1 Will Person A be eligible to apply roll-over relief on the proposed transfer of shares in the Trading Company to the Holding Company under Division 122-A of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes Question 2 If the roll-over in Division 122-A of the ITAA 1997 is chosen, will the gain be disregarded in accordance with section 122-40 of the ITAA 1997? Answer Yes This ruling applies for the following period: Year ending 30 June 20YY The scheme commenced on: 1 July 2020
Person A is an Australian resident taxpayer. Person A owns 100% of the ordinary shares in Company B (Trading Company). The shares are held on capital account. The Trading Company does not have retained earnings. All earnings are paid to Person A in salary and wages. Person A proposes to commence new activities and transfer 100% their ordinary shares in the Trading Company to a newly incorporated company not yet established. This will become the Holding Company. The transaction is proposed with the intent of profits from the new activities being paid down to the Holding Company and securely loaned back to conduct further activities. The Holding Company is for asset protection. The Holding Company will be an Australian resident for tax purposes. The Holding Company will not be an exempt entity. The consideration for the transfer will be non-redeemable shares in the Holding Company. The market value of the shares Person A will receive in the Holding Company will be the same as the market value of the shares in the Trading Company as the Holding Company will have no other assets or liabilities.
Income Tax Assessment Act 1997 Section 104-10 Income Tax Assessment Act 1997 Section 108-5 Income Tax Assessment Act 1997 Division 122-A Income Tax Assessment Act 1997 Section 122-15 Income Tax Assessment Act 1997 Section 122-20(1) Income Tax Assessment Act 1997 Subsection122-20(2) Income Tax Assessment Act 1997 Subsection 122-20(3) Income Tax Assessment Act 1997 Subsection 122-25(1) Income Tax Assessment Act 1997 Subsection 122-25(2) Income Tax Assessment Act 1997 Subsection 122-25(3) Income Tax Assessment Act 1997 Subsection 122-25(5) Income Tax Assessment Act 1997 Subsection 122-25(6) Income Tax Assessment Act 1997 Section 207-155 Income Tax Assessment Act 1997 Section 995-1 Does IVA apply to this private ruling? Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rul
Question 1 Summary Person A will be eligible to choose roll-over relief on the proposed transfer of shares in the Trading Company to the Holding Company under Division 122-A of the ITAA 1997. Detailed reasoning Broadly, Subdivision 122-A allows for the roll-over of a capital gain or loss when an individual or trustee disposes of a CGT asset to a wholly owned company if the conditions in section 122-15 to section 122-35 are satisfied. Section 122-15: Disposal of shares giving rise to CGT event A1 In order for an individual or trustee to obtain roll-over relief under Subdivision 122-A the CGT event which triggers the capital gain or loss must be one listed in the table in section 122-15. CGT event A1 is one of the trigger events listed in the table. CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity. Shares in a company are CGT assets. Under the proposed transaction, Person A will transfer the shares in the Trading Company to the Holding Company and will own 100% of the shares of the Holding company immediately after the transfer.
The shares in the Trading Company are CGT assets for the purposes of section 108-5 of the ITAA 1997, and the transfer of the shares will be a disposal of a CGT asset for the purposes of section 104-10 of the ITAA 1997. Consequently, section 122-15 of the ITAA 1997 has been satisfied. Consideration must be shares - subsection 122-20(1) Subsection 122-20(1) of the ITAA 1997 provides: The consideration you receive for the trigger event happening must be only: a) shares in the company; or b) for a disposal of a CGT asset, or all the assets of a business, to the company (a disposal case) - shares in the company and the company undertaking to discharge one or more liabilities in respect of the asset or assets of the business (as appropriate). In return for the Person A's shares in the Trading Company, they will only receive ordinary shares in the Holding Company. Therefore. subsection 122-20(1)(a) of the ITAA 1997 will be satisfied. No redeemable shares - subsection 122-20(2)
In addition, subsection122-20(2) of the ITAA 1997 outlines that the shares received in the company cannot be redeemable shares. The term 'redeemable shares' is defined in section 995-1 of the ITAA 1997 as shares that are liable to be redeemed or shares that, at the option of the company that issued them, are liable to be redeemed. The shares will not be 'redeemable shares' and consequently subsection 122-20(2) of the ITAA 1997 will be satisfied. Market value of shares must be substantially the same as assets less liabilities - subsection 122-20(3) Section 122-20(3) outlines 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. The market value of the shares Person A will receive for the disposal of the shares in the Trading Company will be the same as the market value of the shares held in the Trading Company as the Holding Company will not hold any assets or liabilities. Therefore, the requirement in subsection 122-20(3) of the ITAA 1997 is met and all the requirements under section 122-20 of the ITAA 19976 are satisfied.
Section 122-25 - Other requirements Subsection 122-25(1) of the ITAA 1997 states that you must own all the shares in the company just after the time of the trigger event. The Note contained in subsection 122-25 (1) of the ITAA 1997 clarifies that you must own the shares in the same capacity as you owned or created the assets that the company now owns. Under the proposed transaction Subsection 122-25(1) of the ITAA 1997 will be satisfied as Person A will own all the shares in the Holding Company prior to the disposal of the shares in the Trading Company to the Holding Company. Excluded assets Subsection 122-25(2) of the ITAA 1997 provides that roll-over cannot be obtained for the disposal CGT assets by an individual to a company, such as collectibles, personal use assets, a decoration award for valour or brave conduct, a precluded asset, an asset that becomes trading stock or an asset that becomes a registered emissions unit.
In the proposed transaction, Person A is disposing of their shares in the Trading Company to the Holding Company. As such, Item 1 of the table in subsection 122-25(2) of the ITAA 1997 is the relevant item in respect of this disposal. The shares Person A is disposing to the Holding Company are not a CGT asset of a type described in item 1 of the table and the Holding Company will hold the Trading Company shares on capital account and therefore the shares will not become trading stock in the hands of the Holding Company. Ordinary income and statutory income of the company must not be exempt from income tax Subsection 122-25(5) requires that the ordinary income and statutory income of the company must not be exempt from income tax because it is an exempt entity for the income year of the trigger event.
An 'exempt entity' is defined in section 995-1 as an entity all of whose ordinary income and statutory income is exempt from income tax because of this Act or because of another Commonwealth law, no matter what kind of ordinary or statutory income the entity might have. Section 11-5 contains a list of such entities, which broadly includes charities, societies and educational or scientific institutions. The ordinary and statutory income of the Holding Company will not be exempt from income tax and the Holding Company will not be an exempt entity for the income year in which the trigger event occurs. Therefore, subsection 122-25(5) is satisfied. Residency requirement Subsection 122-25(6) of the ITAA 1997 provides that if you are an individual at the time of the trigger event, either: a) you and the company must both be Australian residents at that time; or b) both of the following requirements must be satisfied: ii) each asset must be taxable Australian property at that time; iii) the shares in the company mentioned in subsection 122-20(1) must be taxable Australian property just after that time.
In this case, Person A and the Company are Australian residents, and this condition is satisfied. Conclusion All of the relevant requirements of sections 122-20 to 122-30 of the ITAA 1997 will be satisfied. Consequently, Person A will be eligible to choose to obtain roll-over relief under Division 122-A of the ITAA 1997. Question 2 Summary If Person A elects to apply the roll-over relief under Division 122-A when transferring his shares in the Trading Company to the Holding Company, any capital gain or loss arising from the disposal of the shares, will be disregarded. Detailed Reasoning Subsection 122-40(1) of the ITAA 1997 provides that if a taxpayer chooses a roll-over, a capital gain or loss made from the trigger event is disregarded. Consequently, if Person A chooses the rollover when they transfers their shares in the Trading Company to the Holding Company, any capital gain or capital loss made on the disposal of the shares will be disregarded in accordance with subsection 122-40(1) of the ITAA 1997.