Private ruling: Exchange of units in a unit trust for shares in a company
Published: February 2014

Ruling: Q1: Will the applicant be entitled to elect for a roll-over under section 124-445 of the Income Tax Assessment Act 1997 (ITAA 1997) to apply in respect of the disposal of his units in the subject unit trust (SUT) in exchange for shares in the company? | A1: Yes.

Relevant facts and circumstances: SUT is the main operating entity for a group of entities. The applicant is a unit holder in SUT. As one of the current unit holders in SUT, the applicant will be an exchanging member when a proposed restructure of the group of entities creates a new company. The new company will become the holding entity for the group of entities. The restructure is intended to facilitate an initial public offering (IPO) of shares in the new company and the quotation of its shares on the Australian Securities Exchange (ASX). As part of the restructure, the unit holders in SUT will dispose of their units in exchange for shares in the new company. The new company will enter into a contract to acquire all the SUT units from the exchanging members in exchange for the issue of shares in the new company. Each exchanging member will receive the same number of ordinary shares in the new company for units held in SUT, such that the approximate unit holding before the exchange will be reflected in the approximate shareholding after completion.

Relevant legislative provisions: Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1997 Subdivision 122-A | Income Tax Assessment Act 1997 Subdivision 124-H | Income Tax Assessment Act 1997 section 124-445 | Income Tax Assessment Act 1997 section 124-450 | Income Tax Assessment Act 1997 section 124-465 | Income Tax Assessment Act 1997 section 124-470

Reasons for decision: Summary: The Commissioner makes this Ruling with the qualification (as was the case in Class Ruling, CR 2013/44, for example) that it is based on the precise arrangement identified in the relevant facts and circumstances of this Ruling. Subdivision 124-H provides roll-over relief where there is an exchange of units in a unit trust for shares in a company. It enables a unit holder in a unit trust to disregard a capital gain or loss from units disposed of as part of a reorganisation of the affairs of the trust where the unit holder becomes the owner of new shares in a company. The roll-over provisions in Subdivision 124-H relating to an exchange of units in a unit trust for shares in a company contain a number of conditions for eligibility to choose roll-over relief. The conditions in a disposal case are: • that you are a member of a unit trust (subsection 124-445(a)) • there must be more than one entity that owns all the units in the unit trust (subsection 124-445(b)) • there must be a scheme for reorganising the trust's affairs and consideration on disposal of the units must consist of shares in the company and nothing else (subsection 124-445(c)) • the company must own all the units in the unit trust just after all the exchanging members have disposed of their units in the unit trust at completion time (subsection 124-450(1)) • just after completion time, each unit holder must own a whole number of shares in the company (paragraph 124-450(2)(a)) • just after the completion time, each unit holder must own a percentage of the shares in the company that were issued to all unit holders that is equal to the percentage of the units in the unit trust that the unit holder owned (paragraph 124-450(2)(b)) • the ratio of the market value of each exchanging member's shares in the company to the market value of all the shares in the company must equal the ratio of the market value of that member's units in the unit trust to the market value of all the units in the unit trust that were disposed of to the company (subsection 124-450(3)) • the unit holders must be Australian residents, or if they are foreign residents the units and shares must be taxable Australian property (refer subsection 124-450(4)) • the shares issued in the company must not be redeemable shares (subsection 124-465(1)) • each exchanging member must own the shares from the time they are issued to the completion time (subsection 124-465(2)) • just after the completion time the unit holders must own all the shares in the company, or entities other than those unit holders must own no more than 5 shares in the company and the market value of those shares is such that it is reasonable to treat the unit holders as owning all the shares (refer subsection 124-465(3)) • the company must choose that the rules in section 124-470 of the ITAA 1997 apply and the choice must be made within 2 months after the completion time (subsection 124-465(5)). | Detailed Reasoning - Conditions to be satisfied in section 124-445: The entities (the exchanging members ) own all the units in SUT and it is proposed that the exchanging members will dispose of their units in SUT in exchange for shares in the new company. Furthermore, there will be no other consideration paid for the units. Based on the information provided, it is considered that the conditions set out in section 124-445 will be satisfied. | Detailed Reasoning - Conditions to be satisfied in section 124-450: The proposed arrangement will only proceed if all members of SUT accept the offer. Therefore all members will participate in the exchange of units in SUT for shares in the new company. As a result the new company will own all the units in SUT. Under the restructure the new company will offer all the unitholders a share in it in exchange for each unit in SUT. Therefore, just after completion each exchanging member will own a whole number of shares in the new company. A further condition is that t he ratio of the market value of each exchanging member 's shares in the new company (worked out just after the completion time) must equal the ratio of the market value of that member's units in SUT (worked out just before the first disposal). The rights of each ordinary share will subsume the rights of each unit. Therefore the market value of the units and shares must be identical and the ratio must be unchanged. Pursuant to this condition, each unit in SUT will be exchanged for a share in the new company. The last condition is that all the members of the unit trust are Australian residents at the time they dispose of their units in the unit trust. The applicant has confirmed that the SUT unitholders are Australian residents. Accordingly, the conditions in section 124-450 will be satisfied. | Detailed Reasoning - Requirements to be satisfied in section 124-465: A requirement under this section is that the shares issued in the company must not be redeemable shares. The applicant has stated that the shares to be issued will not be redeemable shares. The applicant has also confirmed that each exchanging member who is issued shares in the new company will own them from the time they are issued to the completion time (when all of the unit holders have disposed of their units). Also, just after the completion time the exchanging members must own all of the shares in the company, or entities other than those members must own no more than 5 shares in the company and the market value of those shares expressed as a percentage of the market value of all the shares in the company is such that it is reasonable to treat the exchanging members as owning all the shares. In the context of this case, at the completion time the exchanging members will own all of the shares in the new company. As a consequence of obtaining a roll-over, a company must choose that the rules in section 124-470 apply. The new company has undertaken to apply section 124-470 consequences to all of the units it owns (i.e. all units) in SUT just after the completion time, if the conditions for roll-over relief are satisfied. Consideration of the facts and circumstances of this ruling indicate that should the exchanging members elect to proceed with the roll-over; the requirements in section 124-465 will be satisfied. | Detailed Reasoning - Conclusion: Consideration of the facts and circumstances of this ruling indicate that should the exchanging members elect to proceed with the roll-over ; the applicant will be eligible for roll-over relief under Subdivision 124-H of the ITAA 1997 on disposal of units in SUT in exchange for shares in the new company.