The CGT rollover provisions in Division 615 of the Income Tax Assessment Act 1997 (Cth) are a versatile tool for restructuring your clients’ affairs – perhaps even more versatile than you realise!
Although the rollover is typically applied to facilitate a tax-free interposition of a holding company between shareholders and a company, you may not know that the provisions can also be used to amalgamate multiple companies under a single holding company.
The following scenario shows how this may come into effect:
Before
Stephen holds 60% of the ordinary shares in Trading Co Pty Ltd, IP Pty Ltd and Staff Pty Ltd.
Marty owns 40% of the ordinary shares in the corresponding companies.
Restructure applying Division 615
Stephen and Marty incorporate Holding Co Pty Ltd, issuing shares to themselves.
Holding Co Pty Ltd agrees to issue shares in Holding Co Pty Ltd to Stephen and Marty to bring them up to their 60/40 proportions in exchange for Stephen and Marty’s shares in all three companies.
Stephen and Marty now hold all of the shares in Holding Co Pty Ltd in their original proportions.
Trading Co Pty Ltd, IP Pty Ltd and Staff Pty Ltd are now wholly owned subsidiaries of Holding Co Pty Ltd.
Outcome
If applied correctly, Stephen and Marty’s shares in Holding Co Pty Ltd will acquire an averaged cost CGT base equivalent to the cost bases of the shares exchanged – thereby rolling over any CGT liability which would have otherwise arisen.
When should I use these provisions?
This strategy may be particularly useful where a client with multiple corporate structures would be better served by centralising their ultimate shareholding (e.g. administrative burden, costs).
This strategy fundamentally requires that:
- There is more than one shareholder in each of the companies;
- The proportional shareholdings in each of the original companies before the interposition occurs are identical; and
- The proportionate market value of the shareholdings for each shareholder is the same as the original companies.
A summary of the Commissioner of Taxation’s views on this particular strategy and many others can be found within Taxation Ruling TR 97/18.
If you have any questions regarding this CGT rollover strategy please contact us on (07) 3223 6100 or email tax@redchip.com.au.
