Private ruling: Amalgamation of not-for-profit entities
Date of advice: 30 July 2015
Published: July 2015
Ruling period: 1 July 2015 to 30 June 2016.

Ruling: Q1: Will Association A incur a capital gains tax liability under Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) when it amalgamates with Association B? | A1: No. The transfer of the property from Association A to the new amalgamated entity will result in a CGT event A1 occurring under section 104-10 of the ITAA 1997. However as the property is a pre-CGT asset, any capital gain or loss is disregarded.

Relevant facts and circumstances: Association A and Association B are both incorporated in an Australian State and both pursue similar interests. They do not fall under the tax-exempt not-for-profit organisations listed in Division 50 of the ITAA 1997. Association A and Association B are considering amalgamating under Division 3 of the Associations Incorporation Reform Act 2012 (Vic). Association A owns a real estate asset - a meeting hall used for meetings of the Association. Section 21 of the Associations Incorporation Reform Act 2012 (Vic) states: 21 Effect of amalgamation 1. On the registration of an amalgamated association under section 19(1) - a) The bodies corporate previously constituted by the constituent associations are taken to be subsumed in the body corporate constituted by the amalgamated association; b) The property of each constituent association vests in the amalgamated association and, by force of this provision, without the necessity for any conveyance, transfer or assignment; Following the amalgamation it will be necessary to change the name of the owner on the title of the real estate asset to the name of the amalgamated society. Association A's real estate asset was purchased by the association some X years ago. Until recently it was effectively held in trust by X of the members of Association A as joint proprietors. These individuals were members of the association when the property was purchased. In 20XX the decision was made to transfer the property title to the association as X of the titleholders were deceased, and the other individuals are elderly, but continuing members of the association. The title to the property was subsequently transferred, with Association A being named as sole proprietor.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Section 104-10

Reasons for decision: Summary: Association A and Association B are associations incorporated under the Associations Incorporation Reform Act 2012 (Vic) (AIRA (Vic)). The two associations intend to amalgamate under Division 3 of the AIRA (Vic). The relevant provisions are set out below: | Detailed Reasoning - 21 Effect of amalgamation: (1) On the registration of an amalgamated association under section 19(1)- (a) the bodies corporate previously constituted by the constituent associations are taken to be subsumed in the body corporate constituted by the amalgamated association; (b) the property of each constituent association vests in the amalgamated association and, by force of this provision, without the necessity for any conveyance, transfer or assignment; (c) the amalgamated association is, by force of this provision, substituted as a party to any arrangement or contract (including a contract of employment)- (i) entered into by, or on behalf of, any of the constituent associations as a party; and (ii) in force immediately before the registration. (2) Any property vested in an amalgamated association by reason of subsection (1)(b) vests in the incorporated association subject to- (a) any trust; and (b) any restriction, limitation, mortgage, charge, security interest, encumbrance, lien, lease, covenant, contract or liability- to which the property was subject immediately before it was vested by reason of subsection (1)(b). (3) On the registration of an amalgamated association under section 19(1), all debts and liabilities, whether certain or contingent, of a constituent association existing immediately before the registration become the debts and liabilities of the amalgamated association. (4) A reference in a will to a constituent association must, unless the will otherwise provide, be construed as a reference to the amalgamated association. (5) In this section- constituent association , in relation to an amalgamated association, means an incorporated association that is subsumed by the amalgamated association on the registration of the latter under section 19(1). An amalgamation is the merging of two separate things to create a new thing ( Butterworths Australian Legal Dictionary ). The legislation under which the amalgamation is effected does not provide for the continuation of the same legal entity. Instead the legislation refers to 'constituent associations' being associations that have applied to amalgamate and to an 'amalgamated association' being one that is formed under the amalgamation process. The constituent associations are separate legal entities incorporated under the AIRA (Vic) and the amalgamated association is also a separate legal entity. Section 19 of the AIRA (Vic) provides that if an application is made for the amalgamation of two or more incorporated associations in accordance with section 18, the Registrar must register the amalgamated association as a single incorporated association. Section 20 of the AIRA (Vic) provides for the cancellation of the incorporation of the constituent associations. Section 21 of the AIRA (Vic) provides that the assets and liabilities of the constituent associations become the assets and liabilities of the amalgamated association. In becoming assets of the amalgamated association there is a transfer of assets from the constituent associations to the amalgamated association. Paragraph 21(1)(b) of the AIRA (Vic) states: 'the property of each constituent association vests in the amalgamated association and, by force of this provision, without the necessity for any conveyance, transfer or assignment;' In other words, the property, is vested in the amalgamated entity by force of statute law. Vesting of land in an Australian state by statute law is recognised as a dutiable transaction under the Duties Act 2000 (Vic) . Paragraph 7A(1) of the Duties Act 2000 (Vic) provides that: '7A Vesting of land in Victoria by statute law (1) Without limiting section 7(1)(b)(iib), land in Victoria is vested under statute law if the law vests the land in an entity that the law states is the successor in law of, continuation of or same entity as, the entity in which the land was previously vested.' Capital Gains Tax (CGT) event A1 The real estate asset was originally acquired some X years ago by Association A, but title to the property was held in the name of X members of the association. The property was held by the individuals in Estate Fee Simple as Joint Proprietors. Under the trust deed the X members are appointed "to be the Trustees for the said Society for the purposes of acquiring, maintaining and otherwise dealing with property to be purchased by the said Society". Although title to the property was held in the name of the X individuals, Association A remained the beneficial owner. It is considered that the property was merely held on bare trust for the benefit of the members of Association A. A 'bare trust' has been described by Alastair Hudson in his work Equity & Trusts 3 rd ed., 2003, at p35: "A bare trust arises where the trustees hold property on trust for a single, absolutely-entitled beneficiary. The beneficiary therefore holds the entire equitable interest in the trust fund. That means that the trustee has no discretion nor any obligation other than the stewardship of the trust property on behalf of that beneficiary. The beneficiary herself must not be subject to any contingency or encumbrance which will interfere with her equitable interest in the property. She will hold 100% of the possible equitable interest in that property. The trustee in such a situation is generally referred to as being a 'nominee'. That is, one who holds property in the name of another." Similar views on the nature of a bare trust were expressed by Gummow J in Herdegen & Anor v Federal Commissioner of Taxation 88 ATC 4995. CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) happens when there is a disposal of a CGT asset. There is a disposal of a CGT asset if a change of ownership occurs from one entity to another entity. Subsection 104-10(2) of the ITAA 1997 states that 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. The title to the property was subsequently transferred from the X 'nominees' to Association A in 20XX. However a CGT event A1 did not occur at this time as there was no change in ownership of the asset from one entity to another entity. The transfer of legal title to the association did not trigger a CGT event. Accordingly the property retained its pre-CGT status - it is regarded as being acquired by the association before 20 September 1985. When the property of the constituent association (Association A) will be transferred to a new entity (the amalgamated association) there will be a change of ownership (that is, a disposal) of the property from Association to the amalgamated association. CGT event A1 therefore will happen when amalgamation occurs. However under subsection 104-10(5)(a) of the ITAA 1997 a capital gain or loss you make from a CGT event A1 is disregarded if the asset was acquired before 20 September 1985.