Capital gains tax: CGT event J1 - transfer of roll over asset intra-group

Will CGT event J1 happen upon the transfer of shares in a foreign resident company, that is a member of a wholly-owned group of companies, to another member of the group (foreign parent company) if: • the foreign resident company had previously acquired shares in an Australian resident company as a result of a transfer for which rollover relief under Subdivision 126-B of the Income Tax Assessment Act 1997 (ITAA 1997) was chosen • foreign parent company was the ultimate holding company of the group at the time of the earlier Subdivision 126-B rollover, and • the foreign resident company and foreign parent company have been members of the same wholly-owned group at all times since before the Subdivision 126-B rollover?

No. CGT event J1 will not happen upon the transfer of the shares in the foreign resident company to foreign parent company as the foreign resident company has not ceased to be a wholly-owned subsidiary of the company, being foreign parent company, that was the ultimate holding company of the group at the time of the earlier rollover.

Prior to a group restructure, the corporate structure of the group was represented as:

All companies in the group structure are foreign resident companies except for A Company who is an Australian resident company.

Under the group restructure, Z Company transferred its shares in Recipient Company to Foreign Parent Company.

Recipient Company had earlier acquired its shares in A Company from Z Company under a transfer for which rollover relief under Subdivision 126-B of the ITAA 1997 was chosen. Foreign Parent Company has been the ultimate holding company of the group since before the time of that earlier rollover.

CGT event A1 in section 104-10 of the ITAA 1997 will happen upon Z Company transferring its shares in Recipient Company to Foreign Parent Company. Because Z Company is a foreign resident company, it will only make a capital gain as a result of the event if the shares have the necessary connection with Australia (section 136-10 of the ITAA 1997). The shares in Recipient Company do not have the necessary connection with Australia under any of the categories in the table in section 136-25 of the ITAA 1997.

However, as Recipient Company acquired its shares in A Company from Z Company under an earlier transfer for which rollover relief under Subdivision 126-B of the ITAA 1997 was chosen, it is necessary to consider whether the transfer of the shares in Recipient Company from Z Company to Foreign Parent Company will result in CGT event J1 happening: subsection 104-175(1) of the ITAA 1997.

CGT event J1 happens if rollover relief under Subdivision 126-B of the ITAA 1997 is chosen in relation to an earlier transfer of a CGT asset and the company that received the asset under the rollover subsequently ceases to be a wholly-owned subsidiary of the company that was the ultimate holding company of the group at the time of the rollover. If the rollover under Subdivision 126-B was the last in a series of rollovers under that Subdivision, CGT event J1 instead happens if the company ceases to be a wholly-owned subsidiary of the company that was the ultimate holding company of the group at the time of the first of those rollovers.

If CGT event J1 happens, the recipient company will make a capital gain if the market value of the rollover asset at the break-up time is more than its cost base. The company will make a capital loss if the market value of the rollover asset at the break-up time is less than its reduced cost base.

In this case, there has been only one earlier transfer for which rollover relief under Subdivision 126-B was chosen, being the transfer of shares in A Company from Z Company to Recipient Company. At the time of that rollover, Foreign Parent Company was the ultimate holding company of the group.

CGT event J1 will not happen to Recipient Company upon its shares being transferred to Foreign Parent Company as Recipient Company has not ceased to be a wholly-owned subsidiary of the company, being Foreign Parent Company, which was the ultimate holding company of the group at the time of the earlier rollover.

Accordingly, CGT event J1 will not happen when the shares in Recipient Company are transferred to the ultimate holding company of the group.