ATO ID 2002/955: Capital gains tax: Trust to company rollover
Date of decision: 27 August 2002
Year of income: Year ending 30 June 2003 Year ending 30 June 2004 Year ending 30 June 2005
Business line: Private Groups and High Wealth Individuals

Issue
Is a trust to company rollover available under Subdivision 124-N of the Income Tax Assessment Act 1997 (ITAA 1997) where one of the beneficiaries of the trust owns an interest in the trust that only has a discretionary income entitlement and no capital entitlement?

Decision
No. Paragraph 124-855(1)(b) of the ITAA 1997 requires that CGT event E4 (capital payments for trust interest) in section 104-70 of the ITAA 1997 must be capable of applying to all interests in the trust. CGT event E4 does not apply where a trust interest is merely discretionary.

Facts
The taxpayer carries on a business through a unit trust. The trust has two classes of unitholders. One class owns interests with capital and income rights. The other class, comprising of a single unitholder, owns an interest with a discretionary income entitlement and no capital entitlement.

Reasons for decision
Summary: Section 124-850 of the ITAA 1997 states that an entity may choose to obtain a rollover where a trust disposes of all of its assets to a company and units and interests in the trust are replaced with shares in the company. Section 124-855 of the ITAA 1997 outlines when a rollover for trust restructuring may be available. Specifically, paragraph 124-855(1)(b) of the ITAA 1997 states that in order for the rollover to be available CGT event E4 must be capable of applying to all of the units and interests in the trust. A beneficiary with only a discretionary interest in a trust does not own an interest of the nature or character referred to in section 104-70 of the ITAA 1997. CGT event E4 cannot apply to an interest in a trust where a beneficiary only owns an interest with a discretionary income entitlement and no capital entitlement. Therefore, paragraph 124-855(1)(b) of the ITAA 1997 is not satisfied and the rollover contained in Subdivision 124-N of the ITAA 1997 is not available.

Legislative references: Income Tax Assessment Act 1997 Subdivision 124-N subsection 104-70 section 124-850 paragraph 124-855(1)(b)
Related public rulings and determinations: Taxation Determination TD 2003/28
Subject references: Capital gains tax Capital gains CGT roll-over relief CGT events CGT events E1-E9 - trusts CGT replacement asset rollover