Private ruling: Restructure of The Group
Date of advice: 8 September 2016
Published: November 2016
Ruling period: Year ending 30 June 20YY | Year ending 30 June 20ZZ
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the unitholders of Unit Trust A ( Trust A ), Unit Trust B ( Trust B ) and Unit Trust C ( Trust C ) be eligible to choose roll-over relief under Division 615 of the Income Tax Assessment Act 1997 ( ITAA 1997 ) when they exchange their respective units in those unit trusts for their respective shares in New Company ( New Company )? | A1: Yes. | Q2: If the unitholders choose roll-over relief under Division 615 of the ITAA 1997 (on exchanging their units in the unit trusts for shares in New Company), will the first element of the cost base of New Company's units in Trust A, Trust B and Trust C, be a negative amount by virtue of subsection 615-65(4) of the ITAA 1997? | A2: No. | Q3: When New Company elects to form a tax consolidated group under section 703-50 of the ITAA 1997 (and each of Trust A, Trust B and Trust C join the group as subsidiary members), will the 'step 1 amount' worked out under section 705-65 of the ITAA 1997 for the units (membership interests) held by New Company in each unit trust be a negative amount? | A3: No. | Q4: When New Company elects to form a tax consolidated group under section 703-50 of the ITAA 1997 (and each of the unit trusts join the group as subsidiary members), will the 'step 2 amount' worked out under section 705-70 of the ITAA 1997 include the accounting liabilities held by Trust A and Trust B? | A4: Yes.

Relevant facts and circumstances: Group History and Current Structure The Group carries on a business of providing services to clients. The Group includes: Trust A, Trust B and Trust C. Each of the trusts qualifies as a unit trust. The Group is not a tax consolidated group under Part 3-90 of the ITAA 1997. The unitholders in Trust A, Trust B and Trust C are: • Company D; • Family Trust E; and • Family Trust F Each unitholder owns the same proportion of shares in Trust A, Trust B and Trust C. All the unitholders are Australian residents. The Financial Reports for Trust A and Trust B showed that they have some accounting liabilities. The Restructure The Group will restructure from its current unit trust structure to a company structure. The proposed restructure will proceed as follows: 1) New Company is incorporated as a shelf company, with three shares initially (each unitholder holding one share). 2) The unitholders of Trust A, Trust B and Trust C will transfer all of their respective units in those unit trusts to New Company in exchange for newly issued shares in New Company. 3) Each exchanging unitholder receives replacement shares in New Company and nothing else. 4) The shares issued by New Company to the exchanging unitholders are ordinary shares. 5) In aggregate, these newly issued shares in New Company will be held by the unitholders of Trust A, Trust B and Trust C in the same ratio as their units currently held in Trust A, Trust B and Trust C. 6) New Company (being the interposed company ) will own all the units in Trust A, Trust B and Trust C immediately after a time (being the completion time ) the exchanging unitholders dispose of their units in Trust A, Trust B and Trust C. 7) The New Company, as head of the Group, will elect to form a tax consolidated group under Part 3-90 of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-90 | Income Tax Assessment Act 1997 section 104-55 | Income Tax Assessment Act 1997 section 104-60 | Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 Division 615 | Income Tax Assessment Act 1997 sub section 615-5(1) | Income Tax Assessment Act 1997 paragraph 615-5(1)(a) | Income Tax Assessment Act 1997 paragraph 615-5(1)(b) | Income Tax Assessment Act 1997 paragraph 615-5(1)(c) | Income Tax Assessment Act 1997 paragraph 615-5(1)(d) | Income Tax Assessment Act 1997 Subdivision 615-B | Income Tax Assessment Act 1997 section 615-15 | Income Tax Assessment Act 1997 section 615-20 | Income Tax Assessment Act 1997 subsection 615-20(1) | Income Tax Assessment Act 1997 subsectio n 615-20(2) | Income Tax Assessment Act 1997 subsection 615-20(3) | Income Tax Assessment Act 1997 section 615-25 | Income Tax Assessment Act 1997 subsection 615-25(1) | Income Tax Assessment Act 1997 subsection 615-25(2) | Income Tax Assessment Act 1997 subsection 615-25(3) | Income Tax Assessment Act 1997 section 615-30 | Income Tax Assessment Act 1997 subsection 615-30(1) | Income Tax Assessment Act 1997 section 615-65 | Income Tax Assessment Act 1997 subsection 615-65(4) | Income Tax Assessment Act 1997 paragraph 615-65(4)(a) | Income Tax Assessment Act 1997 s ubsection 615-65(5) | Income Tax Assessment Act 1997 section 703-50 | Income Tax Assessment Act 1997 Subdivision 705-A | Income Tax Assessment Act 1997 section 705-60 | Income Tax Assessment Act 1997 section 705-65 | Income Tax Assessment Act 1997 subsection 705-65(1) | Income Tax Assessment Act 1997 subsection 705-65(4) | Income Tax Assessment Act 1997 section 705-70 | Income Tax Assessment Act 1997 subsection 705-70(1) | Income Tax Assessment Act 1997 subsection 705-70(2) | Income Tax Assessment Act 1997 Subdivision 705-B | Income Tax Assessment Act 1997 section 705-140 | Income Tax Assessment Act 1997 Subdivision 713-A

Reasons for decision: Summary: The unitholders of Trust A, Trust B and Trust C can choose roll-over relief under Division 615 of the ITAA 1997 when they exchange their respective units in those unit trusts for their respective shares in New Company. | Detailed Reasoning - Detailed reasoning: Division 615 of the ITAA 1997 provides CGT roll-over relief for a shareholder or unitholder (the exchanging members) on the disposal of all the shares in a company or all the units in a unit trust for shares in another company. Under subsection 615-5(1) of the ITAA 1997, an exchanging member can choose to obtain a roll-over under this Division if: (a) you are a member of a company or a unit trust ( the original entity ); and (b) you and at least one other entity ( the exchanging members ) own all of the shares or units in it; and (c) under a scheme for reorganising its affairs, the exchanging members dispose of all their shares or units in it to a company ( the interposed company ) in exchange for shares in the interposed company (and nothing else); and (d) the requirements in Subdivision 615-B are satisfied. The requirement in paragraph 615-5(1)(a) of the ITAA 1997 Trust A, Trust B and Trust C are considered to be a unit trust for the purposes of paragraph 615-5(1)(a) of the ITAA 1997. Company D, Family Trust E and Family Trust F are the unitholders of Trust A, Trust B and Trust C. As such, for the purposes of paragraph 615-5(1)(a) of the ITAA 1997, Company D, Family Trust E and Family Trust F are the members of Trust A, Trust B and Trust C (the original entities ) . Therefore, the requirement in paragraph 615-5(1)(a) of the ITAA 1997 is satisfied. The requirement in paragraph 615-5(1)(b) of the ITAA 1997 Company D, Family Trust E and Family Trust F (the exchanging members ) are the unitholders of Trust A, Trust B and Trust C, and together, own 100% of the units in Trust A, Trust B and Trust C. Therefore, the requirement in paragraph 615-5(1)(b) of the ITAA 1997 is satisfied. The requirement in paragraph 615-5(1)(c) of the ITAA 1997 The unitholders of Trust A, Trust B and Trust C will transfer all of their respective units in Trust A, Trust B and Trust C for shares in New Company (the interposed company ) and nothing else. Therefore, the requirement in paragraph 615-5(1)(c) of the ITAA 1997 is satisfied. The requirement in paragraph 615-5(1)(d) of the ITAA 1997 Further requirements are imposed by Subdivision 615-B of the ITAA 1997. They are: • the interposed company must own all the original interests (section 615-15 of the ITAA 1997) • requirements relating to your interests in the original entity (subsections 615-20(1),(2) and (3) of the ITAA 1997) • special requirement relating to the interposed company (section 615-25 of the ITAA 1997), and • the interposed company must make a particular choice under section 615-30 of the ITAA 1997. Has section 615-15 of the ITAA 1997 been satisfied? Section 615-15 of the ITAA 1997 provides that: The interposed company must own all the shares or units in the original entity immediately after the time (the completion time) all the exchanging members have had their shares or units in the original entity disposed of, redeemed or cancelled under the scheme. This requirement is satisfied because New Company owns all the units in Trust A, Trust B and Trust C immediately after the exchanging members disposed of their units in Trust A, Trust B and Trust C. Has section 615-20 of the ITAA 1997 been satisfied? Subsection 615-20(1) of the ITAA 1997 requires that: 1) Immediately after the completion time, each exchanging member must own: (a) a whole number of shares in the interposed company; and (b) a percentage of the shares in the interposed company that were issued to all the exchanging members that is equal to the percentage of the shares or units in the original entity that were: (i) owned by the member; and (ii) disposed of, redeemed or cancelled under the scheme. Under the scheme, each exchanging member will acquire a whole number of shares in New Company (the interposed company ). The percentage of newly issued shares, which each exchanging member will receive in consideration for their units in Trust A, Trust B and Trust C, will be equal to the percentage of units the exchanging members currently hold in each the unit trusts. Therefore, the requirements under subsection 615-20(1) of the ITAA 1997 are satisfied. Subsection 615-20(2) of the ITAA 1997 requires that: The following ratios must be equal: (a) the ratio of: (i) the market value of each exchanging member's shares in the interposed company; to (ii) the market value of the shares in the interposed company issued to all the exchanging members (worked out just after the completion time); (b) the ratio of: (i) the market value of that member's shares or units in the original entity that were disposed of, redeemed or cancelled under the scheme; to (ii) the market value of all the shares in the original entity that were disposed of, redeemed or cancelled under the scheme (worked out immediately before the first disposal, redemption or cancellation). Under the scheme, the proportion of shares to be held by each of the exchanging members in New Company after the transfer of their units will equal to the same proportion of their units they currently hold in Trust A, Trust B and Trust C. The proportionate market value of the interest of each shareholder in New Company after the reorganisation will also be the same as the proportionate market value of the prior interest that was held by the exchanging member in Unit Trust A, Trust B and Trust C just before the first disposal. Therefore, the requirements in subsection 615-20(2) of ITAA 1997 are satisfied. Subsection 615-20(3) of the ITAA 1997 requires that: Either: (a) you are an Australian resident at the time your shares or units in the original entity are disposed of, redeemed or cancelled under the scheme; or (b) if you are a foreign resident at that time: (i) your shares or units in the original entity were taxable Australian property immediately before that time; and (ii) your shares in the interposed company are taxable Australian property immediately after the completion time. The exchanging members, being Company D, Family Trust E and Family Trust F will continue to be Australian residents when they dispose of their units in Trust A, Trust B and Trust C. Therefore, the requirements in subsection 615-20(3) of the ITAA 1997 are satisfied. As such, section 615-20 of the ITAA 1997 is satisfied. Has section 615-25 of ITAA 1997 been satisfied? Section 615-25 of the ITAA 1997 concerns some requirements that the interposed company must meet and provides that: (1) The shares issued in the interposed company must not be redeemable shares. (2) Each exchanging member who is issued shares in the interposed company must own the shares from the time they are issued until at least the completion time. (3) Immediately after the completion time: (a) the exchanging members must own all the shares in the interposed company; or (b) entities other than those members must own no more than 5 shares in the interposed company, and the *market value of those shares expressed as a percentage of the market value of all the shares in the interposed company must be such that it is reasonable to treat the exchanging members as owning all the shares. For the purposes of subsection 615-25(1) of the ITAA 1997, the shares to be issued by New Company to the exchanging members will be ordinary shares and no redeemable shares will be issued. As such, subsection 615-25(1) of the ITAA 1997 is satisfied. For the purposes of subsection 615-25(2) of the ITAA 1997, shares in New Company that are to be issued to exchanging members under the scheme will continue to be held by those exchanging members. There will not be any subsequent transfers of those shares as part of the scheme. Therefore, subsection 615-25(2) of the ITAA 1997 is satisfied. For the purposes of subsection 615-25(3) of the ITAA 1997, the exchanging members will own all of the shares in New Company immediately after the completion time. Accordingly, the requirements in subsection 615-25(3) of the ITAA 1997 are satisfied. As such, section 615-25 of the ITAA 1997 is satisfied. Has section 615-30 of the ITAA 1997 been satisfied? Under section 615-30 of the ITAA 1997, the interposed company must make a choice that section 615-65 of ITAA 1997 applies. Section 615-30 of the ITAA 1997 relevantly provides that: (1) Unless subsection (2) applies, the interposed company must choose that section 615-65 applies. (2) The interposed company must choose that a consolidated group continues in existence at and after the completion time with the interposed company as its head company, if: (c) immediately before the completion time, the consolidated group consisted of the original entity as head company and one or more other members (the other group members); and (d) immediately after the completion time, the interposed company is the head company of a consolidatable group consisting only of itself and the other group members. (3) A choice under subsection (1) or (2) must be made: (e) within 2 months after the completion time, if the choice is under subsection (1) or (f) within 28 days after the completion time, if the choice is under subsection (2); or (g) within such further time as the Commissioner allows. The choice cannot be revoked. (4) The way the interposed company prepares its income tax returns is sufficient evidence of the making of the choice. New Company is not the head company of a consolidated group immediately before the completion date and, in accordance with subsection 615-30(1) of the ITAA 1997, is required to apply section 615-65 of the ITAA 1997. The New Company will choose to apply section 615-65 of the ITAA 1997. Therefore, the requirements in section 615-30 of the ITAA 1997 are satisfied. As such, given that, sections 615-15, 615-20, 615-25 and 615-30 of the ITAA 1997 are satisfied, the requirements in paragraph 615-5(1)(d) of the ITAA 1997 are satisfied. | Detailed Reasoning - Conclusion: Company D, Family Trust E and Family Trust F, being the unitholders of Trust A, Trust B and Trust C can choose roll-over relief under Division 615 of the ITAA 1997 when they exchange their respective units in those unit trusts for their respective shares in New Company. | Summary: If the unitholders choose roll-over relief under Division 615 of the ITAA 1997 (on exchanging their units in the unit trusts for shares in New Company), the first element of the cost base of New Company's units in Trust A, Trust B and Trust C will be nil by virtue of subsection 615-65(4) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 615-65(4) of the ITAA 1997 states that: The first element of the *cost base of the interposed company's shares or units in the original entity that are not taken to have been acquired before 20 September 1985 is: (a) the total of the cost bases (as at the completion time) of the original entity's assets that it acquired on or after that day; less (b) its liabilities (if any) in respect of those assets. Subsection 615-65(5) of the ITAA 1997 also states that: A liability of the original entity that is not a liability in respect of a specific asset or assets of the original entity is taken to be a liability in respect of all the asset of the original entity. According to Taxation Ruling 97/18 Income tax: capital gains: roll-over relief following reorganisation of the affairs of a unit trust or company - sections 160ZZPA, 160ZZPB, 160ZZPC and 160ZZPD , the phrase 'completion time' is taken to mean 'the time when the last of the unitholders disposes of his or her units in the unit trust.' Pursuant to subsections 615-65(4) and (5) of the ITAA 1997, the cost base of the units in each of Trust A, Trust B and Trust C (taken to have been acquired by New Company after 19 September 1985) is to be determined by working out the total cost bases of the assets held by the unit trust less the total of the liabilities owned by the trust (at the completion time). If the total of the cost bases of the assets held is less than the total of the liabilities owed by the unit trust at the completion time- then the first element of the cost base of New Company's units in Trust A, Trust B and Trust C will be nil. | Summary: When New Company elects to form a tax consolidated group under section 703-50 of the ITAA 1997 (and each of Trust A, Trust B and Trust C join the group as subsidiary members), the 'step 1 amount' worked out under section 705-65 of the ITAA 1997 for the units (membership interests) held by New Company in each unit trust will be nil. | Detailed Reasoning - Detailed reasoning: New Company, as head of the Group, will elect to form a tax consolidated group under Part 3-90 of the ITAA 1997. As such, Subdivision 705-B of the ITAA 1997 will apply on group formation. Section 705-140 of the ITAA 1997 provides that: (1) Subdivision 705-A has effect in relation to each entity becoming a subsidiary member of the consolidated group at the formation time in the same way as that Subdivision has effect in relation to an entity becoming a subsidiary member of a consolidated group in circumstances covered by that Subdivision. (2) However, that effect of Subdivision 705-A is subject to modifications set out in this Subdivision. Accordingly, for the purposes of step 1 of the table in section 705-60 of the ITAA 1997, the 'step 1 amount' will be worked out under subsection 705-65(1) of the ITAA 1997. Under subsection 705-65(1) of the ITAA 1997, 'the step 1 amount' is worked out in accordance with the table in that subsection for each membership interest held in each of the joining entities. The table in subsection 705-65(1) of the ITAA 1997 makes a comparison between the market value of the membership interests and the cost base or reduced cost base in order to work out the 'step 1 amount'. Under item 1 of the table in subsection 705-65(1) of the ITAA 1997, if the market value of the membership interest is greater than its cost base, the 'step 1 amount' is its cost base. As Division 615 of the ITAA 1997 is applicable, subsection 615-65(4) of the ITAA 1997 is relevant in determining cost base. When calculating the first element of the cost base of New Company's units in Trust A, Trust B and Trust C, if the unit trusts' liabilities in respect of the assets, for the purposes of subsection 615-65(4) of the ITAA 1997, is greater than the total of the cost bases (at the completion time) of the unit trusts' assets that New Company acquires, the first element of the cost bases of New Company's units in Trust A, Trust B and Trust C will be nil. Given the above and given the assumptions with respect to completion time and joining time upon which the ruling is predicated and the market value of each relevant unit trust, for the purposes of step 1 of the table in section 705-60 of the ITAA 1997, where the first element of the units' cost base for the purposes of subsection 615-65(4) of the ITAA 1997 plus any other elements of the cost base as determined under section 110-25 of the ITAA 1997 is nil, the 'step 1 amount' for each of Trust A, Trust B and Trust C's membership interests that New Company holds, at the joining time, will also be nil. Finally, Subdivision 713-A of the ITAA 1997 will have no application in the present case. | Summary: When New Company elects to form a tax consolidated group under section 703-50 of the ITAA 1997 (and each of the unit trusts join the group as subsidiary members), the 'step 2 amount' worked out under section 705-70 of the ITAA 1997 will include the accounting liabilities held by Trust A and Trust B. | Detailed Reasoning - Detailed reasoning: The 'step 2 amount' is worked out under section 705-70 of the ITAA 1997. In the present case, none of the modifications in Subdivision 705-B of the ITAA 1997 apply in working out 'the step 2 amount'. Subsection 705-70(1) of the ITAA 1997 provides that: For the purposes of step 2 in the table in section 705-60, the step 2 amount is worked out by adding up the amounts of each thing (an accounting liability) that, in accordance with the joining entity's accounting principles for tax cost setting, is a liability of the joining entity at the joining time. The accounting liabilities held by Trust A and Trust B are liabilities that satisfy subsection 705-70(1) of the ITAA 1997 and would therefore be included in the 'step 2 amount'. On the facts presented, subsection 705-70(2) of the ITAA 1997 is not enlivened in respect of these accounting liabilities.