Private ruling: Income Tax - Capital gains tax - Rollovers - Trust to company
Date of advice: 13 May 2016
Published: June 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Can the unitholders of Unit Trust A choose roll-over relief under Division 615 of the Income Tax Assessment Act 1997 (ITAA 1997) for disposing of their units in Unit Trust A for ordinary shares in Co B? | A1: Yes.

Relevant facts and circumstances: Unit Trust A Unit Trust A is a unit trust for the purposes of Division 615 of the ITAA 1997. Unit Trust A has a number of different classes of units. Each class of units carries fixed entitlements to income and capital of Unit Trust A. Each class of units also carries the same rights and obligations as the others under the Trust Deed. One unitholder owns pre-CGT units in Unit Trust A. All the other units in Unit Trust A are post-CGT units. All unitholders are Australian residents. Reorganisation of Unit Trust Unit Trust A is proposing to undergo a reorganisation of its affairs. The detailed steps of the restructure are as follow: Step 1: Incorporation of Co B Co B is incorporated as a shelf company, with the one share initially held by one of the original unitholder of Unit Trust A. Co B does not carry on any business activities between the time of incorporation and the time Unit Trust A undergoes its restructure. Co B has no assets other than its initial share capital. Step 2: The acquisition by Co B of all the units in Unit Trust A from its existing unitholders Under a scheme for reorganising the affairs of Unit Trust A, Co B acquires 100% of the issued units of Unit Trust A. Each exchanging unitholder receives replacement shares in Co B and nothing else. The unitholders in Unit Trust A do not receive cash or other property as a result of the exchange of their units in Unit Trust A. The shares issued by Co B to the exchanging unitholders are ordinary shares. The shares will not be redeemable shares. Each of the unitholders makes a capital gain from the exchange of their units in Unit Trust A for replacement shares in Co B. Each exchanging member who acquires Co B shares, will own the shares from the time they are issued until at least after the time that all exchanging members have had their units acquired by Co B. Co B issues replacement shares in the same proportions as their original interest holdings in Unit Trust A. After the restructure of Unit Trust A, Co B holds 100% of the issued units in Unit Trust A.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 124 | Income Tax Assessment Act 1997 Subdivision124-A | Income Tax Assessment Act 1997 subsection 124-15(2) | Income Tax Assessment Act 1997 subsection 124-15(3) | Income Tax Assessment Act 1997 subsection 124-15(4) | Income Tax Assessment Act 1997 Division 615 | Income Tax Assessment Act 1997 section 615-1 | Income Tax Assessment Act 1997 subsection 615-5(1) | Income Tax Assessment Act 1997 paragraph 615-5(1)(a) | Income Tax Assessment Act 1997 paragraph 615-5(1)(b) | Income Tax Assessment Act 1997 paragraph 615-5(1)(c) | Income Tax Assessment Act 1997 Subdivision 615-B | Income Tax Assessment Act 1997 section 615-15 | Income Tax Assessment Act 1997 subsection 615-20(1) | Income Tax Assessment Act 1997 subsectio n 615-20(2) | Income Tax Assessment Act 1997 subsection 615-20(3) | Income Tax Assessment Act 1997 paragraph 615-20(3)(a) | Income Tax Assessment Act 1997 section 615-25 | Income Tax Assessment Act 1997 subsection 615-25(1) | Income Tax Assessment Act 1997 subsection 615-25(2) | Income Tax Assessment Act 1997 subsection 615-25(3) | Income Tax Assessment Act 1997 paragraph 615-25(3)(a) | Income Tax Assessment Act 1997 section 615-30 | Income Tax Assessment Act 1997 subsection 615-30(1) | Income Tax Assessment Act 1997 subsection 615-30(2) | Income Tax Assessment Act 1997 section 615-40 | Income Tax Assessment Act 1997 section 615-65

Reasons for decision: Summary: Section 615-1 of the ITAA 1997 states: 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 unit trust; and (b) In exchange, you become the owner of new shares in another company. Subsection 615-5(1) of the ITAA 1997 states that you can choose to obtain the 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 of the shares or units in it, and (c) under the 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 of Subdivision 615-B are satisfied. Unit Trust A is considered to be a unit trust for the purposes of paragraph 615-5(1)(a) of the ITAA 1997. The unitholders (the exchanging members), are unitholders of Unit Trust A (the original entity), and they own all the units in Unit Trust A, and therefore the conditions in paragraphs 615-5(1)(a) and (b) of the ITAA 1997 are satisfied. Paragraph 615-5(1)(c) of the ITAA 1997 requires that, under a scheme for reorganising its affairs, the exchanging members dispose of all their units in the original entity to another company (the interposed company) in exchange for shares in the interposed company (and nothing else). The restructure of Unit Trust A is a scheme for reorganising its affairs under paragraph 615-5(1)(c) of the ITAA 1997. The unitholders dispose of all their units in Unit Trust A in exchange for shares in Co B (and nothing else). Therefore, paragraph 615-5(1)(c) is satisfied. Further requirements are imposed by Subdivision 615-B of the ITAA 1997. They are: • the interposed company must own all the original interests (section 615-15 of the ITAA 1997); • requirements relating to your interests in the original entity (subsections 615-20(1),(2) and (3) of the ITAA 1997) • special requirement relating to the interposed company (section 615-25 of the ITAA 1997), and • the interposed company must make a particular choice under section 615-30 of the ITAA 1997. Section 615-15 of the ITAA 1997 states that the interposed company must own all of 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. This requirement is satisfied because Co B owns all the units in Unit Trust A immediately after the exchanging members disposed of their units in Unit Trust A. Subsection 615-20(1) of the ITAA 1997 requires that just after the completion time, each exchanging member must own: • a whole number of shares in the interposed company; and • 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 owned by the member and disposed of, redeemed or cancelled under the scheme). These requirements are also satisfied because each original Unit Trust A unitholder owns a whole number of shares in Co B equal to the percentage of units they originally held in Unit Trust A. Subsection 615-20(2) of the ITAA 1997 requires that the ratio of the market value of each exchanging member's shares in the interposed company to the market value of the shares in the interposed company issued to all the exchanging members (worked out immediately after the completion time) is equal to the ratio of 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 the market value of all the shares or units in the original company that were disposed of, redeemed or cancelled under the scheme (worked out immediately before the first disposal, redemption or cancellation). This condition is satisfied. The proportionate market value of the interest of each shareholder in Co B after the reorganisation is the same as the proportionate market value of the prior interest that was held by the exchanging member in the Unit Trust A just before the first disposal. Co B is incorporated as a shelf company, with no other assets other than nominal initial share capital. As all the units in Unit Trust A carry the same rights and obligations, and each exchanging member owns shares in Co B equal to the percentage of units they originally own in Unit Trust A - it follows that the market value ratio will be maintained. Paragraph 615-20(3)(a) of the ITAA 1997 is also satisfied because all the unitholders in Unit Trust A to which this roll-over applies are Australian residents. Section 615-25 of the ITAA 1997 imposes requirements specifically relating to the interposed company. Subsection 615-25(1) states that shares in the interposed company must not be redeemable shares. The shares issued in Co B will not be redeemable shares. Therefore this condition is satisfied. Subsection 615-25(2) of the ITAA 1997 requires that each exchanging member who is issued shares in the interposed company must own the shares from the time they are issued to the completion time. This condition is also satisfied as each unitholder who is issued Co B shares holds those shares from the time they are issued until at least the completion time. Additionally, subsection 615-25(3) of the ITAA 1997 requires that just 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. Paragraph 615-25(3)(a) of the ITAA 1997 is satisfied in this case. All the exchanging unitholders of Unit Trust A hold all the issued Co B shares just after the completion time. Furthermore, subsection 615-30(2) of the ITAA 1997 does not apply in this case because Unit Trust A is not the head company of a consolidated group immediately before the completion date. Therefore, Co B chooses section 615-65 of the ITAA 1997 to apply (subsection 615-30(1) of the ITAA 1997). Section 615-40 of the ITAA 1997 outlines the CGT consequences of this roll-over. It provides that the consequences set out in Subdivision 124-A of the ITAA 1997 also apply to this roll-over as if it was a roll-over covered by Division 124 of the ITAA 1997. The capital gains tax consequences are as follow: • For each unitholders of Unit Trust A who holds post-CGT units, any capital gain or capital loss made from the disposal of those units is disregarded (section 615-40 and subsection 124-15(2) of the ITAA 1997). Further, the first element of the cost base and reduced cost base of each Co B share is the total cost bases of all the Unit Trust A (worked out when each of Unit trust A unitholders disposes of their units) apportioned over the number of New Co shares (subsection 124-15(3) of the ITAA 1997). • The unitholder who holds pre-CGT units in Unit Trust A is taken to acquire each Co B share also pre-CGT, i.e. prior to 20 September 1985 (subsection 124-15(4) of the ITAA 1997). Any capital gain on disposal of a pre-CGT asset is disregarded. | Detailed Reasoning - Conclusion: The unitholders of Unit Trust A can choose roll-over relief under Division 615 of the ITAA 1997. All the conditions under this Division are satisfied.