Capital gains tax: rollover relief - transfer of assets to company in same wholly-owned group prior to 1 July 2003

Can rollover relief under Subdivision 126-B of the Income Tax Assessment Act 1997 (ITAA 1997) be chosen if, after 30 June 2002 but before 1 July 2003, an Australian resident company (the originating company) transfers a CGT asset to another Australian resident company (the recipient company) who is a member of the same wholly-owned group of companies and the originating company had not been a member of a consolidated group or MEC group at any time before the transfer?

Yes. Rollover relief under Subdivision 126-B of the ITAA 1997 may be chosen because the transfer occurred before 1 July 2003 and the originating company was not a member of a consolidated group or MEC group at any time before the transfer. Also, in the circumstances, the originating and recipient companies met all of the other rollover requirements.

The taxpayer, an Australian resident company (the originating company), acquired a small shareholding in an Australian resident public company in the 2000-01 income year.

The originating company is a member of a wholly-owned group of companies.

In May 2003, the originating company transferred the shares in the public company to another Australian resident company (the recipient company) who is a member of the same wholly-owned group. The originating company made a capital gain in respect of the transfer.

The shares did not form part of the trading stock of the recipient company.

Neither the originating company nor the recipient company were members of a consolidated group or MEC group prior to 1 July 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.

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. There are a number of requirements that must be met for the rollover to be available.

Subsections 126-45(1) and 126-45(2) of the ITAA 1997 require that a CGT event of a specified type happen to the originating company. CGT event A1 is one of the listed CGT events in subsection 126-45(2). In this case, CGT event A1 happened on the transfer of the shares from the originating company to the recipient company.

The rollover requirements are set out in section 126-50 of the ITAA 1997. Those requirements were amended by the New Business Tax System (Consolidation) Act (No. 1) 2002 (NBTS Act). As a result, rollover is no longer available under Subdivision 126-B in respect of asset transfers between Australian resident companies (subsection 126-50(5)). More precisely, rollover is not available for CGT events that happen after 30 June 2003 (subitem 23(1) of Schedule 3 to the NBTS Act).

Also, rollover may not be available for CGT events that happen before 1 July 2003 if, before that date, the originating company became a member of a consolidated group or MEC group when the group formed (subitem 23(2) of Schedule 3 to the NBTS Act). In that case, rollover is not available from the day on which the group was formed (subitem 23(3) of Schedule 3 to the NBTS Act).

In this case, neither the originating company nor the recipient company were members of a consolidated group or MEC group prior to 1 July 2003. Therefore, as the CGT event happened in May 2003 when the shares were transferred, it is the requirements which existed in section 126-50 of the ITAA 1997 prior to the amendments which must be met. Where a CGT asset is transferred from an Australian resident company to another Australian resident company, those requirements are: • both companies must be members of the same wholly-owned group at the time that the CGT event happens to the originating company (subsection 126-50(1)) • the CGT assets involved in the rollover must not be trading stock of the recipient company just after the CGT event (subsection 126-50(2)), and • the ordinary income and the statutory income of the recipient company must not be exempt from income tax because it is an exempt entity (subsection 126-50(4)).

In this case, the CGT event happened in May 2003 when the shares were transferred. The originating company and the recipient company were members of the same wholly-owned group at that time. The shares did not form part of the trading stock of the recipient company just after the CGT event and the recipient company was not an exempt entity. Accordingly, all of the requirements for rollover in section 126-50 of the ITAA 1997 are met.

Therefore, as the originating company has made a capital gain under CGT event A1 as a result of the transfer of the shares, 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 any capital gain that arises from the transfer of the shares to the recipient company.

Note: Rollover relief may also have been chosen if the recipient company had been a member of a consolidated group or MEC group prior to the transfer. This is because rollover is only denied for CGT events that happen prior to 30 June 2003 if the originating company has been a member of a consolidated group or MEC group prior to the transfer.