ATO ID 2006/98: Consolidation: CGT event E3 - restructure of membership interests supporting components of life insurance business
Date of decision: 30 March 2006
Year of income: Year ended 30 June 2006 Year ended 30 June 2007
Business line: Public Groups and International

Issue
The head company of a consolidated group is treated as a life insurance company. The consolidated group includes two subsidiary members that are unit trusts. The first unit trust is held under the virtual PST of the head company. The underlying assets of this unit trust are segregated to support virtual PST life insurance policy liabilities. The underlying assets of the second unit trust are not segregated and form part of the ordinary assets of the head company. That unit trust can be said to be held under the 'ordinary component' of the head company. Each trust will issue an additional unit to the other component of the head company's life insurance business resulting in each trust ceasing to be a subsidiary member of the consolidated group. When the unit trusts cease to be subsidiary members of the consolidated group, will CGT Event E1 'Creation of a trust over a CGT asset' apply to the head company?

Decision
No. CGT event E1 'Creation of a trust over a CGT asset' will not apply to the head company in regard to the unit trusts leaving the consolidated group.

Facts
Head Co is the head company of a consolidated group. Under section 713-505 of the Income Tax Assessment Act 1997 (ITAA 1997), Head Co is treated as a life insurance company for the purposes of applying the income tax law. Investment policies are issued to trustees of superannuation funds and to ordinary (non-superannuation) policyholders. The assets supporting these policies are held through two subsidiary member unit trusts: It is proposed to issue an additional unit from each unit trust to other 'components' of Head Co for market value, namely: Therefore, in accordance with subsection 713-10(2) of the ITAA 1997, Trust V and Trust O will cease to be subsidiary members of the consolidated group.

Reasons for decision
Summary: Subsection 104-55(1) of the ITAA 1997 provides that CGT event E1 happens: ...if you create a trust over a *CGT asset by declaration or settlement. * denotes a term defined in section 995-1 of the ITAA 1997. Under the proposal, the respective unit trusts currently held under the virtual PST and the 'ordinary component' will issue other/ additional units to the 'ordinary component' and to the virtual PST respectively. As a consequence of the issue of these other/additional units, the relevant unit trusts will cease to be subsidiary members of the consolidated group. This will happen because of the application of subsection 713-510(2) of the ITAA 1997 and not as a result of a disposal of membership interests to another entity or person outside the group. Although the unit trusts will cease to be subsidiary members of the consolidated group, this will not result in a change in either the legal or beneficial ownership of any assets. The units in the trusts and the assets held according to the terms of the trusts will continue to be beneficially owned by the head company. Given that the pre-existing units will continue, the deconsolidation of the unit trusts will not result in the creation of a trust over a CGT asset. In addition, the second requirement of subsection 104-55(1) of the ITAA 1997 will not be met as the deconsolidation of the unit trusts from the consolidated group will not constitute an act of 'declaration or settlement'.

Legislative references: Income Tax Assessment Act 1997 subsection 104-55(1) section 713-505 subsection 713-510(2)
Subject references: Capital gains tax CGT events CGT events E1-E9 - trusts Consolidation Life insurance company Virtual pooled superannuation trusts Complying superannuation funds