Private ruling: Rollover of Business Assets from a Trust to a Company
Published: February 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2011

Ruling: Q1: Can the Trustee of the Trust access the Capital Gains Tax (CGT) rollover under section 122-15 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the transfer of the goodwill? | A1: Yes. | Q2: Can the Trustee of the Trust access the CGT rollover under section 122-15 of the ITAA 1997 in relation to the transfer of the non-fixed plant and equipment? | A2: No. | Q3: Can the Trustee of the Trust access the Capital Gains Tax (CGT) rollover under section 122-15 of the ITAA 1997 in relation to the transfer of the trading stock? | A3: No. | Q4: Will section 70-90 of the ITAA 1997 include an amount in the assessable income of the trust on the transfer of the trading stock to the propriety company? | A4: Yes. | Q5: Will the transfer of the non-fixed plant and equipment to a propriety company result in a balancing adjustment event under section 40-285 of the ITAA 1997? | A5: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The Trust is a family trust that is involved in machinery manufacturing and sale. They include specific machinery as well as other machinery and equipment specific to an industry. Being a family trust, the guardian and appointer is Person A and upon their death, their spouse, Person B. The trustee of the trust is a propriety company. The shareholders are Persons A and B. The Trust has never lodged a family trust election as there are no carry forward capital or revenue losses in the trust. The trust owns four major assets: Goodwill relating to the trading operation Commercial Land and Buildings at cost (premises from which the business is conducted) Plant & Equipment (not fixed to the buildings) relating to the above business Trading stock relating to the business There are no collectible assets, personal use assets or precluded assets that are being rolled over other than plant and equipment and trading stock. The trustees are considering the rollover of the business goodwill, non-fixed plant and equipment and the trading stock from the current business structure of a discretionary family trust to a private company. The trustee wishes to retain the commercial land and building in the family trust due to favourable CGT concessions that are not available in a company structure. The business commenced after 20 September 1985 and therefore all assets are post CGT assets The trustees understand that the shares in the proposed rollover company cannot be redeemable preference shares. The trust will own all the shares in the new company just after the trigger event as per section 122-25 of the ITAA 1997. The trustees are not seeking advice on small business CGT concessions as the business does not meet the necessary requirements to be classified as a small business.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 40-285, | Income Tax Assessment Act 1997 Section 70-90, | Income Tax Assessment Act 1997 Section 122-15, | Income Tax Assessment Act 1997 Section 122-25, | Income Tax Assessment Act 1997 Subsection 122-25(2) and | Income Tax Assessment Act 1997 Subsection 122-25(3). Summary | Under section 122-15 of the ITAA 1997, the Trust will be eligible for rollover relief in respect of the transfer of the goodwill of the trust to the company in exchange for shares in the company. | As not all of the assets of the trust are being transferred, the trading stock and non-fixed equipment of the trust, being precluded assets, will not be eligible for the rollover relief under section 122-15 of the ITAA 1997. The market value of the trading stock on the day of the transfer will be included in the assessable income of the trust and a balancing adjustment event in relation to the non-fixed plant and equipment will occur on the day of transfer. | Detailed reasoning | An individual or a trustee can choose roll-over under Subdivision 122-A of the ITAA 1997 if they dispose of an asset (or all the assets of a business) to a company (section 122-15 of the ITAA 1997). | Roll-over relief is available under section 122-15 of the ITAA 1997 to trustees of a trust who dispose of a CGT asset, or all the assets of a business, to a company in which the trustees will own all the shares after the CGT event. | However there are a number of conditions in sections 122-20 and 122-25 of the ITAA 1997 which must be met before roll-over relief is available. These conditions are: | A trigger event must happen involving the trustees and the company. A trigger event includes CGT event A1, which involves the disposal of an asset, or all of the assets from the trustee to the company. | The consideration the trustee received for the trigger event happening must only be shares in the company and/or the company undertaking to discharge one or more liabilities in respect of the assets | The market value of the shares that the trustee receives for the trigger event happening must be substantially the same as the market value of the asset or assets disposed of, less any liability the company undertakes to discharge in respect of the asset or assets. | The trustee must own all the shares in the company just after the time of the trigger event and in the same capacity as the trustees owned the assets that the company comes to own. | Where not all of the assets of a trust are transferred to the company, that is only specific assets are transferred, under subsection 122-25(2) item 1 of the ITAA 1997, the roll-over relief does not apply to the disposal or creation of any of the following assets: | · a collectable or personal use asset; or | · a decoration awarded for valour or brave conduct; or | · a precluded asset. | Precluded assets, under subsection 122-25(3) of the ITAA 1997 include | · a depreciating asset; or | · trading stock; or | · an interest in the copyright in a film referred to in section 118-30. | Application of the law | With the proposed transaction, not all of the assets of the trust will be rolled over into the company. The trust will retain ownership of the land and building while transferring the goodwill, non-fixed plant and equipment and trading stock. | When specific assets are transferred, the rollover provision will not apply to precluded assets. Precluded assets include depreciable assets and trading stock. Therefore although the rollover under subdivision 122-A of the ITAA 1997 will be available in respect of the goodwill of the trust, the rollover will not be available in relation to the non-fixed plant and equipment or the trading stock. | Trading Stock | When an entity stops holding trading stock, in this case due to transfer of the stock to another entity, section 70-90 of the ITAA 1997 operates to include in the assessable income of the entity the market value of the stock on the day of the disposal. | Non-fixed plant and equipment | When depreciable assets are transferred from one entity to another, a balancing adjustment event for the purposes of section 40-285 of the ITAA 1997 will occur. | An amount will be included in the entity's assessable income if the asset's termination value is greater than the adjustable value just before the event occurred. | Conversely, an entity is able to deduct an amount if the asset's termination value is less than its adjustable value just before the event occurred.


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