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INCOME TAX ASSESSMENT ACT 1997 - SECT 126.85

Effect of roll - over on certain liquidations

  (1)   A * capital gain a company (the holding company ) makes because * shares in its * 100% subsidiary are cancelled (an example of * CGT event C2: see section   104 - 25) on the liquidation of the subsidiary is reduced if the conditions in subsection   (2) are satisfied. The reduction is worked out under subsection   (3).

  (2)   These conditions must be satisfied:

  (a)   there must be a roll - over under this Subdivision for at least one * CGT asset that the subsidiary * acquired on or after 20   September 1985 (the CGT roll - over asset ) being * disposed of by the subsidiary to the holding company in the course of the liquidation of the subsidiary;

  (c)   the disposals must either:

  (i)   be part of the liquidator's final distribution in the course of the liquidation; or

  (ii)   have occurred within 18 months of the dissolution of the subsidiary if they are part of an interim distribution in the course of the liquidation;

  (d)   the holding company must have beneficially owned all of the shares in the subsidiary for the whole period from the time of the disposal, or the first disposal, of a CGT roll - over asset until the cancellation of the shares;

  (e)   the * market value of the CGT roll - over asset or assets must comprise at least part of the * capital proceeds for the cancellation of the shares in the subsidiary that are beneficially owned by the holding company;

  (f)   one or more of the shares that were cancelled (the post - CGT shares ) must have been acquired by the holding company on or after 20   September 1985.

  (3)   The reduction of the * capital gain is worked out in this way.

Method statement

Step 1.   Work out (disregarding this section) the sum of the * capital gains and the sum of the * capital losses the holding company would make on the cancellation of its shares in the subsidiary.

Step 2.   Work out (disregarding this Subdivision):

  (a)   the sum of the * capital gains the subsidiary would make on the * disposal of its CGT roll - over assets to the holding company; and

  (b)   the sum of the * capital losses it would make except for Subdivision   170 - D on the disposal of its * CGT assets to the holding company;

  in the course of the liquidation assuming the * capital proceeds were the assets' * market values at the time of the disposal.

Step 3.   If, after subtracting the sum of the * capital losses from the sum of the * capital gains, there is an overall capital gain from step 1 and an overall capital gain from step 2, then continue. Otherwise there is no adjustment.

Step 4.   Express the number of post - CGT shares as a fraction of the total number of shares the holding company owned in the subsidiary.

Step 5.   Multiply the overall * capital gain from Step 2 by the fraction from Step 4.

Step 6.   Reduce the overall * capital gain from Step 1 by the amount from Step 5. The result is the * capital gain the holding company makes from the cancellation of its shares in the subsidiary.

Note:   This Subdivision is modified in calculating the attributable income of a CFC: see section   419 of the Income Tax Assessment Act 1936 .


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