Private ruling: Proposed Transfer of Business from a Trust to a new, wholly-owned Company
Date of advice: 25 August 2015
Published: August 2015
Ruling period: Income tax year ended 30 June 2016
Date scheme commenced: August 2015

Ruling: Q1: Is section 122-40 of the Income Tax Assessment Act 1997 (ITAA 1997) (which relates to the disposal of individual CGT assets) the applicable provision when applying Subdivision 122-A of the ITAA 1997 to the proposed transaction, rather than section 122-45 of the ITAA 1997 (which relates to the disposal of all of the assets of a business)? | A1: Yes | Q2: If the answer to Question 1 is 'Yes', is the Trust eligible to choose a roll-over under section 122-40 of the ITAA 1997 such that: a. any capital gain or loss in respect of each asset disposed of is disregarded under subsection 122-40(1) of the ITAA 1997; and b. the shares issued by the new company to the Trust in consideration for the pre-CGT assets transferred to the new company with the business will be treated as acquired by the Trust before 20 September 1985 under subsection 122-40(3) of the ITAA 1997? | A2: Yes | Q3: Will the cash payment from the new company to the Trust in respect of the work in progress (WIP) amounts associated with the business be: a. included in the Trust's assessable income by section 15-50 of the ITAA 1997; and b. deductible to the new company under section 25-95 of the ITAA 1997? | A3: Yes

Relevant facts and circumstances: The business The Trust is a discretionary trust that was established by a deed of settlement dated pre-CGT (the Deed). The Trust commenced carrying on its business in 19XX and has continuously carried on the business. The Trust carries on its business using assets it owns, together with assets owned by other trusts and companies controlled by the beneficiaries of the Trust. Assets and liabilities of the business The key accounting assets and liabilities of the business are summarised in the following table. The corresponding values are as per the audited financial statements of the consolidated group as at 30 June 20YY. Assets Liabilities Accounts Receivable $x million Accounts Payable ($x million) Work in Progress (WIP) $x million External Borrowings ($x million) Plant and Equipment (P&E) $x million Unpaid Present Entitlements (UPEs) ($x million) The accounts receivable/(payable) balances represent recoverable debts which have arisen in respect of invoices issued by/(to) the Trust to/(by) customers/(suppliers), or where milestones under the relevant contract (e.g. certification of a stage of a particular project) giving rise to a recoverable debt have been achieved. The WIP balance recognises costs incurred by the Trust in connection with performing services under customer contracts (e.g. salary and wages of staff working on those projects) in respect of which no recoverable debt has yet arisen (e.g. where no invoice has been issued). The P&E balance consists of various depreciating assets (for the purposes of Division 40 of the ITAA 1997). The external borrowings are predominantly in respect of equipment finance. In addition to the assets and liabilities as listed in the Trust's financial statements and management accounts, the business assets of the Trust also include the following: a. contracts with existing customers b. contracts with existing employees c. contracts with existing suppliers d. business records e. information technology systems f. leases of business premises g. registered business names, and h. goodwill. The Trust's goodwill should represent the amount by which the market value of the business exceeds the market value of the Trust's business assets, net of associated liabilities. The proposed business transfer The Trust's management consider that it would be commercially desirable for the business to be carried on through a corporate structure instead of a trust. Reasons for the proposed business transfer 1. A company is a more accepted and understood structure for customers and suppliers than a trust. • A significant number of the Trust's existing and prospective customers lack familiarity with trust structures in contrast to corporate structures which has led to some difficulties in explaining the existing business structure to some customers. 2. A company better facilitates an independent board of directors to oversee the business. • An independent Chief Executive Officer (CEO) and Advisory Board (Board) have been engaged by the Trust in relation to its business. The existing Trust structure results in some complications in relation to the decision-making of the CEO and Board (in comparison to a company). For example: i. to the extent that the Trustee of the Trust does not exercise its discretion to make one or more beneficiaries presently entitled to the Trust's income for each income year, a corresponding share of the Trust's net income will generally be subject to tax. The decisions regarding distribution of trust income are decisions for the beneficiaries of the Trust, not the Board and external management. Hence the Board cannot be directors of the Trustee in a legal sense. ii. Instead of having retained earnings like a company (out of which dividends may be paid), where the profits of the business have been retained for use in the business, the Trust instead has UPEs that beneficiaries are entitled to call for payment of. The CEO and Board of the Trust also need to consider the fiduciary obligations of the Trustee to its beneficiaries in relation to profit distributions and the associated implications for funding its business. 3. A company provides a simpler means of reinvesting profits to fund working capital/ongoing expansion. • Due to the Trust's structure, where the working capital requirements of the business have been funded out of undistributed profits, substantial UPEs due to corporate beneficiaries have arisen (which have been made subject to investment agreements subject to Law Administration Practice Statement PS LA 2010/4 Division 7A: Trust entitlements). In contrast to a company, which can simply retain profits used in its business (generally without incurring additional compliance costs), in order to meet the requirements in PS LA 2010/4, the Trust is required to take the following actions: i. New UPEs to corporate beneficiaries need to be made subject to investment agreements ii. Interest on existing UPEs subject to investment agreements needs to be calculated using the applicable interest rate (as published annually) and accrued in the Trust's account each 30 June iii. Interest accrued under investment agreements each 30 June needs to be paid to the relevant corporate beneficiary by the due date for the Trust's income tax return in respect of the year then ended, and iv. At the end of the terms of the respective investment agreements, the underlying UPEs need to be paid to the relevant company. Correspondingly, the contemplated reorganisation is expected to reduce the complexity and compliance costs described above. 4. A company will better facilitate the whole or partial sale to third parties at some point in the future. Accordingly, it is proposed that the business of the Trust will be transferred to a new, wholly-owned company in consideration for cash and shares in that new company. However, some specific assets and liabilities associated with the business will remain with the Trust, as identified below. Assets of the business that are proposed to be transferred As part of the proposed business restructure, all of the assets of the Trust will be transferred to the new company, with the exception of its accounts receivable and P&E. It is also proposed that the associated liabilities of the Trust associated with those assets (i.e. accounts payable, external borrowings and UPEs) will not be assumed by the new company. This is on the basis that the ownership of those assets (as opposed to access to working capital and a right to use appropriate P&E) is not essential to the continued effective and efficient operation of the business, and there are commercial benefits associated with not transferring these assets. The benefits associated with not transferring the Trust's accounts receivable and P&E to the new company include: a. In order for the Trust's accounts receivable (i.e. debts due to it under customer contracts) to be transferred to the new company, an assignment of those debts would be required. The retention of accounts receivable (typically in conjunction with accounts payable, as is proposed by the Trust) by the vendor in a business sale transaction is a common practice. Correspondingly, it is proposed that the Trust will retain its accounts receivable and accounts payable at the time of the contemplated business transfer and subsequently collect and discharge them respectively. b. In addition to the P&E that it owns, the Trust also leases other P&E used in the business from other related parties. The P&E is also subject to multiple equipment finance arrangements. Accordingly, a single lease agreement between the Trust and the new company in respect of P&E currently used by the Trust in the business (some of which is owned by the Trust and some of which is leased by the Trust) is considered to be a simpler arrangement to implement than multiple transfers and/or leases between the new company and associated entities and arranging for approval of the same with multiple financiers with security interests in that P&E. c. A transfer of the business assets of the Trust to the new company will be a dutiable transaction for the relevant State stamp duty purposes. In that regard, duty should be calculated on the basis of the gross value of the assets transferred from the Trust to the new company. Consequently, not transferring certain assets which are not essential for the new company to own (as opposed to being able to use) in order to efficiently and effectively carry on the business (i.e. accounts receivable and P&E) should limit the duty cost associated with achieving the commercial objective of undertaking that business in a corporate structure. The balance of the assets of the Trust used in the business is proposed to be transferred to the new company and will, accordingly, include: • contracts with existing customers • contracts with existing employees • contracts with existing suppliers • business records • business intelligence/'know-how' • leases of business premises, and • business names and trademarks. That is, it is proposed that all of the assets necessary for the new company to carry on the business will be transferred to the new company from the Trust (notwithstanding that those assets may not be recognised in the Trust's accounts or individually have a material value). On the basis that a transfer of those assets from the Trust to the new company (in conjunction with the proposed leases of P&E discussed above and WIP payments discussed below) will result in the transfer of the business, the goodwill associated with that business will correspondingly transfer from the Trust to the new company. Consideration for the transfer of business assets Immediately before the proposed transaction, the new company will be a newly incorporated Australian company, in which one ordinary share is held by the Trust (i.e. it will be a 'shelf company'). It is proposed that the new company will then issue additional ordinary shares in consideration for the transfer of the assets described above (with the exception of WIP, in respect of which it is proposed that a cash payment will be made, as described below). On the basis that the new company may be issuing shares to the Trust in consideration for a mix of assets acquired before 20 September 1985 (i.e. the Trust's goodwill) and on or after 20 September 1985 (i.e. the balance of the CGT assets proposed to be transferred), the Trust should be treated as having a combination of both pre-CGT and post-CGT shares in the new company. The number of the new company's shares treated as pre-CGT assets and post-CGT assets of the Trust will be determined based on the proportionate market values of the Trust's goodwill and the other CGT assets to be transferred. If the Trust's management decides to proceed with the proposed transaction, a valuation of the assets proposed to be transferred will be performed (amongst other things, to appropriately substantiate the calculation of any associated stamp duty liability). WIP payment It is proposed that the new company will make a cash payment to the Trust equal to the WIP balance in the Trust's accounts at the time of the proposed transaction. This proposal recognises: a. the fact that there is significant commercial value in the partially performed work under the customer contracts to be transferred from the Trust to the new company (i.e. the WIP of the business), and b. the statutory framework in sections 15-50 and 25-95 of the ITAA 1997 for dealing with WIP amounts. The funding for that payment (together with the initial working capital requirements of the new company) is proposed to be provided by the beneficiaries of the Trust in the form of debt.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 15-50 | Income Tax Assessment Act 1997 Section 25-95 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 122-15 | Income Tax Assessment Act 1997 Section 122-20 | Income Tax Assessment Act 1997 Section 122-25 | Income Tax Assessment Act 1997 Section 122-35 | Income Tax Assessment Act 1997 Section 122-40 | Income Tax Assessment Act 1997 Section 122-45 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: Section 122-40 of the ITAA 1997 is the applicable provision when applying Subdivision 122-A to the proposed restructure of the business from the Trust to the new company, as the contemplated transaction will only include the transfer of certain, and not all, assets connected with the business. | Detailed Reasoning - Detailed reasoning: Subdivision 122-A of the ITAA 1997 allows an optional roll-over where an individual or a Trustee disposes of an asset or all the assets of a business to a company that is wholly owned by that individual or Trustee. A CGT asset is defined in subsection 108-5(1) of the ITAA 1997 as: a. any kind of property, or b. a legal or equitable right that is not property. Subsection 108-5(2) of the ITAA 1997 states that a CGT asset may be part of, or an interest in, property or a legal or equitable right that is not property, or goodwill 1 , or an interest in goodwill. Section 122-40 of the ITAA 1997 pertains to the effect of a roll-over on the transferor where a single CGT asset is transferred. In these instances: a. under subsection 122-40(1), any capital gain or loss the transferor makes from the disposal is disregarded b. under subsection 122-40(2), if the transferred asset was acquired by the transferor on or after 20 September 1985 (post-CGT), the cost base and reduced cost base of the shares acquired on the roll-over are essentially the cost base and reduced cost base of that asset, less any related liabilities that the company undertakes to discharge, and c. under subsection 122-40(3), if the transferred asset was acquired by the transferor before 20 September 1985 (pre-CGT), the shares acquired on the roll-over are also taken to have been acquired before then. Conversely, section 122-45 of the ITAA 1997 relates to the effect of a roll-over on the transferor where all of the assets of a business are transferred. In such circumstances, the capital gain or loss from the disposal is also disregarded. There is no definition of 'all of the assets of a business' in Subdivision 122-A of the ITAA 1997 or elsewhere in the ITAA 1997 or the Income Tax Assessment Act 1936 . Therefore, this phrase is to be interpreted according to its ordinary meaning. The contemplated transfer of assets from the Trust to the new company will not incorporate the disposal of the accounts receivable and P&E associated with the business. It therefore follows that, if the proposed transfer will not include the accounts receivable and P&E of the business, it cannot be said that all of the assets of the business will be transferred from the Trust to the new company. On this basis, section 122-40 of the ITAA 1997 is the applicable provision when applying Subdivision 122-A to the proposed restructure of the business from the Trust to the new company. | Detailed Reasoning - Question 2: If the answer to Question 1 is 'Yes', is the Trust eligible to choose a roll-over under section 122-40 of the ITAA 1997 such that: a. any capital gain or loss in respect of each asset disposed of is disregarded under subsection 122-40(1) of the ITAA 1997, and b. the shares issued by the new company to the Trust in consideration for the pre-CGT assets transferred to the new company with the business will be treated as acquired by the Trust before 20 September 1985 under subsection 122-40(3) of the ITAA 1997? | Summary: Subject to the assumptions stipulated below, the Trust is eligible to choose a roll-over in respect of each of the proposed CGT asset disposals under section 122-40 of the ITAA 1997. As such, any capital gains or capital losses that the Trust makes in respect of the CGT assets proposed to be transferred by it to the new company can be disregarded under subsection 122-40(1) of the ITAA 1997. Further, the shares issued by the new company the Trust in consideration for the pre-CGT assets transferred to the new company with the business can be treated as acquired by the Trust before 20 September 1985 pursuant to subsection 122-40(3) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The effect of a roll-over is that any capital gain or loss made because a CGT event happens to a CGT asset is disregarded. However, a capital gain or loss may later arise when a CGT event happens to a replacement asset in respect of which a roll-over is made. When a roll-over happens, the asset held by a taxpayer after the roll-over carries the same CGT characteristics as the asset held before the roll-over. In other words, when a pre-CGT asset is rolled over, the asset held after the roll-over remains a pre-CGT asset. When a post-CGT asset is rolled over, the asset held after the roll-over carries the same cost base or reduced cost base as the asset held before the roll-over. Conditions for a Trust to be eligible to choose a roll-over under section 122-40 of ITAA 1997 Under section 122-15 of the ITAA 1997, roll-over relief is available to a Trustee of a trust who disposes of a CGT asset, or all the assets of a business, to a company in which the Trustee will own all the shares after the CGT event. However, there are a number of conditions in sections 122-15, 122-20, 122-25 and 122-35 of the ITAA 1997 which must be met before roll-over relief under section 122-40 of the ITAA 1997 is available: a. Section 122-15 i. Under section 122-15, one of the following events, known as a 'trigger event', must happen involving the Trustee and the company: | Detailed Reasoning - Description of CGT Event: A1 Dispose of a CGT asset, or all the assets of a business, to a company D1 Create a contractual or other right in the company D2 Grant an option to the company D3 Grant the company a right to income from mining F1 Grant, renew or extend a lease to the company b. Section 122-20 i. Under subsection 122-20(1) of the ITAA 1997, the consideration the Trustee receives for the trigger event happening must be only: a) shares in the company, or b) for a disposal of a CGT asset, or all the assets of a business, to the company (a disposal case) - shares in the company and the company undertaking to discharge one or more liabilities in respect of the asset or all the assets of the business. ii. The shares cannot be redeemable, as per subsection 122-20(2) of the ITAA 1997. iii. Pursuant to subsection 122-20(3) of the ITAA 1997, the market value of the shares that the Trustee receives for the trigger event happening must be substantially the same as: a) for a disposal case - the market value of the assets the Trustee disposed of less any liabilities the company undertakes to discharge in respect of the asset or assets, or b) for a creation case - the market value of the CGT asset created in the company. iv. Subsection 122-20(4) provides that, in working out if the requirement in paragraph 122-20(3)(a) is satisfied, if the market value of the shares is different to what it would otherwise be only because of the possibility of liabilities attaching to the asset or assets, disregard the difference. c. Section 122-25 i. Under subsection 122-25(1) of the ITAA 1997, the transferor (the Trustee) must own all of the shares in the company just after the time of the trigger event and in the same capacity as the transferor (Trustee) owned or created the assets that the company comes to own. ii. As per subsection 122-25(2) of the ITAA 1997, Subdivision 122-A does not apply to the disposal or creation of any of the following assets: a) a collectable or a personal use asset; or b) a decoration awarded for valour or brave conduct (except if you paid money or gave any other property for it); or c) a precluded asset 2 ; or d) an asset that becomes trading stock of the company just after the disposal or creation; or e) an asset that becomes a registered emissions unit held by the company just after the disposal or creation. iii. Under subsection 122-25(4), if: a) the CGT asset or any of the assets of the business is a right, option, convertible interest or exchangeable interest, and b) the company acquires another CGT asset by exercising the right or option or by converting the convertible interest or in exchange for the disposal or redemption of the exchangeable interest the other asset cannot become trading stock of the company just after the company acquired it. iv. Under subsection 122-25(5) of the ITAA 1997, the company must not be exempt from income tax on its ordinary and statutory income because it is an exempt entity in the year in which the trigger event occurs. v. Subsection 122-25(6) of the ITAA outlines residency requirements in the event the transferor is an individual. vi. Subsection 122-25(7) of the ITAA outlines residency requirements in the event the transferor is a Trustee of a trust. Under this subsection, the trust must be a resident trust for CGT purposes and the company must be an Australian resident at the time of the trigger event or both of the following requirements are satisfied: a) each CGT asset must be a CGT asset of the trust that is taxable Australian property at the time, and b) the shares in the company mentioned in subsection 122-20(1) of the ITAA 1997 must be taxable Australian property just after the trigger event. d. Section 122-35 i. This section outlines special rules in the event the company undertakes to discharge liabilities in respect of transferred assets. | Detailed Reasoning - Have the conditions been satisfied?: Section 122-15 According to subsection 104-10(2) of the ITAA 1997, you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner (or merely because of a change in Trustee). CGT event A1 happens if you dispose of a CGT asset, as per subsection 104-10(1) of the ITAA 1997. The contemplated transfer of assets of the business from the Trust to the new company - including contracts with customer, suppliers and employees; leases of premises; business names; business records; and associated goodwill 3 - will involve the disposal of a CGT asset (with the exception of the WIP amounts, which do not constitute a CGT asset). On this basis, the proposed business restructure would therefore involve a 'trigger event' in the form of CGT event A1, which satisfies the first element of section 122-15 of the ITAA 1997. Under section 122-15 of the ITAA 1997, this CGT event A1 must occur in the circumstances as outlined in sections 122-20, 122-25 and 122-35 of the ITAA 1997, each of which are discussed below. Section 122-20 The contemplated business restructure would satisfy the conditions at subsection 122-20(1) and 122-20(2) of the ITAA 1997 on the basis that the consideration proposed to be provided by the new company to the Trust in respect of the asset disposals consist solely of non-redeemable ordinary shares in the new company. The condition in subsections 122-20(3) and 122-20(4) of the ITAA 1997 will also be satisfied on the basis that, immediately prior to the proposed transaction, the new company will be a shelf company (with its only asset being $1 in cash representing the single ordinary share to be issued to the Trust upon its incorporation). The new shares to be issued by the new company to the Trust in consideration for the assets proposed to be transferred will have a market value equal to those assets (subject to the rule in subsection 122-20(4) that provides for deferred tax liabilities associated with the assets acquired by the new company to be ignored). Section 122-25 The proposed asset transfer from the Trust to the new company will satisfy the condition at subsection 122-25(1) of the ITAA 1997 on the basis that the Trust will own all of the shares in the new company just after the time of the trigger event (i.e. the proposal asset disposals) in the same capacity as the Trust owned the assets that the new company comes to own. The conditions at subsections 122-25(2), 122-25(3) and 122-25(4) are not relevant to the contemplated business restructure. This is on the basis that the assets proposed to be transferred by the Trust to the new company (i.e. contracts with customers, suppliers and employees; leases of premises; business names; business records and associated goodwill) do not, and will not after the proposed asset transfer, fall within the following types of assets: a. a collectable or a personal use asset b. a decoration awarded for valour or brave conduct c. a precluded asset as defined by section 122-25(3) d. an asset that becomes trading stock of the company just after the disposal or creation e. an asset that becomes a registered emissions unit held by the company just after the disposal or creation, or f. a right, option, convertible interest or exchangeable interest that the new company will exercise, convert or exchange to acquire another asset that becomes trading stock. The condition at subsection 122-25(5) is also not relevant, as the new company will not be an exempt entity. As the transferor of the applicable assets proposed to be transferred (i.e. the Trust) is not an individual, the condition at subsection 122-25(6) is not applicable. According to subsection 995-1(1) of the ITAA 1997, a trust (that is not a unit trust) is a 'resident trust for CGT purposes' for an income year if, at any time during the income year, a trustee is an Australian resident or the central management and control of the trust is in Australia. Therefore, the contemplated business restructure will satisfy the condition at subsection 122-25(7) on the basis that: a. the Trust is a resident for CGT purposes because its Trustee is a company incorporated in Australia, and b. the new company will be an Australian resident, being a company incorporated in Australia. Section 122-35 Section 122-35 of the ITAA 1997 is not relevant to the proposed business restructure on the basis that the new company will only issue additional ordinary shares in consideration for the transfer of the CGT assets to it. The new company will not undertake to discharge any liabilities in respect of the assets in consideration for the trigger event. Therefore, the Trust will be eligible to choose a roll-over in respect of each of the proposed CGT assets disposals as the contemplated transfer of assets of the business from the Trust to the new company will satisfy the relevant requirements stipulated at sections 122-15, 122-20, 122-25 and 122-35 of the ITAA 1997. As per the response to Question 1 above, section 122-40 of the ITAA 1997 is the relevant provision under which to choose the roll-over on the basis that not all of the assets of the business will be transferred from the Trust to the new company. Accordingly, in the event the Trust chooses a roll-over under section 122-40 of the ITAA 1997, any capital gains or losses that the Trust makes in respect of the CGT assets proposed to be transferred by the Trust to the new company are disregarded pursuant to subsection 122-40(1). Subsection 122-40(3) provides that, if a transferred asset (e.g. goodwill) was acquired by the transferor (i.e. the Trust) before 20 September 1985 (pre-CGT), the shares acquired on the roll-over are also taken to have been acquired before then. Therefore, subject to the following assumptions, the shares proposed to be issued by the new company to the Trust in consideration for the goodwill of the business is to be treated as acquired by the Trust before 20 September 1985 under subsection 122-40(3) of the ITAA 1997: a. The business is a 'pre-CGT business'. b. The goodwill of the business is a pre-CGT asset of the Trust. c. The Trust does not own any other pre-CGT assets. | Detailed Reasoning - Question 3: Will the cash payment from the new company to the Trust in respect of the work in progress (WIP) amounts associated with the business be: a. included in the Trust's assessable income by section 15-50 of the ITAA 1997, and b. deductible to the new company under section 25-95 of the ITAA 1997? | Summary: The proposed cash payment by the new company to the Trust in respect of the WIP associated with the business will be assessable income of the Trust pursuant to section 15-50 of the ITAA 1997, and deductible to the new company pursuant to section 25-95 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: A WIP amount is defined in subsection 25-95(3) as follows: An amount is a work in progress amount to the extent that: (a) an entity agrees to pay the amount to another entity (the recipient); and (b) the amount can be identified as being in respect of work (but not goods) that has been partially performed by the recipient for a third entity but not yet completed to the stage where a recoverable debt has arisen in respect of the completion or partial completion of the work. The note to subsection 108-5(2) of the ITAA 1997 provides examples of CGT assets, one of which includes 'debts owed to you'. A WIP amount is not a CGT asset as it is not property or a legal or equitable right that is not property, and a WIP amount has not progressed to a point where a recoverable debt has arisen. Section 15-50 of the ITAA 1997 provides that a WIP amount that is received is included in assessable income. Subsection 25-95(1) states that: You can deduct a work in progress amount that you pay for the income year in which you pay it to the extent that, as at the end of that income year: (a) a recoverable debt has arisen in respect of the completion or partial completion of the work to which the amount related; or (b) you reasonably expect a recoverable debt to arise in respect of the completion or partial completion of that work within the period of 12 months after the amount was paid. Under subsection 25-95(2), a taxpayer can deduct the remainder (if any) of the WIP amount for the following income year. According to subsection 25-95(4), an amount does not stop being a work in progress amount merely because it is paid after a recoverable debt has arisen in respect of the completion or partial completion of the work to which the amount related. The proposed cash payment by the new company to the Trust in respect of the WIP associated with the business will constitute a WIP amount on the basis that: a. the new company agrees to pay an amount to the Trust, and b. the agreement pursuant to which the payment will be made will identify it as being made in respect of work performed by the Trust for its customers that has not yet been completed to a stage where a recoverable debt has arisen (e.g. because no invoice has been issued or a relevant milestone for the project, such as a certification of a stage, has not yet happened). Therefore, as part of the contemplated business restructure, the proposed cash payment by the new company to the Trust for the value of the business' WIP will be assessable to the Trust under section 15-50 of the ITAA 1997. Correspondingly, the new company will be entitled to a deduction in respect of the proposed WIP payment under subsection 25-95(1) of the ITAA 1997 (and, if applicable, under subsection 25-95(2)). That is, the proposed WIP payment to the Trust should be deductible to the new company in either the income year in which it is paid or the following income year (depending on the length of time before a recoverable debt arises in respect of the WIP). Subsection 25-95(4) makes it clear that the proposed business' WIP payment will not stop being a work in progress amount if it is paid after the WIP to which it relates has wholly or partially been converted into recoverable debts. The amount which will be assessable to the Trust and deductible to the new company as a consequence of the contemplated business restructure is to reflect the value of the WIP balance on the Trust's financial records as at the date of the cash payment from the new company to the Trust. 1 'Goodwill' for the purposes of the definition of 'CGT asset' has the meaning it bears under the general law. It is the legal definition of goodwill as explained by the High Court in the case of FC of T v. Murry 98 ATC 4585;(1998) 39 ATR 129, which applies. Goodwill is the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it. The attraction of custom is central to the legal concept of goodwill. Goodwill is a quality or attribute that derives among other things from using or applying other assets of a business. It may be site, personality, service, price or habit that obtains custom. It is more accurate to refer to goodwill as having sources than it is to refer to it as being composed of elements. Goodwill is a composite thing. It is one whole. It is an indivisible item of property that is legally distinct from the sources from which it emanates. It is something that attaches to a business and is inseparable from the conduct of a business. It cannot be dealt with separately from the business with which it is associated. Goodwill is a species of intangible property. 2 A precluded asset is defined in subsection 122-25(3) of the ITAA 1997 to include a depreciating asset; trading stock; an interest in the copyright in a film referred to in section 118-30 of the ITAA 1997; or a registered emissions unit. 3 In FC of T v Murry (1998) 193 CLR 605; 1998 72 ALJR 1065; (1998) 39 ATR 129; (1998) 155 ALR 67; (1998) 98 ATC 4585, the High Court found that goodwill is inseparable from the conduct of a business and that it cannot be dealt with separately from the business with which it is associated. It therefore follows that there will be a disposal of goodwill from the Trust to the new company when the company commences operating the business.

Your arguments in support of your private ruling application: 1. On the basis that the contemplated transfer of assets by the Trust to the new company will not include the accounts receivable and P&E connected with the business, section 122-40 of the ITAA 1997 is the applicable provision when applying Subdivision 122-A to the proposed transaction. | 2. The Trust satisfies the necessary requirements stipulated in sections 122-15, 122-20, 122-25 and 122-35 of the ITAA 1977 to be eligible to choose a roll-over in respect of each of the proposed CGT asset disposals under section 122-40 of the ITAA 1997 on the basis that: | a. CGT Event A1 should occur in respect of each CGT asset proposed to be disposed of by the Trust to the new company | b. consideration proposed to be provided by the new company in respect of the asset disposals is to consist solely of ordinary shares in the new company | c. immediately before the proposed transaction, the new company will be a shelf company (i.e. its only asset will be $1 cash representing the single ordinary share issued to the Trust on its incorporation). The new shares to be issued by the new company to the Trust in consideration for the assets transferred will, correspondingly, have a market value equal to those assets, and | d. the Trust will own all of the shares in the new company just after the proposed asset disposals in the same capacity that it owned the assets disposed of (i.e. as Trustee, on the terms described in the Deed). | As such, any capital gains or capital losses that the Trust makes in respect of the CGT assets proposed to be transferred by it to the new company should be disregarded under subsection 122-40(1) of the ITAA 1997. | 3. Subject to the assumption (as stated below) that the goodwill of the business is a pre-CGT asset of the Trust, the shares proposed to be issued by the new company to the Trust in consideration for that goodwill should be treated as acquired by the Trust before 20 September 1985 under subsection 122-40(3) of the ITAA 1997. | 4. The proposed cash payment by the new company to the Trust in respect of the WIP associated with the business should be included in the Trust's assessable income pursuant to section 15-50 of the ITAA 1997 to the extent that it is a 'work in progress amount'. | 5. Pursuant to either subsection 25-95(1) or 25-95(2) of the ITAA 1997, the new company should be entitled to a deduction for the proposed cash payment by the new company to the Trust in respect of the business' WIP, in either the income year in which it is paid or the following income year (depending on the length of time before a recoverable debt arises in respect of the WIP). | 1. The business is a 'pre-CGT business'. | 2. The goodwill of the business is a pre-CGT asset of the Trust. | 3. The Trust does not own any other pre-CGT assets.