Private ruling: Income tax - capital gains tax - division 615 rollover
Date of advice: 21 December 2017
Published: May 2018
Ruling period: Income year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Can unitholders of Unit Trust A (Trust A) choose business restructure roll-over relief under Division 615 , for disposing of units in Trust A for ordinary shares in a newly incorporated company (NewCo)? | A1: Yes

Relevant facts and circumstances: Unit Trust A Trust A is a unit trust for the purposes of Division 615. All unitholders are Australian residents. Trust A is not, and has never been, part of an income tax consolidated group at any time. As at 30 June 2017, the key assets held by Trust A consist of 4 properties. The original intention was for Trust A to quarry its landholdings. However, this intention changed shortly after the unit trust was established. It was determined that the land would be developed, as the potential future value of Trust A’s land could be re-zoned and held for long term capital growth, rather than used for quarrying activities. The proposed restructure Trust A is proposing to undergo a restructure due to: ● The desire to change the way in which interests in Trust A are held; and ● In order for the unitholders to strengthen their respective asset protection mechanisms. The Proposed Restructure would involve the following steps: ● The unitholders of Trust A will dispose of all their respective units in Trust A to NewCo; ● In exchange for this disposal, each of the unitholders of Trust A will then acquire non-redeemable ordinary shares in NewCo (and nothing else), with the shares acquired proportionate to each of their respective previous unitholdings in Trust A; and ● NewCo owning 100% of the units in Trust A. It is intended that: ● NewCo will be incorporated; ● The share capital of NewCo will comprise only non-redeemable ordinary shares; ● Each of the unitholders in Trust A expects to remain residents of Australia for income tax purposes until at least the completion of the proposed restructure; and ● Upon completion of the proposed restructure, NewCo will hold only units in Trust A and no other assets and/or liabilities. Upon completion of the proposed restructure: ● NewCo will hold only units in Trust A and no other assets and/or liabilities; ● The total market value of NewCo is expected to be similar to the total market value of Trust A; ● None of the unitholders have any intention to dispose of their shares in NewCo for the foreseeable future; and ● NewCo is not expected to be a part of any income tax consolidated group for the foreseeable future. Assumptions ● Based on the fact that Trust A changed its intent from holding the various landholdings as CGT assets, to one of holding such landings as trading stock, Trust A elected to carry its various landholdings at cost in accordance with paragraph 70-30(1)(a) of the ITAA 1997, on the basis that CGT Event K4 did not occur.

Relevant legislative provisions: Income Tax Assessment Act Paragraph 70-30(1)(a) | Income Tax Assessment Act Division 124 | Income Tax Assessment Act Subdivision 124-A | Income Tax Assessment Act Section 124-15 | Income Tax Assessment Act Subsection 124-15(2) | Income Tax Assessment Act Subsection 124-15(3) | Income Tax Assessment Act Division 615 | Income Tax Assessment Act Subdivision 615-A | Income Tax Assessment Act Section 615-1 | Income Tax Assessment Act Subsection 615-5(1) | Income Tax Assessment Act Paragraph 615-5(1)(a) | Income Tax Assessment Act Subdivision 615-B | Income Tax Assessment Act Section 615-15 | Income Tax Assessment Act Subsection 615-20(1) | Income Tax Assessment Act Subsection 615-20(2) | Income Tax Assessment Act Paragraph 615-20(3)(a) | Income Tax Assessment Act Section 615-25 | Income Tax Assessment Act Subsection 615-25(1) | Income Tax Assessment Act Subsection 615-25(2) | Income Tax Assessment Act Subsection 615-25(3) | Income Tax Assessment Act Paragraph 615-25(3)(a) | Income Tax Assessment Act Subsection 615-30(1) | Income Tax Assessment Act Subsection 615-30(2) | Income Tax Assessment Act Section 615-65 | Income Tax Assessment Act Subdivision 615-C | Income Tax Assessment Act Section 615-40 | Income Tax Assessment Act Section 960-130 | Income Tax Assessment Act Subsection 960-130(1) | Income Tax Assessment Act Section 995-1

Reasons for decision: Detailed Reasoning - Division 615 - Application of roll-over provisions: Broadly, roll-over relief is available under Division 615 for certain business reorganisations where no change occurs in the economic ownership of a particular underlying asset or where the underlying assets in which the taxpayer has an economic interest do not change. Section 615-1 provides that you can choose for transactions under a scheme to restructure a company’s or unit trust’s business to be tax neutral if, under the scheme: a) you cease to own shares in the company or units in the trust; and b) in exchange, you become the owner of new shares in another company. | Detailed Reasoning - Subdivision 615-A - Choosing to obtain roll-overs: Subsection 615-5(1) states that you can choose to obtain a roll-over 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 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. Subsection 995-1(1) states that a ‘member’, in relation to an entity, has the meaning given by section 960-130. Item 3 in subsection 960-130(1) provides that where an entity is a trust, a beneficiary, unitholder or object of the trust is a ‘member’ of the trust. Each of the unitholders would be considered a ‘member’ of Trust A for the purposes of paragraph 615-5(1)(a). Pursuant to subsection 615-5(1), the unitholders of Trust A will be able to choose to obtain a roll-over as they, individually: ● are members of a unit trust; ● own all units in that trust; ● under the proposed restructure, will have disposed of all their units in the Trust A to NewCo in exchanges for shares in NewCo; and ● the requirements in Subdivision 615-B are satisfied (as per the analysis below). | Detailed Reasoning - Subdivision 615-B– Further requirements for choosing to obtain roll-overs: Subdivision 615-B sets out the further requirements for choosing to obtain roll-over relief. Section 615-15 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. Under the Proposed Restructure, NewCo will own all the original units in Trust A immediately after the time that all the unitholders (exchanging members) of Trust A have disposed of their units, and thus the scheme satisfies the requirements of section 615-15. Subsection 615-20(1) states that 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. All unitholders are exchanging members who will own a whole number of shares in NewCo, and the percentage of shares in NewCo that will be issued to them will equal the percentage of units they originally held in Trust A. Therefore, the requirements of subsection 615-20(1) are satisfied. Subsection 615-20(2) sets out 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 immediately 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 or units in the original entity that were disposed of, redeemed or cancelled under the scheme (worked out immediately before the first disposal, redemption or cancellation). The proportionate market value of the interest of each shareholder in NewCo after the reorganisation is the same as the proportionate market value of the prior interest that was held by the exchanging member in Trust A just before the first disposal. NewCo will be incorporated with no other assets other than the nominal initial share capital. As all the units in Trust A carry the same rights and obligations, and each exchanging member will own shares in NewCo equal to the percentage of units they originally own in Trust A, it follows that the market value ratio will be maintained. Accordingly, the requirements in subsection 615-20(2) are satisfied. Paragraph 615-20(3)(a) provides that for subdivision 615-A to apply, you must be an Australian resident at the time your shares or units in the original entity are disposed of, redeemed or cancelled under the scheme. As per the facts, each of the four unitholders in Trust A are expected to remain residents of Australia for income tax purposes, until at least the completion of the proposed restructure. As such, paragraph 615-20(3)(a) is satisfied. Section 615-25 imposes requirements relating to the interposed company. Subsection 615-25(1) provides that shares issued in the interposed company must not be redeemable shares. Subsection 615-25(2) provides that 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. Subsection 615-25(3) provides that 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. On the basis of the facts provided: ● the shares issued in NewCo will not be redeemable shares; ● each unitholder who is issued NewCo shares expects to hold those shares from the time they are issued until at least the completion time; and ● all the exchanging unitholders of Trust A will between them hold all the issued shares in NewCo just after completion time. As such, the requirement in each of subsections 615-25(1) and (2), and paragraph 615-25(3)(a) are all met. Subsection 615-30(1) provides that unless subsection (2) applies, the interposed company must choose that section 615-65 applies. As per the facts, Trust A does not satisfy the conditions in subsection 615-30(2). Trust A was not a head company immediately before the completion date, and just after that time NewCo is not the head company of a consolidatable group consisting of itself and other group members. For this reason, NewCo must choose that section 615-65 applies. Therefore, in making a choice to apply section 615-65, the condition in subsection 615-30(1) is met. | Detailed Reasoning - Subdivision-C - Consequences of roll-overs: Section 615-40 directs us to subdivision 124A. Section 615-40 provides that: The consequences set out in Subdivision 124-A also apply to a roll-over under this Division as if that roll-over were a roll-over covered by Division 124. NOTE: Those consequences generally involve: (a) disregarding a capital gain or capital loss you make from the disposal, redemption or cancellation of your shares or units in the original entity; and (b) working out the first element of the cost base of each of your new shares in the interposed entity by reference to the cost bases of your shares or units in the original entity. | Detailed Reasoning - Subdivision 124A: The consequences set out in section 124-15 apply where a taxpayer’s ownership of more than one CGT asset (the original assets) ends and the taxpayer acquires one or more CGT assets, in a situation covered by any of the subdivisions of Division 124, and a roll-over is available. On the basis that the unitholders of Trust A will be able to choose to obtain a roll-over under Division 615, they will each be affected as follows: ● any capital gain or loss made from the disposal of units in Trust A will be disregarded (as per section 615-40 and subsection 124-15(2)); and ● the first element of the cost base and reduced cost base of each of the shares in NewCo is the total of the cost bases of all the assets of Trust A (worked out when each of Trust A’s unitholders dispose of their units), apportioned over the number of new shares in NewCo (as per subsection 124-15(3)). | Detailed Reasoning - Conclusion: The unitholders of Trust A can choose rollover relief under Division 615. The proposed restructure will have a tax neutral outcome on the basis that all the conditions under this division are satisfied.