income year of the originating company that commences after 30 June 2003, and • the originating company became a member of a MEC group when the group formed on 1 October 2003 and had not been a member of another consolidated group or MEC group prior to that date?
Decision
Yes. Rollover relief under Subdivision 126-B of the ITAA 1997 can be chosen. As a result of amendments made to subsection 126-50(5) of the ITAA 1997 by the New Business Tax System (Consolidation) Act (No. 1) 2002 (NBTS Act), rollover is no longer available in respect of asset transfers between Australian resident companies. However, because the originating company became a member of the MEC group when the group formed on 1 October 2003 (being the first day of its first income year commencing after 30 June 2003) those amendments only apply from 1 October 2003.
Facts
The taxpayer, an Australian resident company (the originating company) acquired a small shareholding in an Australian resident listed company in the 2001 income year.
The originating company is a member of a wholly-owned group of companies with a foreign resident company as its immediate parent company.
In August 2003, the originating company transferred the shares in the listed company to another Australian resident company (the recipient company) and made a capital gain.
The shares did not form part of the trading stock of the recipient company.
The recipient company is a member of the same wholly-owned group as the originating company and both companies have the same foreign resident company as their immediate parent company.
The originating company has an income year that runs from 1 October to 30 September. The originating company became a member of a MEC group when the group formed on 1 October 2003 and was appointed as the provisional head company of that group. The originating company had not been a member of another consolidated group or MEC group prior to 1 October 2003.
The recipient company is not an exempt entity, within the definition of that term in subsection 995-1(1) of the ITAA 1997, for the income year in which the shares were transferred.
Both the originating company and the recipient company wish to choose to obtain rollover relief under Subdivision 126-B of the ITAA 1997 in relation to the transfer of the shares.
Reasons for Decision
Subdivision 126-B of the ITAA 1997 provides for a rollover in relation to certain transactions between two companies that are members of the same wholly-owned group of companies. One of the consequences of the rollover is that the capital gain made by the originating company is disregarded: subsection 126-60(1) of the ITAA 1997.
The requirements that must be met for the rollover to be available are set out in section 126-50 of the ITAA 1997. Those requirements were amended by the NBTS Act. As a result, rollover is generally no longer available under Subdivision 126-B for CGT events that happen after 30 June 2003 involving transactions between Australian resident companies: subsection 126-50(5) of the ITAA 1997; subitem 23(1) of Schedule 3 to the NBTS Act.
However, rollover continues to be available in the limited circumstances set out in subitem 23(2) of Schedule 3 to the NBTS Act for CGT events happening after 30 June 2003 if: • a consolidated group or MEC group is formed with effect from the first day of the head company's (or in the case of a MEC group, the provisional head company's) first income year commencing after 30 June 2003 but before 1 July 2004 • the originating company becomes a member of the group at the time it is formed • the originating company has not been a member of a consolidated group or MEC group prior to this time, and • the CGT event that gives rise to the gain happens after 30 June 2003 but before the day on which the group is formed.
Where these conditions are satisfied for an originating company, rollover continues to be available for CGT events happening prior to the day on which the group is formed provided the other requirements in section 126-50 of the ITAA 1997 are satisfied (subitem 23(3) of Schedule 3 to the NBTS Act).
In this case, a MEC group was formed with effect from the first day of the provisional head company's first income year commencing after 30 June 2003. As the originating company had not been a member of another consolidated group or MEC group before this time and as the CGT event happened in August 2003, the requirements in subitem 23(2) of Schedule 3 to the NBTS Act have been satisfied.
Therefore, because the other rollover requirements in section 126-50 of the ITAA 1997 are also satisfied, both the originating company and the recipient company may choose to obtain rollover relief in relation to the transfer (section 126-55 of the ITAA 1997). If the choice is made, the originating company can disregard under subsection 126-60(1) of the ITAA 1997 the capital gain that arises from the transfer of the shares to the recipient company.