ATO ID 2006/31: Franking Credits: CGT roll-over relief and its interaction with the date of acquisition for imputation purposes - qualified person - family trust election
Date of decision: 29 November 2005
Year of income: Year ended 30 June 2006
Business line: Public Groups and International

Issue
If a trustee of a discretionary trust elects to apply the capital gains tax (CGT) roll-over provisions of Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) to deem the acquisition date of newly issued shares to be pre-20 September 1985, will the new shares be deemed to have been acquired before 20 September 1985 for the purposes of the imputation rules, in particular, the 'holding period' and 'related payment' rules contained in Division 1A of Part IIIAA of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
No. If a trustee of a discretionary trust elects to obtain the CGT roll-over available under Subdivision 122-A of the ITAA 1997 to deem the acquisition date of newly issued shares to be pre 20 September 1985, then the new shares will not be deemed to have been acquired before 20 September 1985 for the purposes of the imputation rules. For the purposes of the imputation rules, the trustee of the discretionary trust will be taken to have acquired the newly issued shares on the date of acquisition. This occurred post 1 July 1997. Therefore, in respect of dividends paid on the newly issued shares, the beneficiaries of the trust will not, in the absence of any other long or short positions, be a 'qualified person' under Division 1A of Part IIIA of the ITAA 1936 unless the trustee makes a family trust election.

Facts
Discretionary trust A holds 100% of the shares in company B and company C. These shares were acquired before 20 September 1985. Consequently, distributions in respect of them were not subject to the holding period rules contained in Division 1A of the Part IIIA of the ITAA 1936. In June 2003, discretionary trust A transferred its shares in company C to company B in exchange for newly issued shares in company B. Following the transfer, discretionary trust A owns 100% of the shares in company B and company C becomes a wholly owned subsidiary of company B. This was done to facilitate entry into the consolidations regime. Discretionary trust A elected to obtain the CGT roll-over available under Subdivision 122-A of the ITAA 1997 in respect of the transfer of shares to company B. Beneficiary D is a beneficiary of discretionary trust A. Beneficiary D will receive distributions of franked dividends from the trust in the 2003-04 to 2007-08 income years. The franking credits attached to the dividends exceed $5,000.

Reasons for decision
Summary: The CGT roll-over is found in Subdivision 122-A of the ITAA 1997. If an individual or a trustee of a trust transfers a CGT asset (for example a share) to a company in which the individual or trustee holds all the shares, and the market value of the asset transferred and the market value of the share issued by the transferee are substantially the same, then any capital gain on the disposal of the asset to the company is disregarded. Moreover, if the asset has been acquired before 20 September 1985, then the share the trustee receives in exchange are also taken to have been acquired before 20 September 1985. Section 995-1 of the ITAA 1997 provides a definition of the term 'acquire' in the context of a CGT asset: Acquire: The effect of the words 'in the capacity as a CGT asset', is to restrict the relevance of the acquisition date of a CGT asset, including deemed acquisitions dates as determined under Division 109 of the ITAA 1997 and provisions listed in Subdivision 109B of the ITAA 1997 to circumstances in which the taxpayer deals with an asset in its capacity as a CGT asset. The present circumstance is listed at item 6 of the table contained in section 109-55 of the ITAA 1997. Consequently, the acquisition date deemed in respect of the newly issued shares to trust A is relevant purely in the context of CGT consequences. It is not intended to extend to the share's treatment for imputation purposes or any other purpose outside the CGT provisions. Division 1A of Part IIIAA of the ITAA 1936 generally applies to shares and interests in shares acquired on or after 1 July 1997. New shares were issued by company B to trust A pursuant to the establishment of the current structure in June 2003. An underlying principle of the imputation system is to ensure that the benefits of imputation are only available to the true economic owners of shares and only to the extent that those taxpayers are able to utilise those benefits. Section 160APHH of the ITAA 1936 provides some special rules relating to the date of acquisition or disposal for imputation purposes, outlining several circumstances where a taxpayer may be taken to acquire or dispose of shares at a time other than the actual time of acquisition or disposal. However, neither this section nor any other provision within Division 1A of Part IIIAA of the ITAA 1936 deems the acquisition date of shares issued post 1 July 1997 as consideration in respect of the disposal of pre-CGT shares to have a pre-CGT acquisition date. Therefore, in the absence of a specific provision that deems shares issued post 1 July 1997 as consideration in respect of the disposal of pre-CGT shares to have a pre-CGT acquisition date, the shares issued to trust A as consideration for the transfer to it of pre-CGT shares will be taken to have been issued at that time.

Legislative references: Income Tax Assessment Act 1997 section 122-55 section 995-1 section 109-55
Subject references: CGT roll-over relief Family trust election