ITO Section 96

Disposal of business by association of persons to wholly-owned company.

(1) Where a resident association of persons disposes of all the assets of a business of the association to a resident company, no gain or loss shall be taken to arise on the disposal if the following conditions are satisfied, namely: 

• (a) The consideration received by the association for the disposal is a share or shares in the company (other than redeemable shares);
• (b) the association must own all the issued shares in the company immediately after the disposal;
• (c) each member of the association must have an interest in the shares in the same proportion to the member’s interest in the business assets immediately before the disposal;
• (d) the company must undertake to discharge any liability in respect of the assets disposed of to the company;
• (e) any liability in respect of the assets disposed of to the company must not exceed the association’s cost of the asset at the time of the disposal;
• (f) the fair market value of the share or shares received by the association for the disposal must be substantially the same as the fair market value of the assets disposed of to the company, as reduced by any liability that the company has undertaken to discharge in respect of the assets; and
• (g) the company must not be exempt from tax for the tax year in which the disposal takes place.

(2) Where sub-section (1) applies —

• (a) each of the assets acquired by the company shall be treated as having the same character as it had in the hands of the association;
• (b) the company’s cost in respect of the acquisition of the assets shall be —

(i) in the case of a depreciable asset or amortised intangible, the written down value of the asset or intangible immediately before the disposal;

(ii) in the case of stock-in-trade valued for tax purposes under sub-section (4) of section 35 [ ], that value; or

(iii) in any other case, the association’s cost at the time of the disposal;

• (c) if, immediately before the disposal, the association is subject to tax in accordance with sub-section (1) of section 92 and the association has deductions allowed under sections 22, 23 and 24 in respect of the assets transferred which have not been set off against the association’s income, the amount not set off shall be added to the deductions allowed under those sections to the company in the tax year in which the transfer is made; and
• (d) the association’s cost in respect of the share or shares received as consideration for the disposal shall be —

(i) in the case of a consideration of one share, the association’s cost of the assets transferred as determined under clause (b), as reduced by the amount of any liability that the company has undertaken to discharge in respect of the assets; or

(ii) in the case of a consideration of more than one share, the amount determined under sub-clause (i) divided by the number of shares received.

(3) In determining whether the association’s deductions under Sections 22, 23 or 24 have been set off against income for the purposes of clause (c) of sub-section (2), those deductions are taken into account last.