CGT and foreign amalgamation

1 Did CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to the shares in For SubCo1 and the shares in For SubCo2, both owned by Aus Co, when these shares were cancelled upon the amalgamation of For SubCo1, For SubCo2 and For SubCo3 to become For SubCo3 under the Foreign Act?

Yes. Question 2 If the answer to Question 1 is yes, did the market value substitution rule in subsection 116-30(1) of the ITAA 1997 apply to substitute the market value of the shares in For SubCo1 and the shares in For SubCo2 as the capital proceeds from the cancellation of the shares in For SubCo1 and the shares in For SubCo2 (respectively)? Answer Yes. Question 3 If the answer to Question 2 is yes, were: (a)  the cancellation of the shares in For SubCo1 and For SubCo3's succession to all For SubCo1's assets and liabilities; and (b)  the cancellation of the shares in For SubCo2 and For SubCo3's succession to all For SubCo2's assets and liabilities disregarded in working out the market value of the shares in For SubCo1 and the shares in For SubCo2 (respectively) in accordance with subsection 116-30(3A) of the ITAA 1997? Answer Yes. Question 4 If the answer to Question 1 is yes, would Aus Co, apart from Division 727 of the ITAA 1997: (a)  make a capital loss from CGT event C2 happening to the shares in For SubCo1 referred to in Question 1? (b)  make a capital loss from CGT event C2 happening to the shares in For SubCo2 referred to in Question 1? Answer 4(a) Yes. 4(b) No. Question 5

If the answer to: (a)  Question 4(a) is yes, did section 727-615 of the ITAA 1997 apply to reduce the capital loss that Aus Co, apart from Division 727 of the ITAA 1997, would make from CGT event C2 happening to the shares in For SubCo1 referred to in Question 1? (b)  Question 4(b) is yes, did section 727-615 of the ITAA 1997 apply to reduce the capital loss that Aus Co, apart from Division 727 of the ITAA 1997, would make from CGT event C2 happening to the shares in For SubCo2 referred to in Question 1? Answer 5(a) No. 5(b) Not applicable. Question 6 If the answer to: (a)  Question 5(a) is yes, will section 727-620 of the ITAA 1997, in conjunction with section 727-625 of the ITAA 1997, apply to reduce any capital gain that Aus Co, apart from Division 727 of the ITAA 1997, would make from CGT event A1 in section 104-10 of the ITAA 1997 happening to its shares in For SubCo3 if Aus Co disposes of these shares to For ParentCo?

(b)  Question 5(b) is yes, will section 727-620 of the ITAA 1997, in conjunction with section 727-625 of the ITAA 1997, apply to reduce any capital gain that Aus Co, apart from Division 727 of the ITAA 1997, would make from CGT event A1 in section 104-10 of the ITAA 1997 happening to its shares in For SubCo3 if Aus Co disposes of these shares to For ParentCo? Answer 6(a) Not applicable. 6(b) Not applicable. This ruling applies for the following period : Income year ended XXXX The scheme commences on: XXXX

Background 1.    Aus Co was a company incorporated in Australia and a resident of Australia for Australian income tax purposes. 2.    Aus Co was wholly owned by For ParentCo. For ParentCo was a company incorporated in Country X and a resident of Country X for Country X tax purposes. 3.    Aus Co directly owned all the shares in For SubCo1, For SubCo2 and For SubCo3. For SubCo1, For SubCo2 and For SubCo3 were all companies incorporated in Country X and all residents of Country X for Country X tax purposes. The Amalgamation 4.    For SubCo1, For SubCo2 and For SubCo3 amalgamated to become For SubCo3 under the specific legislation in Country X (Foreign Act) on the date of the amalgamation (Amalgamation). 5.    The Amalgamation was a short form amalgamation covered by the Foreign Act, which allows two or more companies directly or indirectly wholly owned by the same entity to amalgamate and continue as one company subject to approval by a resolution of the directors of each amalgamating company.

6.    The Amalgamation was approved by the board resolutions of For SubCo1, For SubCo2 and For SubCo3. Upon the Amalgamation becoming effective, For SubCo3 will continue as the amalgamated company. Each of the requirements in the relevant sections of the Foreign Act were satisfied with each of the boards resolving, that: •         The Amalgamation is approved and upon the Amalgamation becoming effective: o   the shares of For SubCo1 and of For SubCo2 will be cancelled without payment or other consideration; o   the constitution of the amalgamated company will be the same as that of For SubCo3; o   the directors named will be the directors of the amalgamated company; •         the board is satisfied that For SubCo3 will satisfy all tests under the relevant sections of the Foreign Act. 7.    Upon receipt of all necessary documentation as required by the Foreign Act, a certificate of amalgamation is issued. The relevant section of the Foreign Act sets out the effect of the certificate of amalgamation on the date shown in the certificate of amalgamation, including that: •         the amalgamation is effective;

•         the amalgamating companies, other than the amalgamated company, must be deregistered by the registrar of companies (Registrar); •         the amalgamated company succeeds to all the assets of each of the amalgamating companies; •         the amalgamated company succeeds to all the liabilities of each of the amalgamating companies. 8.    The certificate of amalgamation for the Amalgamation was issued on the date of amalgamation and certifies that on the date of amalgamation, For SubCo1, For SubCo2 and For SubCo3 amalgamated to become For SubCo3 under the Foreign Act. Assumptions 9.    Aus Co held its shares in For SubCo1 and its shares in For SubCo2 on capital account. 10.  At the time the shares in For SubCo1 and the shares in For SubCo2 were cancelled upon the Amalgamation becoming effective, the market value of those shares, worked out as if the Amalgamation had not occurred and was never proposed to occur, were equal to the market value of For SubCo1's and of For SubCo2's net assets (respectively) at that time.

11.  Subsections 104-25(4) and (5) of the ITAA 1997, and the scenarios referred to in the Notes to section 104-25 and the Note to subsection 104-25(3) were not applicable in respect of the cancellation of the shares in For SubCo1 and the shares in For SubCo2 upon the Amalgamation becoming effective. 12.  The active foreign business asset percentage of For SubCo1 and of For SubCo2 in relation to Aus Co at time of the cancellation of the shares in For SubCo1 and the shares in For SubCo2 upon the Amalgamation becoming effective were zero (respectively) for the purposes of Subdivision 768-G of the ITAA 1997.

Income Tax Assessment Act 1997 Division 104 Income Tax Assessment Act 1997 Section 104-25 Income Tax Assessment Act 1997 Subsection 104-25(3) Income Tax Assessment Act 1997 Section 108-5 Income Tax Assessment Act 1997 Division 116 Income Tax Assessment Act 1997 Section 116-20 Income Tax Assessment Act 1997 Section 116-30 Income Tax Assessment Act 1997 Subsection 116-30(1) Income Tax Assessment Act 1997 Subsection 116-30(3A) Income Tax Assessment Act 1997 Division 727 Income Tax Assessment Act 1997 Section 727-1 Income Tax Assessment Act 1997 Section 727-5 Income Tax Assessment Act 1997 Section 727-10 Income Tax Assessment Act 1997 Section 727-95 Income Tax Assessment Act 1997 Subsection 727-150(3) Income Tax Assessment Act 1997 Section 727-615 Income Tax Assessment Act 1997 Section 977-5 I

All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated. Question 1 Did CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to the shares in For SubCo1 and the shares in For SubCo2, both owned by Aus Co, when these shares were cancelled upon the amalgamation of For SubCo1, For SubCo2 and For SubCo3 to become For SubCo3 under the Foreign Act? Summary Yes, CGT event C2 in section 104-25 happened to the shares in For SubCo1 and the shares in For SubCo2, when these shares were cancelled upon the amalgamation of For SubCo1, For SubCo2 and For SubCo3 to become For SubCo3 under the Foreign Act. Detailed reasoning CGT event C2 in section 104-25 happens if a taxpayer's ownership of an intangible CGT asset ends by the asset being redeemed or cancelled. Paragraph 104-25(1)(a) states: CGT event C2 happens if your ownership of an intangible *CGT asset ends by the asset: (a)  being redeemed or cancelled; or.... The shares that Aus Co owns in For SubCo1 and For SubCo2 are shares in a company and thus meet the definition of a CGT asset under section 108-5.

Upon the Amalgamation becoming effective, the shares in For SubCo1 and the shares in For SubCo2 were cancelled and For SubCo1 and For SubCo2 were deregistered. Accordingly, CGT event C2 in section 104-25 happened to the shares in For SubCo1 and the shares in For SubCo2 when those shares were cancelled upon the amalgamation of For SubCo1, For SubCo2 and For SubCo3 to become For SubCo3, pursuant to paragraph 104-25(1)(a). Subsection 104-25(2) provides that 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. The cancellation of the shares in For SubCo1 and the shares in For SubCo2 and the deregistration of For SubCo1 and For SubCo2 occurred on the date of amalgamation, the date that the Amalgamation became effective. Accordingly, the time of the CGT event C2 is when the Amalgamation became effective on the date of amalgamation. Question 2

If the answer to Question 1 is yes, did the market value substitution rule in subsection 116-30(1) of the ITAA 1997 apply to substitute the market value of the shares in For SubCo1 and the shares in For SubCo2 as the capital proceeds from the cancellation of the shares in For SubCo1 and the shares in For SubCo2 (respectively)? Summary Yes, the market value substitution rule in subsection 116-30(1) applies to substitute the market value of the shares in For SubCo1 and the shares in For SubCo2 as the capital proceeds from the cancellation of the shares in For SubCo1 and the shares in For SubCo2 respectively. Detailed reasoning Under the general rules about capital proceeds, subsection 116-20(1) provides that the capital proceeds from a CGT event are the total of the money received (or entitled to receive) and the market value of any other property received (or entitled to receive) in respect of the event happening (worked out at the time of the event).

Where no capital proceeds are received from a CGT event, the general rules about capital proceeds are modified. Subsection 116-30(1) sets out the market value substitution rule which applies when no capital proceeds are received from a CGT event. Subsection 116-30(1) applies to substitute the market value of the CGT asset (worked out at the time of the event) as the capital proceeds. When For SubCo1, For SubCo2 and For SubCo3 amalgamated to become For SubCo3 under the Foreign Act, Aus Co received no money or property and was not entitled to receive any money or property, in respect of the cancellation of its shares in For SubCo1 and its shares For SubCo2 in accordance with the Foreign Act. The exclusion from subsection 116-30(1) in paragraph 116-30(3)(a) does not apply because the cancellation of shares is not an example of CGT event C2 as referred to this paragraph. Accordingly, the market value substitution rule in subsection 116-30(1) applied to substitute the market value of the shares in For SubCo1 and the shares in For SubCo2 as the capital proceeds from the cancellation of the shares in For SubCo1 and the shares in For SubCo2 respectively. Question 3

If the answer to Question 2 is yes, were: (a)  the cancellation of the shares in For SubCo1 and For SubCo3's succession to all For SubCo1's assets and liabilities; and (b)  the cancellation of the shares in For SubCo2 and For SubCo1's succession to all For SubCo2's assets and liabilities disregarded in working out the market value of the shares in For SubCo1 and the shares in For SubCo2 (respectively) in accordance with subsection 116-30(3A) of the ITAA 1997? Summary Yes, in accordance with subsection 116-30(3A), the cancellation of the shares in For SubCo1 and the shares in For SubCo2, and For SubCo3's succession to all For SubCo1's and For SubCo2's assets and liabilities are disregarded in working out the market value of the shares in For SubCo1 and the shares in For SubCo2 respectively. Detailed reasoning As discussed in the detailed reasoning under Question 2, where no capital proceeds are received from a CGT event, the market value substitution rule in subsection 116-30(1) operates to substitute the market value of the CGT asset (worked out at the time of the CGT event) as the capital proceeds from the CGT event.

Where the CGT event that happens is CGT event C2, subsection 116-30(3A) provides that the market value of a CGT asset that is subject of CGT event C2 is to be worked out as if the event had not occurred and was never proposed to occur. Subsection 116-30(3A) states: 116-30(3A) If you need to work out the *market value of a *CGT asset that is the subject of *CGT event C2, work it out as if the event had not occurred and was never proposed to occur. Example : A company cancels shares you own in it. You work out the market value of the shares by disregarding the cancellation.

As Aus Co received no money or property in respect of the cancellation of its shares in For SubCo1 and its shares in For SubCo2, the market value substitution rule in subsection 116-30(1) applied to substitute the market value of the shares in For SubCo1 and the shares in For SubCo2 as the capital proceeds from the cancellation of the shares in For SubCo1 and the shares in For SubCo2 respectively. In working out the market value of the shares in For SubCo1 and the shares in For SubCo2, that are the subject of CGT event C2, subsection 116-30(3A) provides that the market value needs to be worked out as if the event had not occurred and was never proposed to occur. The relevant CGT event C2 in this case was the cancellation of the shares in For SubCo1 and the shares in For SubCo2 that occurred under the short form amalgamation under the Foreign Act. Having regard to the relevant sections of the Foreign Act, and the board resolutions of the amalgamating companies For SubCo1, For SubCo2 and For SubCo3, the following relevantly occurs simultaneously upon the Amalgamation becoming effective on the date of amalgamation: •         For SubCo3 continues as the amalgamated company;

•         the shares of each of the amalgamating companies other than For SubCo3, i.e. For SubCo1 and For SubCo2, are cancelled without payment or other consideration; •         For SubCo1 and For SubCo2 are deregistered by the Registrar; •         For SubCo3 succeeds to all the assets of For SubCo1 and of For SubCo2 by virtue of the Foreign Act; •         For SubCo3 succeeds to all the liabilities of For SubCo1 and of For SubCo2 by virtue of the Foreign Act. Considering the above, the short form amalgamation process under which For SubCo1, For SubCo2 and For SubCo3 amalgamated to become For SubCo3 can be characterised for the purposes of subsection 116-30(3A) as a single process whereby from the effective date For SubCo3 will stand in the shoes of For SubCo1 and of For SubCo2. The cancellation of the shares in For SubCo1 and the shares in For SubCo2 are an integral part of this single process. Relevantly, if the cancellation of these shares had not occurred, then automatically the Amalgamation would not have occurred including For SubCo3's succession to all For SubCo1's and For SubCo2's assets and liabilities.

On this basis, subsection 116-30(3A) would require the market value of the shares in For SubCo1 and the shares in For SubCo2 to be worked out as if the Amalgamation had not occurred and was never proposed to occur, including by disregarding: •         the cancellation of the shares in For SubCo1 and For SubCo3's succession to all For SubCo1's assets and liabilities; and •         the cancellation of the shares in For SubCo2 and For SubCo3's succession to all For SubCo2's assets and liabilities. Accordingly, subsection 116-30(1) in conjunction with subsection 116-30(3A) would treat Aus Co as taken to have received capital proceeds from the cancellation of its shares in For SubCo1 and its shares in For SubCo2 equal to the market value of the shares in For SubCo1 and the shares in For SubCo2 worked out as if the Amalgamation had not occurred and was never proposed to occur.

At the time the shares in For SubCo1 and the shares in For SubCo2 were cancelled upon the Amalgamation becoming effective, the market value of those shares, worked out as if the Amalgamation had not occurred and was never proposed to occur, were equal to the market value of For SubCo1's and of For SubCo2's net assets (respectively) at that time. Question 4 If the answer to Question 1 is yes, would Aus Co, apart from Division 727 of the ITAA 1997: (a)  make a capital loss from CGT event C2 happening to the shares in For SubCo1 referred to in Question 1? (b)  make a capital loss from CGT event C2 happening to the shares in For SubCo2 referred to in Question 1? Summary Question 4(a) - Yes, Aus Co would, apart from Division 727, make a capital loss from CGT event C2 happening to its shares in For SubCo1 referred to in Question 1. Question 4(b) - No, Aus Co would not, apart from Division 727, make a capital loss from CGT event C2 happening to its shares in For SubCo2 referred to in Question 1. Detailed reasoning Question 4(a)

Under subsection 104-25(3) you make a capital gain from CGT event C2 if the capital proceeds from the ending are more than the asset's cost base and you make a capital loss from CGT event C2 if those capital proceeds are less than the asset's reduced cost base. Following on from Questions 2 and 3, the capital proceeds received by Aus Co from the cancellation of its shares in For SubCo1, as worked out in accordance with the market value substitution rule in subsection 116-30(1) in conjunction with subsection 116-30(3A), were less than the reduced cost base of the shares in For SubCo1. Aus Co made therefore a capital loss under subsection 104-25(3). Subsections 104-25(4) and (5), and the scenarios referred to in the Notes to section 104-25 and the Note to subsection 104-25(3) were not applicable in respect of the cancellation of the shares in For SubCo1. Furthermore, the capital loss was not reduced under Subdivision 768-G noting that the active foreign business asset percentage of For SubCo1 upon the Amalgamation becoming effective was zero for the purposes of Subdivision 768-G.

Accordingly, Aus Co would, apart from Division 727, make a capital loss from CGT event C2 happening to its shares in For SubCo1 referred to in Question 1. Question 4(b) Under subsection 104-25(3) you make a capital gain from CGT even C2 if the capital proceeds from the ending are more than the asset's cost base and you make a capital loss from CGT event C2 if those capital proceeds are less than the asset's reduced cost base. Following on from Questions 2 and 3, the capital proceeds received by Aus Co from the cancellation of its shares in For SubCo2, as worked out in accordance with the market value substitution rule in subsection 116-30(1) in conjunction with subsection 116-30(3A), were more than the cost base of the shares in For SubCo2. Aus Co made therefore a capital gain under subsection 104-25(3). Subsections 104-25(4) and (5), and the scenarios referred to in the Notes to section 104-25 and the Note to subsection 104-25(3) were not applicable in respect of the cancellation of the shares in For SubCo2.

Furthermore, the capital gain was not reduced under Subdivision 768-G noting that the active foreign business asset percentage of For SubCo2 upon the Amalgamation becoming effective was zero for the purposes of Subdivision 768-G. Accordingly, Aus Co would, apart from Division 727, not make a capital loss but a capital gain from the CGT event C2 happening to its shares in For SubCo2 referred to in Question 1. Question 5 If the answer to: (a)  Question 4(a) is yes, did section 727-615 of the ITAA 1997 apply to reduce the capital loss that Aus Co, apart from Division 727 of the ITAA 1997, would make from CGT event C2 happening to the shares in For SubCo1 referred to in Question 1? (b)  Question 4(b) is yes, did section 727-615 of the ITAA 1997 apply to reduce the capital loss that Aus Co, apart from Division 727 of the ITAA 1997, would make from CGT event C2 happening to the shares in For SubCo2 referred to in Question 1? Summary Question 5(a) - No, section 727-615 of the ITAA 1997 did not apply to reduce the capital loss that Aus Co, apart from Division 727 of the ITAA 1997, would make from CGT event C2 happening to the shares in For SubCo1 referred to in Question 1.

Question 5(b) - Not applicable as the answer to question 4(b) is no. Detailed reasoning Question 5(a) As determined in Question 4(a), Aus Co would, apart from the indirect value shifting rules in Division 727, make a capital loss from CGT event C2 happening to its shares in For SubCo1 referred to in Question 1. For the purposes of Division 727, this capital loss is a loss that, apart from Division 727, would be realised for income tax purposes by a realisation event that happens to the shares in For SubCo1 (within the meaning of sections 977-5 and 977-10).

Broadly, if there is a net shift of value between 2 related entities because of a non-arm's length dealing, Division 727 prevents losses from arising, because of the value shift, on the realisation of, relevantly, an equity interest in an entity from which there has been a net shift of value (section 727-1 and paragraph 727-95(a)). When the interest is realised, an indirect value shift can produce an inappropriate loss for income tax purposes (subsection 727-5(5)). The realisation time method (Subdivision 727-G) reduces the amount of the loss to prevent an inappropriate loss from arising on realisation of an interest (subsection 727-10(1)). CGT event C2 happening to Aus Co's shares in For SubCo1 upon the Amalgamation becoming effective is the realisation of equity interests in a losing entity (For SubCo1), from which there was an indirect value shift to a gaining entity (For SubCo3) within the meaning of subsection 727-150(3) as a result of For SubCo3's succession to all For SubCo1's assets and liabilities. There was a net shift of value from For SubCo1 to For SubCo3 upon the Amalgamation becoming effective.

As determined in Question 4(a), Aus Co would, apart from Division 727, make a capital loss from CGT event C2 happening to its shares in For SubCo1 upon the Amalgamation becoming effective. This capital loss was not caused by the indirect value shift from For SubCo1 to For SubCo3, because in calculating this capital loss the capital proceeds have been worked out as if the Amalgamation had not occurred and was never proposed to occur, as required by subsection 116-30(3A). That is, this capital loss was not caused by the indirect value shift from For SubCo1 to For SubCo3, because in calculating this capital loss For SubCo3's succession to all For SubCo1's assets and liabilities were disregarded. For this reason, whilst upon the Amalgamation becoming effective there was a net shift of value shift from For SubCo1 to For SubCo3, this capital loss is unrelated to this net shift of value and is therefore not an inappropriate loss produced by this net shift of value.

Accordingly, the capital loss that Aus Co, apart from Division 727, would make from CGT event C2 happening to its shares in For SubCo1 referred to in Question 1 is not an inappropriate loss that is within the scope of Division 727 to be reduced by section 727-615 of Subsection 727-G. Question 5(b) Not applicable as the answer to Question 4(b) is no. Question 6 If the answer to: (a)  Question 5(a) is yes, will section 727-620 of the ITAA 1997, in conjunction with section 727-625 of the ITAA 1997, apply to reduce any capital gain that Aus Co, apart from Division 727 of the ITAA 1997, would make from CGT event A1 in section 104-10 of the ITAA 1997 happening to its shares in For SubCo3 if Aus Co disposes of these shares to For ParentCo? (b)  Question 5(b) is yes, will section 727-620 of the ITAA 1997, in conjunction with section 727-625 of the ITAA 1997, apply to reduce any capital gain that Aus Co, apart from Division 727 of the ITAA 1997, would make from CGT event A1 in section 104-10 of the ITAA 1997 happening to its shares in For SubCo3 if Aus Co disposes of these shares to For ParentCo? Summary Question 6(a) - Not applicable as the answer to Question 5(a) is no.

Question 6(b) - Not applicable as the answer to Question 5(b) is not applicable. Detailed reasoning Question 6(a) - Not applicable as the answer to Question 5(a) is no. Question 6(b) - Not applicable as the answer to Question 5(b) is not applicable.