1 Will the Trustee for the Estate be eligible to choose the capital gains tax (CGT) roll-over in Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) when transferring its shares in Company A to a wholly owned company (Interposed Company 1)?
Yes. Question 2 Will the transfer of shares in Company A to Interposed Company 1, utilising the roll-over in Subdivision 122-A of the ITAA 1997, restart the holding period for the purposes of the 45 day rule in former Division 1A of Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936) when determining Interposed Company 1's ability to utilise the franking credits from any dividends declared by Company A? Answer Yes. Question 3 Will the dividends received by Interposed Company 1 and Company B from Company A be base rate entity passive income under section 23AB of the Income Tax Rates Act 1986 (ITRA 1986) for the purposes of determining whether Interposed Company 1 is a base rate entity under section 23AA of the ITRA 1986 and is subject to the reduced corporate tax rate under section 23 of the ITRA 1986? Answer No. Question 4
Will the components of the Liquidation Distribution from Company A that will be received by Interposed Company 1 and Company B that relate to the return of share capital and pre-CGT capital gains of Company A be consideration for the cancellation of the Company A shares under CGT Event C2 in section 104-25 of the ITAA 1997 and not dividends under section 47 of the ITAA 1936? Answer Yes. Question 5 Will Interposed Company 1 be entitled to claim a capital loss on the cancellation of the shares in Company A under CGT Event C2 in section 104-25 of the ITAA 1997? Answer Yes, Interposed Company 1 can claim a capital loss on the cancellation of the shares in Company A under CGT Event C2 if the full proceeds of the Liquidators Distribution are less than the reduced cost base for the shares. Question 6 Will any capital gain or loss made by Company B in relation to the cancellation of its shares in Company A under CGT event C2 in section 104-25 of the ITAA 1997 be disregarded as the shares are pre-CGT? Answer Yes. Question 7 Will a capital gain be made by Company B on the cancellation of its pre-CGT shares in Company A under CGT Event K6 in section 104-230 of the ITAA 1997? Answer No.
Question 8 Will the transfer of shares in Company B to Interposed Company 2 and Interposed Company 3, utilising the CGT roll-over in Subdivision 122-A ITAA 1997, restart the holding period for the purposes of the 45 day rule in former Division 1A of Part IIIAA of the ITAA 1936 when determining the ability of Interposed Company 2 and Interposed Company 3 to utilise franking credits on dividends declared by Company B? Answer Yes. Question 9 Will the dividends received by Interposed Company 2 and Interposed Company 3 from Company B be base rate entity passive income under section 23AB of the ITRA 1986 for the purposes of determining whether Interposed Company 2 and Interposed Company 3 are base rate entities under section 23AA of the ITRA 1986 and subject to the reduced corporate tax rate under section 23 of the ITRA 1986? Answer No. Question 10
Will the components of the Liquidation Distribution that will be received by the Trustee for the Estate No 2, Interposed Company 2, Interposed Company 3, Individual A, Individual B and Individual C that relate to the return of share capital and pre-CGT capital gains and profits be treated as consideration for cancellation of their shares in Company B under CGT event C2 in section 104-25 of the ITAA 1997 and not dividends under section 47 of the ITAA 1936? Answer Yes. Question 11 Will Interposed Company 2 and Interposed Company 3 be entitled to claim a capital loss on the cancellation of their shares in Company B under CGT event C2 in section 104-25 of the ITAA 1997? Answer Yes, Interposed Company 2 and Interposed Company 3 can claim a capital loss on the cancellation of the shares in Company B under CGT Event C2 if the full proceeds of the Liquidators Distribution are less than the reduced cost base for the shares. Question 12 Will the Estate No 2 be entitled to claim a capital loss on the cancellation of its shares in Company B under CGT event C2 in section 104-25 of the ITAA 1997? Answer
Yes, the Estate No 2 can claim a capital loss on the cancellation of the shares in Company B under CGT Event C2 if the full proceeds of the Liquidators Distribution are less than the reduced cost base for the shares. Question 13 Will any capital gains or capital losses made by Individual A and Individual B in relation to the cancellation of their shares in Company B under CGT event C2 in section 104-25 of the ITAA 1997 on the liquidation of Company B be disregarded because the shares are pre-CGT shares? Answer Yes. Question 14 Will a capital gain be made by Individual A and Individual B on the cancellation of their pre-CGT shares in Company B under CGT event K6 in section 104-230 of the ITAA 1997? Answer No. Question 15 Will a capital gain be made by Individual C on the cancellation of their share in Company B? Answer No. Question 16 Will the Proposed Restructure, or part of the Proposed Restructure, described in this ruling constitute a scheme to which Part IVA of the ITAA 1936 applies within the meaning of section 177D of the ITAA 1936? Answer No. Question 17 Will section 177E of the ITAA 1936 apply to the Proposed Restructure or part of the Proposed Restructure? Answer No.
Question 18 Will section 177EA of the ITAA 1936 apply to the Proposed Restructure or part of the Proposed Restructure? Answer No. This ruling applies for the following period: 1 July 20XX to 30 June 20YY The scheme commenced on: 1 July 20XX
: Background: 1. The trustees of the Estate (Estate) are Australian residents. 2. The trustees of the Estate No 2 are Individual A and Individual B. 3. Individual A, Individual B and Individual C are also the beneficiaries of the Estate No 2. 4. Individual A and Individual B are Australian tax residents. 5. Individual C has been a resident of a foreign country for a number of years. 6. Company A and Company B are private companies ultimately owned by members of the Individuals family, with the majority shareholders being the Estate and the Estate No 2. 7. The shareholders of Company A and Company B and the trustees and beneficiaries of the Estate and the Estate No 2 are seeking to wind up both companies as part of finalising the affairs of the estates and simplifying the affairs of the family group. Company A 8. Company A was registered as a proprietary company in Australia pre-20 September 1985. 9. Company A currently has X ordinary shares on issue: • X shares are currently held by the Estate. • X shares are owned by Company B.
10. The shares held by the Estate were pre-CGT shares prior to original owner's death. 11. The shares owned by Company B are pre-CGT shares. 12. The ordinary shares in Company A carry the right to vote on any matters concerning the company and there are no arrangements by virtue of which any person is in a position, or may become in a position, to affect that right. 13. Company A holds cash and investments in listed shares and units with unrealised gains and losses. These are both pre-CGT and post-CGT investments. 14. Company A also has some realised pre-CGT gains accounted for in a separate retained earnings reserve. Company B 15. Company B was registered as a proprietary company in Australia pre-20 September 1985. 16. Company B currently has X ordinary shares on issue: • X shares are held by the Estate No 2; • 1 share is held by Individual A; • 1 share is held by Individual B; and • 1 share is held by Individual C.
17. The ordinary shares in Company B carry the right to vote on any matters concerning the company and there are no arrangements by virtue of which any person is in a position, or may become in a position, to affect that right. 18. The X shares held by Estate No 2 were pre-CGT assets of the original owner. 19. The shares that Individual A, Individual B and Individual C hold in Company B are all pre-CGT assets. 20. Individual C's share was a pre-CGT asset prior to the time they became a resident of the foreign country. 21. In addition to the shares it holds in Company A, Company B holds cash and post-CGT investments in listed shares and units with unrealised gains and losses. 22. An illustration of the current structure of the group was provided. Proposed Restructure 23. Owing to the interconnectedness of the group, the family is seeking to unwind and divide the group, so that: (a) the Estate will hold its Company A shares in a new, wholly owned company, which will receive its proportionate share of the proceeds from the sale of Company A's investments and the liquidation of Company A;
(b) Company B will continue to hold its Company A shares until the liquidation of Company A; (c) Individual A and Individual B will each inherit and hold 1/3 of the Company B shares from the Estate No 2 in new, wholly owned companies, which will receive their proportionate shares of the proceeds from the sale of the group's investments and the liquidation of Company B (excluding the share of proceeds relating to their single pre-CGT shares, which will be received directly); (d) the Estate No 2 will continue to hold 1/3 of the Company B shares until the liquidation of Company B; (e) Individual C will not inherit Company B shares and/or interpose a new, wholly owned company, as they would prefer to take their share of the Estate No 2 (including proceeds from the sale of Company B's investments and the ultimate liquidation) in cash. Individual C will directly receive the proceeds relating to Individual C's single pre-CGT Company B share. 24. This is proposed to be achieved by undertaking the following steps (the Proposed Restructure):
(a) interposing a company (Interposed Company 1) between the Estate and Company A utilising the CGT roll-over in Subdivision 122-A of the ITAA 1997 in the following steps; a. Interposed Company 1 will be incorporated in Australia and will therefore be an Australian resident company. b. The Estate will dispose of the shares it holds in Company A to Interposed Company 1 in exchange for 100% of the ordinary shares in Interposed Company 1. i. These ordinary shares in Interposed Company 1 will not be redeemable shares. c. The Estate will choose to roll-over the capital gain from the disposal of its Company A shares in accordance with Subdivision 122-A of the ITAA 1997. (b) Company A will sell all its investments; (c) Company A will declare and pay franked dividends and unfranked dividends sourced from retained earnings (leaving realised pre-CGT capital gains) to Interposed Company 1 and Company B; (d) Company A will be wound up and declare a final distribution (Liquidation Distribution); a. Interposed Company 1 will receive a Liquidation Distribution in respect of the cancellation of the shares that are held in Company A;
b. Company B will receive a Liquidation Distribution in respect of the cancellation of the shares that it holds in Company A. (e) Company A will be de-registered. (f) the Estate No 2 will transfer one third of its shares in Company B to Individual A in satisfaction of Individual A's rights in the Estate No 2; (g) interposing a company (Interposed Company B) between Company B and Individual A utilising the CGT roll-over in Subdivision 122-A of the ITAA 1997 in the following steps; a. Interposed Company B will be incorporated in Australia and will therefore be an Australian resident company. b. Individual A will dispose of the shares in Company B that Individual A receives from the Estate No 2 to Interposed Company 2 in exchange for 100% of the ordinary shares in Interposed Company 2. i. These ordinary shares in Interposed Company B will not be redeemable shares. c. Individual A will choose to roll-over the capital gain from the disposal of the Company B shares in accordance with Subdivision 122-A of the ITAA 1997.
(h) the Estate No 2 will transfer one third of its shares in Company B to Individual B in satisfaction of Individual B's rights in the Estate No 2; (i) interposing a company (Interposed Company 3) between Company B and Individual B utilising the CGT roll-over in Subdivision 122-A of the ITAA 1997 in the following steps; a. Interposed Company 3 will be incorporated in Australia and will therefore be an Australian resident company. b. Individual B will dispose of the shares in Company B that Individual B receives from the Estate No 2 to Interposed Company 3 in exchange for 100% of the ordinary shares in Interposed Company 3. i. these ordinary shares in Interposed Company 3 will not be redeemable shares. c. Individual B will choose to roll-over the capital gain from the disposal of the Company B shares in accordance with Subdivision 122-A of the ITAA 1997. (j) Company B will sell all its investments; (k) Company B will declare and pay franked dividends and unfranked dividends from retained earnings (leaving realised pre-CGT capital gains); (l) Company B will be wound up and declare a final distribution (Liquidation Distribution);
a. Individual A, Individual B and Individual C will each receive a proportion of the Liquidation Distribution in respect of the cancellation of the 1 share that they each hold in Company B; b. Interposed Company B and Interposed Company 3 will each receive a proportion of the Liquidation Distribution in respect of the cancellation of the shares that they each hold in Company B; c. The Estate No 2 will receive a proportion of the Liquidation Distribution in respect of the cancellation of the shares it holds in Company B; d. The cash proceeds received by the Estate No 2 from dividends from Company B and the Liquidation Distribution from Company B in respect of the cancellation of the shares it holds, net of taxes, will ultimately be received by Individual C in satisfaction of Individual C's right in the Estate No 2. (m) Company B will be deregistered. 25. An illustration of the proposed structure prior to the winding up of Company A and Company B was provided.
26. The Proposed Restructure is to give effect to the wishes of the family to finalise the affairs of the previous generation and to separate the financial affairs of the current generation. The members of the current generation each have different goals and personal circumstances, and wish to control their own investment decisions rather than continue to share control and investments with other family members. Assumptions 27. The market value of the shares in Company A that are transferred by the Estate to Interposed Company 1 will be substantially the same as the market value of the shares received in Interposed Company 1. 28. Except as specified in the facts (regarding Individual C), the relevant entities will be Australian residents for the entire period to which this ruling applies. 29. Individual A and Individual B will be eligible to choose to obtain a roll-over under Subdivision 122-A of the ITAA 1997 in relation to the transfer of their shares in Company B to Interposed Company 2 and Interposed Company 3 respectively, and will make that choice.
30. Company A and Company B will be deregistered within 18 months of their respective Liquidation Distributions. 31. The Liquidation Distributions of Company A and Company B will comprise only paid up share capital and profits or gains on pre-CGT assets. 32. Company A and Company B have and will keep adequate records evidencing the amount of capital gains derived from pre-CGT assets. 33. The CGT assets referred to in this ruling as pre-CGT assets, are pre-CGT assets within the meaning of section 149-10 of the ITAA 1997. 34. Interposed Company 1 will not be exempt from income tax due to it being an exempt entity. 35. There are no further steps in the proposed arrangement and there will be no further rollovers or transactions or loans that would change the actual or beneficial ownership of the membership interests in Interposed Company 1, Interposed Company B or Interposed Company 3 (the Interposed Companies).
Issue 1 Question 1 Will the Trustee for the Estate be eligible to choose the CGT roll-over in Subdivision 122-A of the ITAA 1997 when transferring its shares in Company A to a wholly owned company (Interposed Company 1)? Summary The Trustee for the Estate will be eligible to choose the CGT roll-over in Subdivision 122-A of the ITAA 1997 when transferring its shares in Company A to Interposed Company 1. Detailed reasoning Subdivision 122-A of the ITAA 1997 Capital gains tax roll-over relief 1. Generally, section 122-15 in Subdivision 122-A of the ITAA 1997 allows for the roll-over of a capital gain or loss when an individual or trustee disposes of a CGT asset to a company if the conditions in sections 122-20 and 122-35 are met. Disposal or creation of assets - wholly owned company 2. In order for an individual or trustee to obtain roll-over relief under Subdivision 122-A of the ITAA 1997, the CGT event which triggers the capital gain or loss must be one listed in the table of section 122-15. CGT event A1, when you dispose of a CGT asset to a company, is one of the trigger events listed in the table.
3. Under subsection 104-10(1) of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. Under subsection 104-10(2) you dispose of a CGT asset if a change of ownership occurs from you to another entity. Shares in a company are CGT assets (section 108-5 of the ITAA 1997). Application to your circumstances 4. The transfer of the shares in Company A from the Estate to Interposed Company 1, will trigger CGT event A1 pursuant to section 104-10 of the ITAA 1997 as a change of ownership will occur. 5. Therefore, section 122-15 of the ITAA 1997 will be satisfied. What is received for the trigger event 6. Under subsection 122-20(1) of the ITAA 1997, the consideration received for the disposal of the shares must be only shares in the wholly owned company or, in addition to shares in the wholly owned company, the company undertaking to discharge any liabilities in respect of the shares. 7. In addition, subsection 122-20(2) of the ITAA 1997 requires that the shares received in the wholly owned company cannot be redeemable shares.
8. Subsection 122-20(3) of the ITAA 1997 provides that the market value of the shares received for the trigger event happening must be substantially the same as the market value of the shares disposed of, less any liabilities the company undertakes to discharge. Application to your circumstances 9. The consideration the Estate will receive for the disposal of its Company A shares will be shares in Interposed Company 1. The shares in Interposed Company 1 will not be redeemable shares. 10. The market value of the shares in Company A disposed of by the Estate to Interposed Company 1 will be substantially the same as the market value of the shares it receives in Interposed Company 1. 11. Thus, section 122-20 of the ITAA 1997 will be satisfied. Other requirements that must be satisfied 12. Section 122-25 of the ITAA 1997 lists further requirements that must also be satisfied for roll-over relief to be available under subdivision 122-A, relevantly being that:
(a) the individual or trustee must own all the shares in the company just after the time of the disposal of their shares to the company - and they must own the shares in the same capacity as they owned the assets that the company now owns (subsection 122-25(1)); (b) the disposal of the asset is not one listed in the table in subsection 122-25(2); (c) the ordinary and statutory income of the recipient company must not be exempt from income tax because it is an exempt entity for the income year the roll-over occurs (subsection 122-25(5)); and (d) the company and individual are Australian residents at the time of disposal (paragraph 122-25(6)(a)), or for a trustee, a resident trust for CGT purposes (122-25(7)(a)). Application to your circumstances 13. The Estate will own 100% of the shares in Interposed Company 1 just after the share transfer. The Trustee owns those shares in the same capacity, i.e. as a trustee, as they owned the shares in Company A. Therefore, the requirement in subsection 122-25(1) of the ITAA 1997 will be satisfied.
14. None of the exceptions in the table in subsection 122-25(2) of the ITAA 1997, which lists certain assets for which the roll-over is not available, will apply to these circumstances. 15. Subsection 122-25(5) of the ITAA 1997 will be satisfied as the ordinary or statutory income of Interposed Company 1 will not be exempt from income tax due to it being an exempt entity in the year the roll-over occurs. 16. The residency requirement under paragraph 122-25(7)(a) of the ITAA 1997 will be satisfied as the individual trustees of the Estate are Australian residents, and therefore, the Estate is a resident trust for CGT purposes (as defined in subsection 995-1(1) of the ITAA 1997) and Interposed Company 1 will be an Australian resident at the time of the share transfer. Company undertakes to discharge a liability 17. Section 122-35 of the ITAA 1997 provides additional requirements if a CGT asset has been disposed of and the company has undertaken to discharge a liability in respect of it. Application to your circumstances
18. Section 122-35 of the ITAA 1997 will not apply to the proposed arrangement as the arrangement does not include a discharge of liability in relation to the disposal of the Company A shares from the Estate to Interposed Company 1. Conclusion 19. The transfer of the shares in Company A from the Estate to Interposed Company 1 will enable the Estate to choose to obtain a roll-over of any capital gain or loss as specified in Subdivision 122-A of the ITAA 1997. The choice to obtain roll-over relief under Subdivision 122-A does not require a specific election. The way in which the income tax return is prepared is sufficient evidence of making the choice, pursuant to subsection 103-25(2). Question 2 & Question 8 Will the transfer of shares in Company A to Interposed Company 1, utilising the roll-over in Subdivision 122-A of the ITAA 1997, restart the holding period for the purposes of the 45 day rule in former Division 1A of Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936) when determining Interposed Company 1's ability to utilise the franking credits from any dividends declared by Company A?
Will the transfer of shares in Company B to Interposed Company 2 and Interposed Company 3, utilising the CGT roll-over in Subdivision 122-A ITAA 1997, restart the holding period for the purposes of the 45 day rule in former Division 1A of Part IIIAA of the ITAA 1936 when determining the ability of Interposed Company 2 and Interposed Company 3 to utilise franking credits on dividends declared by Company B? Summary Yes. Interposing a company and utilising the CGT roll-over in Subdivision 122-A of the ITAA 1997 will restart the holding period for the purposes of the 45 day rule in former Division 1A of Part IIIAA of the ITAA 1936 when determining the ability of Interposed Companies to utilise the franking credits. Detailed reasoning 20. Section 207-145 of the ITAA 1997 relevantly states: (1) If a *franked distribution is made to an entity in one or more of the following circumstances: (a) the entity is not a qualified person in relation to the distribution for the purposes of Division 1A of former Part IIIA of the Income Tax Assessment Act 1936 ; ... then for the purposes of this Act:
(e) the amount of the franking credit on the distribution is not included in the assessable income of the entity under section 207-20 or 207-35; and (f) the entity is not entitled to a *tax offset under this Division because of the distribution; and ... 21. Former Division 1A of Part IIIA of the ITAA 1936 was repealed effective 1 July 2002. However, Taxation Determination TD 2007/11 Income tax: imputation: franked distributions: qualified persons: does an entity have to be a qualified person within the meaning of Division 1A of former Part IIIAA of the Income Tax Assessment Act 1936 to avoid the application of paragraphs 207-145(1)(a) and 207-150(1)(a) of the Income Tax Assessment Act 1997 in respect of a franked distribution made directly or indirectly to the entity on or after 1 July 2002? states that it is necessary to continue to have regard to these rules as in force at 30 June 2002 in determining whether an entity is a 'qualified person' for the purposes of section 207-145 of the ITAA 1997. 22. Broadly, former section 160APHO(1) provides that a taxpayer who has held shares [1]
on which dividends have been paid will be a qualified person in relation to the dividend if: (a) the taxpayer held the shares (or interest in the shares) at risk for the primary qualification period (period beginning on the day after the day on which the taxpayer acquired the shares and ending on the 45th day after the day on which the shares or interest became ex dividend (or the 90th day for preference shares); and (b) for taxpayers who were under an obligation to make a related payment in relation to a dividend, the taxpayer held the relevant shares (or interest in the shares) at risk for more than 45 days (or 90 days for preference shares) during the secondary qualification period (period commencing on the 45th day before and ending on the 45th day after the day on which the shares or interest become ex-dividend (the 90th day in the case of preference shares). 23. The Explanatory Memorandum (Senate) accompanying the Taxation Laws Amendment Bill (No. 2) 1999 (EM), the Bill to insert Division 1A into Part IIIAA of the ITAA 1936, states at 4.11:
Broadly speaking, to be a qualified person in relation to a dividend, a taxpayer must satisfy both the holding period rule (or certain alternative rules) and the related payments rule. 24. The holding period rule applies where the shares or interests in shares were acquired on or after 1 July 1997 (unless the taxpayer had become contractually obliged to acquire the shares before 7.30pm AEST 13 May 1997) or after 3.00pm AEST 31 December 1997, if acquired by a trust (excluding a widely held public share trading trust, unless established after 3.00pm AEST, 31 December 1997). [2] 25. Although former section 160APHO of the ITAA 1936 is triggered by the dividend payment, the qualifying person status is determined by taxpayer attributes in relation to the shares, these attributes being how long the shares have been held, and whether they have been held 'at risk' for the required period. 26. The EM explains that:
4.19 The holding period rule is a once-and-for-all test. It sets an initial threshold which only has to be crossed once. Therefore, once a taxpayer is a qualified person in relation to a dividend or distribution by virtue of the fact that the taxpayer has held the relevant shares or interest for more than 45 days, the taxpayer is taken to be a qualified person for the purposes of the rule in relation to future dividends or distributions paid on those shares or interest. 4.20 For example, if a taxpayer acquires a share on 1 September 1997 and, after holding it continuously at-risk, puts in place a risk diminution arrangement on 1 November 1997, the taxpayer will continue to be a qualified person in relation to the dividends paid on the shares for the purposes of the holding period rule (and therefore entitled to the franking credit and section 46 intercorporate dividend rebate on the dividends) because the taxpayer has held the shares for more than 45 days prior to putting the arrangement in place.
4.21 The related payments rule, however, is not a once-and-for-all test. That is, even if a taxpayer is a qualified person in relation to a dividend or distribution by virtue of the fact that the taxpayer has held the relevant shares or interest for more than 45 (or 90) days, the taxpayer is not taken to be a qualified person in relation to future dividends or distributions paid on those shares or interest if the taxpayer or associate is under an obligation to make a related payment in relation to the future dividends or distributions and has not held the shares at risk for the requisite period during the relevant qualification period (ie. if the taxpayer triggers the related payments rule). 27. Paragraph 4.29 of the EM explains that for purposes of the holding period rule and related payments rule, generally a taxpayer is taken to hold the shares from the time the taxpayer acquired the shares, until the time the taxpayer disposes of the shares.
28. Former section 160APHH of the ITAA 1936 provides some special rules relating to the date of acquisition or disposal for imputation purposes, outlining circumstances where a taxpayer may be taken to acquire or dispose of shares at a time other than the actual time of acquisition or disposal. 29. For acquisitions and disposals at a fixed price under an unconditional contract, the time of acquisition and disposal is the time of making the contract (160APHH(1)). 30. However, neither former 160APHH of the ITAA 1936 nor any other provision within former Division 1A of Part IIIAA deems the acquisition date of shares acquired by the company, where the transferor has chosen to obtain a roll-over under a section 122-A, to be other than what would be the actual day of acquisition for the purposes of the holding period rule. [3] Application to your circumstances 31. As there is no antecedent contract, Interposed Company 1 will acquire the Company A shares and commence holding the shares, for the purpose of applying the holding period rule, when the shares are legally transferred from the Estate to Interposed Company 1.
32. Similarly, as there is no antecedent contract, Interposed Company 2 and Interposed Company 3 will acquire the Company B shares and commence holding those shares for the purpose of applying the holding period rule, when the shares are legally transferred from Individual A to Interposed Company 2 and from Individual B to Interposed Company 3. 33. Therefore, the transfer of shares in Company A and Company B to the Interposed Companies, utilising the roll-over in Subdivision 122-A of the ITAA 1997, will restart the holding period for the purposes of the holding period (45 day rule) in former Division 1A of Part IIIAA of the ITAA 1936 when determining the Interposed Companies ability to utilise the franking credits from any dividends declared by Company A and Company B. Question 3 & Question 9 Will the dividends received by Interposed Company 1 and Company B from Company A be base rate entity passive income under section 23AB of the Income Tax Rates Act 1986 (ITRA 1986) for the purposes of determining whether Interposed Company 1 is a base rate entity under section 23AA of the ITRA 1986 and is subject to the reduced corporate tax rate under section 23 of the ITRA 1986?
Will the dividends received by Interposed Company 2 and Interposed Company 3 from Company B be base rate entity passive income under section 23AB of the ITRA 1986 for the purposes of determining whether Interposed Company 2 and Interposed Company 3 are base rate entities under section 23AA of the ITRA 1986 and subject to the reduced corporate tax rate under section 23 of the ITRA 1986? Summary No. The dividends received by Interposed Company 1 and Company B from Company A and by Interposed Company 2 and Interposed Company 3 from Company B are not base rate entity passive income under section 23AB of the Income Tax Rates Act 1986 (ITRA 1986) for the purposes of determining whether they are a base rate entity under section 23AA and subject to the reduced corporate tax rate under section 23. Detailed reasoning 34. Section 23 of the ITRA 1986 provides the rates of tax payable by a company, other than a company in the capacity of a trustee. 35. Paragraph 23(2)(a) of the ITRA 1986 provides that if a company is a base rate entity for a year of income, the applicable tax rate from 1 July 2021 in respect of its taxable income is 25%.
36. Otherwise, paragraph 23(2)(b) of the ITRA 1986 states the rate of tax payable is 30%. Base rate entity 37. Section 23AA of the ITRA 1986 defines the term base rate entity. It provides that an entity is a base rate entity for a year of income if: (a) no more than 80% of its assessable income for the year of income is base rate entity passive income; and (b) its aggregated turnover for the year of income, worked out as at the end of that year, is less than $50 million (applicable for the 2019 income year and later income years). 38. Therefore, eligibility for the 25% corporate tax rate depends on an entity's base rate entity passive income (BREPI) and aggregated turnover in an income year. Base rate entity passive income 39. Subsection 23AB(1) of the ITRA 1986 defines BREPI as assessable income that is any of the following: (a) a distribution (within the meaning of the ITAA 1997) by a corporate tax entity (within the meaning of the ITAA 1997), other than a non-portfolio dividend (within the meaning of section 317 of the ITAA 1936); (b) an amount of franking credit (within the meaning of the ITAA 1997) on such a distribution;
(c) a non-share dividend (within the meaning of the ITAA 1997) by a company; (d) interest (or a payment in the nature of interest), royalties and rent; (e) a gain on a qualifying security (within the meaning of Division 16E of Part III of the ITAA 1936); (f) a net capital gain (within the meaning of the ITAA 1997); or (g) an amount included in the assessable income of a partner in a partnership or of a beneficiary of a trust, to the extent that the amount is referable directly or indirectly to another amount that is BREPI. 40. The Revised Explanatory Memorandum to the Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2017 states: 1.10 In relation to paragraph 23AB(1)(a), a distribution made by a corporate tax entity includes dividends, and amounts that are taken to be dividends under the income tax law, made by a company (item 1 of the table in subsection 960-120(1) of the ITAA 1997).
1.11 However, a dividend that is a non-portfolio dividend (within the meaning of section 317 of the ITAA 1936) is not base rate entity passive income. A non-portfolio dividend is, broadly, a dividend paid to a company where that company has a voting interest amounting to at least 10 per cent of the voting power in the company paying that dividend. Consequently, dividends derived, for example, by a holding company which are made by a wholly-owned subsidiary company will not be base rate entity passive income of the holding company. 41. Non-portfolio dividends are defined in section 317 of the ITAA 1936 as: ... a dividend (other than an eligible finance share dividend or a widely distributed finance share dividend) paid to a company where that company has a voting interest, within the meaning of section 334A, amounting to at least 10% of the voting power, within the meaning of that section, in the company paying the dividend. 42. Subsection 334A(1) of the ITAA 1936 states that a company is taken to have a voting interest in another company if:
(a) the first-mentioned company is the beneficial owner of shares (other than eligible finance shares or widely distributed finance shares) in the other company that carry the right to exercise any of the voting power in the other company; and (b) there is no arrangement in force at the relevant time by virtue of which any person is in a position, or may become in a position, to affect that right; and the extent of the voting interest is taken to be the total number of votes that, by virtue of that right, can be cast on a poll at, or arising out of, a general meeting of the other company as regards all questions that could be submitted to such a poll. Application to your circumstances 43. As Interposed Company 1 will hold more than 10% of the ordinary shares in Company A and Company B will hold more than 10% of the ordinary shares in Company A, which carry the right to vote, paragraph 334A(1)(a) of the ITAA 1936 will be satisfied. In addition, paragraph 334A(1)(b) will also be satisfied as no person is in a position or may become in a position to affect the right. The extent of the voting interest will be the stated percentages.
44. The dividends paid by Company A would be non-portfolio dividends because Interposed Company 1 and Company B, each hold greater than 10% of the voting power in Company A and the dividend exceptions are not relevant. 45. Therefore, the non-portfolio dividends paid by Company A to Interposed Company 1 will not be base rate passive income of Interposed Company 1 under paragraph 23AB(1)(a) of the ITRA 1986. 46. As Interposed Companies 2 and 3 will each hold more than 10% of the ordinary shares in Company B, which carry the right to vote, paragraph 334A(1)(a) will be satisfied. In addition, paragraph 334A(1)(b) will also be satisfied as no person is in a position or may become in a position to affect the right. The extent of the voting interest is the stated percentage. 47. The dividends that will be paid by Company B to Interposed Company 2 and Interposed Company 3 would be non-portfolio dividends because Interposed Company 2 and Interposed Company 3 hold greater than 10% of the voting power in Company B and the dividend exceptions would not be relevant.
48. Therefore, the dividends that will be paid by Company B to Interposed Company 2 and Interposed Company 3 will not be BREPI under paragraph 23AB(1)(a) of the ITRA 1986. 49. Therefore, for the purposes of determining whether the relevant entities are base rate entities under section 23AA of the ITRA 1986 and eligible for the reduced corporate tax rate under section 23 of the ITRA, the dividends from Company A and Company B will not be included in the calculation of base rate entity passive income when determining if they satisfy the eligibility criteria in subsection 23AA(a) of the ITRA 1986. Question 4 & Question 10 Will the components of the Liquidation Distribution from Company A that will be received by Interposed Company 1 and Company B that relate to the return of share capital and pre-CGT capital gains of Company A be consideration for the cancellation of the Company A shares under CGT Event C2 in section 104-25 of the ITAA 1997 and not dividends under section 47 of the ITAA 1936?
Will the components of the Liquidation Distribution that will be received by the Trustee for the Estate No 2, Interposed Company 2, Interposed Company 3, Individual A, Individual B and Individual C (together the shareholders of Company B) that relate to the return of share capital and pre-CGT capital gains and profits be treated as consideration for cancellation of their shares in Company B under CGT event C2 in section 104-25 of the ITAA 1997 and not dividends under section 47 of the ITAA 1936? Summary The Liquidation Distribution of Company A and Company B will comprise only paid up share capital and profits or gains on pre-CGT assets, therefore: • the Liquidation Distribution received by Interposed Company 1 and Company B are not dividends under section 47(1) of the ITAA 1936; • the Liquidation Distribution received by the Estate No 2, Interposed Company 2, Interposed Company 3, Individual A, Individual B and Individual C (the shareholders of Company B) are not dividends under section 47(1) of the ITAA 1936.
The Liquidation Distribution received by Interposed Company 1 and Company B is consideration for the cancellation of the shares in Company A (the capital proceeds) under CGT Event C2 in section of the 104-25 ITAA 1997. The Liquidation Distribution received by the shareholders of Company B is consideration for the cancellation of the shares in Company B (the capital proceeds) under CGT Event C2 in section 104-25 of the ITAA 1997. Detailed reasoning Dividends under section 47 of the ITAA 1936 50. At common law, a distribution to a shareholder by a liquidator is capital, not income, in the hands of the shareholder since it is a realisation of the shareholder's interest in the company which is wound up: FC of T (NSW) v Stevenson (1937) 4 ATD 415; (1937) 59 CLR 80; FC of T v Blakely (1951) 9 ATD 239 at 245, 247; (1951) 82 CLR 388 at 402, 407; FC of T v Brewing Investments Ltd [2000] FCA 920; 2000 ATC 4431 per Hill J at 4437. 51. In Commissioner of Taxation (NSW) v Stevenson (1937) 59 CLR 80, Rich, Dixon and McTiernan JJ said at 98-99:
...But an entirely different set of considerations arises when accumulated profits exist in a company which winds up. In the liquidation the excess of its assets over its external liabilities is distributed among the shareholders in extinguishment of their shares. The shareholders, in other words, as contributories receive nothing but the ultimate capital value of the intangible property constituted by the shares. The res itself ceases to exist. The profits are not detached, released or liberated, leaving the share intact as a piece of property. There is no dividend upon the share. There is no distribution of profits because they are profits. The shareholder simply receives his proper proportion of a total net fund without distinction in respect of the source of its components and he receives it in replacement for his share. [emphasis added] 52. The relevant provision to consider in these circumstances is section 47 of the ITAA 1936 which deems certain amounts paid to shareholders of a company to be dividends paid to shareholders out of the profits derived by the company. 53. Subsection 47(1) of the ITAA 1936 provides that:
Distributions to shareholders of a company by a liquidator in the course of winding-up the company, to the extent to which they represent income derived by the company (whether before or during liquidation) other than income which has been properly applied to replace a loss of paid-up share capital, shall, for the purposes of this Act, be deemed to be dividends paid to the shareholders by the company out of profits derived by it. 54. The use of the term 'income' in the context of subsection 47(1) of the ITAA 1936 has been interpreted in Gibb v FCT (1966) 118 CLR 628 as meaning income according to ordinary concepts rather than 'assessable income'. In response to the uncertainty surrounding the term 'income', subsection 47(1A) of the ITAA 1936 was introduced to extend the definition of 'income' in subsection (1) and states: A reference in subsection (1) to income derived by a company includes a reference to: (a) an amount (except a net capital gain) included in the company's assessable income for a year of income; or
(b) a net capital gain that would be included in the company's assessable income for a year of income if the Income Tax Assessment Act 1997 required a net capital gain to be worked out as follows: Method statement Step 1. Work out each capital gain (except a capital gain that is disregarded) that the company made during that year of income. Do so without indexing any amount used to work out the cost base of a CGT asset. Step 2. Total the capital gain or gains worked out under Step 1. The result is the net capital gain for that year of income. 55. Liquidator distributions sourced from assets acquired prior to 20 September 1985 are, in some circumstances, not taxable as either a deemed dividend under section 47 of the ITAA 1936, or a net capital gain under section 104-25 of the ITAA 1997. If the assets were acquired prior to 20 September 1985 and a capital gain is disregarded, then these assets maintain the tax-free status of the distribution. The Archer Brothers Principle 56. Taxation Determination TD 95/10 Income tax: what is the significance of the Archer Brothers principle in the context of liquidation distributions?
(TD 95/10) discusses the significance of the "Archer Brothers principle" in the context of liquidation distributions and section 47 of the ITAA 1936, stating at paragraph 2 that: ...The principle is that if a liquidator appropriates (or 'sources') a particular fund of profit or income in making a distribution (or part of a distribution), that appropriation ordinarily determines the character of the distributed amount for the purposes of section 47 and other provisions of the Income Tax Assessment Act 1936 (the Act). Generally, we accept that a liquidator may rely on the Archer Brothers principle, except where a specific provision in the Act produces a different result (e.g., the rules in section 160ZLA that specify the order in which different types of funds are distributed). 57. TD 95/10, at paragraph 4, states that the Archer Brothers principle applies if: (a) the company accounts have been kept so that a liquidator can clearly identify a specific profit or fund in making a distribution; and (b) it is clear from either the accounts or statement of distribution that the liquidator has appropriated the specific profit or fund in making the distribution.
58. Importantly, paragraph 5 of TD 95/10 also notes that the maintenance of 'separate accounts' is not essential to identify a fund or profit from which a distribution is made: It has been suggested that the Archer Brothers principle operates only if separate accounts have been kept for each specific fund or profit so that a liquidator's appropriation from any account is unequivocally from a particular fund or profit. Although the maintenance of separate accounts makes it easier to identify the source of a distribution, and is, in our opinion, preferable from a practical point of view, we do not consider that separate accounts are essential provided the liquidator is able to identify a fund or profit from which a distribution is made. For example, if pre-CGT non-assessable profits and post-CGT capital gains have been accumulated in the same reserve, but can still be separately identified, we will accept a liquidator's nominated appropriation. Application to your circumstances 59. The Liquidation Distribution of Company A and Company B will comprise only paid up share capital and profits or gains on pre-CGT assets.
60. The return of paid-up share capital does not represent income derived by Company A or Company B and so will not form part of the assessable dividends under section 47 of the ITAA 1936. 61. The effect of subsection 47(1A) of the ITAA 1936 is that capital gains that are disregarded or otherwise not a 'net capital gain that would be included in company's assessable income' will also not be 'income' for the purposes of subsection 47(1) of the ITAA 1936. 62. Therefore, the components of the Liquidation Distribution received by Interposed Company 1 and Company B that relate to the capital gains made on the pre-CGT assets of Company A will also not be income derived by Company A for the purposes of section 47(1) of the ITAA 1936 provided the profits are able to be separately identified. 63. Similarly, the components of the Liquidation Distribution received by the relevant shareholders of Company B that relate to the capital gains made on the pre-CGT assets of Company B will also not be income derived by Company B for the purposes of section 47(1) of the ITAA 1936 provided the profits are able to be separately identified.
64. We see no reason why the amounts could not be separately identified in these circumstances, provided adequate records are kept. 65. Consequently, the Liquidation Distribution received by Interposed Company 1 and Company B from Company A and by the Company B shareholders from Company B, that comprises only the return of share capital and pre-CGT capital gains will not be dividends under section 47 of the ITAA 1936. Capital gains under CGT event C2 66. Section 104-25 of the ITAA 1997 provides that 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 .... 67. The time of the event is when you enter into the contract that results in the asset ending or, if there is no contract, when the asset ends: subsection 104-25(2) of the ITAA 1997.
68. A taxpayer will make a capital gain if the capital proceeds from the ending are more than the asset's cost base or a capital loss if those capital proceeds are less than the asset's reduced cost base: subsection 104-25(3) of the ITAA 1997. 69. Broadly, capital proceeds include the money and market value of property you receive (or are entitled to receive) when an event happens: section 116-20 of the ITAA 1997. 70. Taxation Determination TD 2001/27 Income tax: capital gains: how do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 ('ITAA 1997') treat: (a) a final liquidation distribution, including where all or part of it is deemed by subsection 47(1) of the Income Tax Assessment Act 1936 ('ITAA 1936') to be a dividend; and (b) an interim liquidation distribution to the extent it is not deemed to be a dividend by subsection 47(1)? (TD 2001/27) considers how Parts 3-1 and 3-3 of the ITAA 1997 treat interim and final liquidation distributions. 71. In respect to final liquidation distributions, paragraph 1 of TD 2001/27 states that:
The full amount of a final distribution made by a liquidator on the winding-up of a company constitutes capital proceeds from the ending of the shareholder's shares in the company for the purposes of capital gains or capital losses made on the happening of CGT event C2 (about cancellation, surrender and similar endings) in section 104-25 of the ITAA 1997. After the winding-up of a company, CGT event C2 happens to the shares when the company ceases to exist in accordance with the Corporations Act 2001 (see Taxation Determination TD 2000/7 paragraphs 3 and 4). 72. Paragraph 3 of TD 2001/27 states that even if all or part of the liquidator's distribution constitutes a dividend under subsection 47(1) of the ITAA 1936, it does not alter the position that the full amount is the capital proceeds for CGT event C2 in section 104-25 of the ITAA 1997 happening to the shares. 73. Paragraph 4 of TD 2001/27 explains that: the apportionment rule in subsection 116-40(2) of the ITAA 1997 does not apply. The capital proceeds for the ending of the shares are not limited to the portion of the distribution that is not assessable under subsection 44(1) of the ITAA 1997.
Application to your circumstances 74. CGT Event C2 will happen on the cancellation of the shares in Company A and the shares in Company B in accordance with paragraph 104-25(1)(a) of the ITAA 1997. The timing of CGT event C2 will be when the respective companies cease to exist, pursuant to subsection 104-25(2) of the ITAA 1997. 75. Consistent with paragraphs 1 and 3 of TD 2001/7, the full amount of the Liquidators Distribution, comprising only paid up share capital and profits or gains on pre-CGT assets, will be consideration for the cancellation of shares (the capital proceeds) under CGT Event C2. Question 5 & Questions 11 & 12 Will Interposed Company 1 be entitled to claim a capital loss on the cancellation of the shares in Company A under CGT event C2 in section 104-25 of the ITAA 1997? Will Interposed Company 2 and Interposed Company 3 be entitled to claim a capital loss on the cancellation of their shares in Company B under CGT event C2 in section 104-25 of the ITAA 1997? Will the Estate No 2 be entitled to claim a capital loss on the cancellation of its shares in Company B under CGT event C2 in section 104-25 of the ITAA 1997? Summary
Interposed Company 1 can claim a capital loss on the cancellation of the shares in Company A under CGT Event C2 if the full proceeds of the Liquidators Distribution is less than the reduced cost base for the shares. Interposed Company 2 and Interposed Company 3 and the Estate No 2 can claim a capital loss on the cancellation of their shares in Company B under CGT Event C2 if the full proceeds of the Liquidators Distribution is less than the reduced cost base for the shares. Detailed Reasoning 76. As explained above, the full amount of a liquidation distribution made by a liquidator on winding up of a company is capital proceeds from the ending of the shareholder's shares in the company. CGT Event C2 happens when the company ceases to exist under section 104-25 of the ITAA 1997. 77. Subsection 104-25(3) has the effect that a shareholder will make a capital loss if the full amount of a liquidation distribution is less than the cancelled shares *reduced cost base. Application to your circumstances
78. In this case the full amount of the Liquidators Distribution paid by Company A and Company B will comprise only paid up share capital and profits or gains on pre-CGT assets. This is the consideration for the cancellation of the shares under CGT Event C2. 79. If the full proceeds of the Liquidators Distribution paid to Interposed Company 1 with respect to the cancellation of their shares in Company A is less than the reduced cost base for the shares, then Interposed Company 1 will make a capital loss. 80. If the full proceeds of the Liquidators Distribution paid to Interposed Company 2, Interposed Company 3 and the Estate No 2 with respect to the cancellation of their shares in Company B is less than the reduced cost base for the shares, then Interposed Company B, Interposed Company 3 and the Estate No 2 will make a capital loss. Question 6 & Question 13 Will any capital gain or loss made by Company B in relation to the cancellation of its shares in Company A under CGT event C2 in section 104-25 of the ITAA 1997 be disregarded as the shares are pre-CGT?
Will any capital gains or capital losses made by Individual A and Individual B in relation to the cancellation of their shares in Company B under CGT event C2 in section 104-25 of the ITAA 1997 on the liquidation of Company B be disregarded because the shares are pre-CGT shares? Summary Any capital gain or loss made by Company B in relation to the cancellation of its shares in Company A under CGT event C2 in section 104-25 of the ITAA 1997 will be disregarded because its shares in Company A are pre-CGT assets. Any capital gain or capital loss made by Individual A and Individual B in relation to the cancellation of their shares in Company B under CGT event C2 in section 104-25 of the ITAA 1997 will be disregarded because their shares in Company B are pre-CGT assets. Detailed reasoning 81. Subsection 104-25(5)(a) of the ITAA 1997 provides that a capital gain arising from CGT event C2 is disregarded if the taxpayer "acquired" the asset before 20 September 1985. 82. The term "acquire" has the meaning as set out in subsection 995-1(1) of the ITAA 1997:
(a) a CGT asset: you acquire a CGT asset (in its capacity as a CGT asset) in the circumstances and at the time worked out under Division 109 (including under a provision listed in Subdivision 109-B); Note: A CGT asset acquired before 20 September 1985 may be treated as having been acquired on or after that day: see, for example, Division 149. 83. Further, subsection 109-5(1) states that: ...you acquire a CGT asset when you become its owner. In this case, the time when you acquire the asset is when you become its owner. Application to your circumstances 84. Company B acquired its ordinary shares in Company A before 20 September 1985. As per the assumption, the shares held by Company B in Company A are pre-CGT assets within the meaning of Division 149 of the ITAA 1997. 85. Therefore, the capital gain or loss made on the cancellation of Company B's shares in Company A will be disregarded in accordance with paragraph 104-25(5)(a) of the ITAA 1997. 86. Individual A and Individual B acquired their ordinary shares in Company B before 20 September 1985.
87. Therefore, the capital gain or loss made on the cancellation of their shares in Company B will be disregarded in accordance with paragraph 104-25(5)(a) of the ITAA 1997. Question 7 & Question 14 Will a capital gain be made by Company B on the cancellation of its pre-CGT shares in Company A under CGT Event K6 in section 104-230 of the ITAA 1997? Will a capital gain be made by Individual A and Individual B on the cancellation of their pre-CGT shares in Company B under CGT event K6 in section 104-230 of the ITAA 1997? Summary Company B will not make a capital gain on the cancellation of its pre-CGT shares in Company A under CGT Event K6 in section 104-230 ITAA 1997 when Company A is liquidated. Individual A and Individual B will not make a capital gain on the cancellation of their pre-CGT Shares in Company B under CGT event K6 in Section 104-230 of the ITAA 1997 when Company B is liquidated. Detailed reasoning
88. CGT event K6 is an anti-avoidance measure designed to prevent the possible avoidance of CGT where the owners of interests in a company or trust acquired prior to 20 September 1985 dispose of these interests, rather than the actual property of the company or trust acquired after 20 September 1985. 89. Under subsection 104-230(1) of the ITAA 1997, CGT event K6 happens if: • you own shares in a company that were acquired before 20 September 1985 (pre-CGT shares); • a CGT event as set out in paragraph 104-230(1)(b) of the ITAA 1997 (including CGT Event C2) happens in relation to the shares; • there is no roll-over for the 'other CGT event'; and • the requirement in subsection 104-230(2) of the ITAA 1997 is satisfied. 90. The time of CGT event K6 is when the other CGT event happens: subsection 104-230(5) of the ITAA 1997.
91. CGT event K6 only happens if, just before the other CGT event happened, the market value of post-CGT property (other than trading stock) of the company or the market value of interests the company owned through interposed companies in post-CGT property is at least 75% of the net value of the company (subsection 104-230(2) of the ITAA 1997). That is, the amount by which the sum of the market values of the assets of the company exceeds the sum of the liabilities of the company: definition of 'net value' in subsection 995-1(1) of the ITAA 1997. 92. Taxation Ruling TR 2004/18 Income tax: capital gains: application of CGT event K6 (about pre-CGT shares and pre-CGT trust interests) in section 104-230 of the Income Tax Assessment Act 1997 (TR 2004/18) considers whether CGT event K6 can happen when pre-CGT shares end under CGT event C2 on deregistration of a company in liquidation following its winding up and states:
48. Although CGT event K6 is theoretically capable of happening, it is most unlikely that the company would have any property of the kind referred to in subsection 104-230(2) just before the time CGT event C2 happens. That is, the company is highly likely to be a 'shell' at that stage. ... 193. On the deregistration of a company in liquidation, CGT event C2 (which is about cancellation, surrender and similar ending of intangible CGT assets) happens in respect of shares in the company. A capital gain or a capital loss may arise under subsection 104-25(3) upon the ending of the post-CGT shares. 194. CGT event K6 can happen when, among other events, CGT event C2 happens in relation to pre-CGT shares in a company: paragraph 104-230(1)(b) and subsection 104-230(5). However, for CGT event K6 to happen, the company must hold post-CGT property just before CGT event C2 happens: subsection 104-230(2). It is unlikely that this requirement would be satisfied just before a company is deregistered (that is, it would be unlikely to have any property at this time). Application to your circumstances
93. The shares in Company A were acquired by Company B before 20 September 1985 and hence paragraph 104-230(1)(a) of the ITAA 1997 will be satisfied under the proposed arrangement. In this case there is no roll-over for the happening of CGT event C2 to the shares. 94. The shares in Company B were acquired by Individual A and Individual B before 20 September 1985 and hence paragraph 104-230(1)(a) of the ITAA 1997 will be satisfied under the proposed arrangement. In this case there is also no roll-over for the happening of CGT event C2 to the shares. 95. However, consistently with the position stated in TR 2004/18, the requirement in subsection 104-230(2) would not be satisfied just before the companies are deregistered (that is, just before CGT Event C2 happens) because any property (cash) in Company A and Company B will have already been distributed. Therefore, just before the CGT Event C2, the company will not hold any post-CGT property so subsection 104-230(2) is not capable of being satisfied. 96. Therefore, CGT event K6 will not apply. Question 15 Will a capital gain be made by Individual C on the cancellation of their share in Company B? Summary
A capital gain will not be made by Individual C on the cancellation of their share in Company B. Detailed reasoning 97. Division 855 of the ITAA 1997 sets the conditions under which foreign residents are entitled to disregard a capital gain or capital loss arising from a CGT event. 98. Subsection 855-10(1) of the ITAA 1997 provides: Disregard a *capital gain or *capital loss from a *CGT event if: (a) you are a foreign resident, or the trustee of a *foreign trust for CGT purposes, just before the CGT event happens; and (b) the CGT event happens in relation to a *CGT asset that is not *taxable Australian property. 99. Section 855-15 of the ITAA 1997 sets out 5 categories of *CGT assets that are taxable Australian property: Table 1: Categories of CGT assets that are taxable Australian property CGT assets that are taxable Australian property Item Description 1 *Taxable Australian real property (see section 855-20) 2 A *CGT asset that: (a) is an *indirect Australian real property interest (see section 855-25); and (b) is not covered by item 5 of this table 3 A *CGT asset that: (a) you have used at any time in carrying on a *business through: (i)
if you are a resident in a country that has entered into an *international tax agreement with Australia containing a *permanent establishment article - a permanent establishment (within the meaning of the relevant international tax agreement) in Australia; or (ii) otherwise - a *permanent establishment in Australia; and (b) is not covered by item 1, 2 or 5 of this table 4 An option or right to *acquire a *CGT asset covered by item 1, 2 or 3 of this table 5 A *CGT asset that is covered by subsection 104-165(3) (choosing to disregard a gain or loss on ceasing to be an Australian resident) Application to your circumstances 100. Individual C will continue to be a foreign resident at the time of the proposed arrangement. 101. The assets of Company B held prior to the proposed restructure will be investments in listed shares and units with unrealised gains. These assets will be sold as part of the proposed restructure. 102. The shares in Company B held by Individual C will not fall within any of the 5 categories of CGT assets that are taxable Australian property in accordance with the table in section 855-15 of the ITAA 1997.
103. Individual C will be a foreign resident just before the CGT event C2 will happen and the CGT event will happen in relation to CGT assets that are not taxable Australian property. Therefore, Individual C will be able to disregard any capital gain made pursuant to CGT Event C2 under section 855-10 of the ITAA 1997. Question 16 Will the Proposed Restructure, or part of the Proposed Restructure, described in this ruling constitute a scheme to which Part IVA of the ITAA 1936 applies within the meaning of section 177D of the ITAA 1936? Summary The Proposed Restructure will not constitute a scheme to which section 177D of the ITAA 1936 applies. Detailed reasoning 104. Section 177D of the ITAA 1936 provides that Part IVA applies to a scheme, or any part of a scheme, entered into or carried out by a person for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme. 105. If Part IVA applies to a scheme, the Commissioner can make a determination under section 177F to cancel the tax benefit obtained under the scheme.
106. A conclusion about a relevant person's purpose is the conclusion of a reasonable person based on all the facts and evidence that are relevant to considering the matters outlined in subsection 177D(2). Application to your circumstances 107. While there is a degree of tax deferral, which can constitute a tax benefit for the purposes of section 177D, on the facts and having consideration of the matters outlined in subsection 177D(2), the tax purpose is insufficient to engage the application of the general anti-avoidance provisions in Part IVA. Question 17 Will section 177E of the ITAA 1936 apply to the Proposed Restructure or part of the Proposed Restructure? Summary The Proposed Restructure will not constitute a scheme by way of or in the nature of dividend stripping. Detailed reasoning 108. Section 177E is an anti-avoidance provision designed to prevent tax benefits being obtained as part of a dividend stripping scheme or a scheme with substantially the same effect as a dividend stripping scheme.
109. Section 177E embraces a scheme which can be said objectively to have the dominant (although not necessarily exclusive) purpose of avoiding tax. Assessing the purpose of the scheme is an objective test having regard to the characteristics of the scheme and the objective circumstances in which the scheme was designed and operated. Application to your circumstances 110. While there is a degree of tax deferral, which can constitute a tax benefit for the purposes of section 177E, on the facts the tax purpose is insufficient to engage the application of the dividend stripping provisions in section 177E. Question 18 Will section 177EA of the ITAA 1936 apply to the Proposed Restructure or part of the Proposed Restructure? Summary The proposed restructure will not constitute a scheme to which section 177EA of the ITAA 1936 applies. Detailed reasoning
111. Section 177EA is a general anti-avoidance rule that supports the operation of the imputation system with the purpose of ensuring that the benefits of the imputation system flow to the economic owner of the share which is the source of the franked distribution. The section is directed at schemes involving the transfer of franking credits on a dividend from entities that cannot fully use them to entities that can. If the section applies, the Commissioner may debit the company's franking account or deny the franking credit benefit to the recipient of the dividend. 112. Specifically, subsection 177EA(3) provides that for section 177EA to apply, the following must be present: (a) there is a scheme for the disposition of shares, or interest in shares, in a company (paragraph 177EA(3)(a)) (b) a franked dividend has been paid, or is expected to be paid, directly or indirectly (paragraphs 177EA(3)(b) and (c)) (c) the relevant taxpayer would, or could reasonably be expected to, receive imputation benefits from the distribution (paragraph 177EA(3)(d)), and
(d) having regard to relevant circumstances of the scheme (as provided for in subsection 177EA(17)), it would be concluded that the scheme was entered into for the not-incidental purpose of enabling the relevant taxpayer to obtain an imputation benefit (paragraph 177EA(3)(e)). Application to your circumstances 113. For the Proposed Restructure: • the interposition of Interposed Company 1, would not be considered to be a scheme the purpose of which was to enable the Estate or Interposed Company 1 to obtain imputation benefits; • the interposition of Interposed Company 2 would not be considered to be a scheme the purposes of which was to enable Interposed Company 2 or Individual A to obtain imputation benefits; • the interposition of Interposed Company 3, would not be considered to be a scheme the purpose of which was to enable Interposed Company 3 or Individual B to obtain imputation benefits. 114. Therefore, section 177EA will not apply. > [1] or interest in shares. [2] Paragraphs 4.3 and 4.2 of the Explanatory Memorandum (Senate) accompanying the Taxation Laws Amendment Bill (No. 2) 1999. [3]
for a similar example see ATO Interpretative Decision ATO ID 2006/31 Income Tax Franking Credits: CGT roll-over relief and its interaction with the date of acquisition for imputation purposes - qualified person - family trust election.