Private ruling: Capital gains tax -rollover
Date of advice: 18 January 2016
Published: March 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the trustee for the unit trust be eligible to choose roll-over relief under section 126-225 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the proposed transfer of its assets to a number of new trusts? | A1: No


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 126-225 | Income Tax Assessment Act 1997 Subsection126-225(1) | Income Tax Assessment Act 1997 Paragraph 126-225(1)(a) | Income Tax Assessment Act 1997 Subparagraph126-225(1)(a)(i) | Income Tax Assessment Act 1997 Subparagraph126-225(1)(a)(ii) | Income Tax Assessment Act 1997 Paragraph 126-225(1)(b) | Income Tax Assessment Act 1997 Paragraph 126-225(1)(c) | Income Tax Assessment Act 1997 Subparagraph 126-225(1)(c)(i) | Income Tax Assessment Act 1997 Subparagraph 126-225(1)(c)(ii) | Income Tax Assessment Act 1997 Subparagraph 126-225(1)(c)(iii)

Reasons for decision: Detailed Reasoning - Subdivision 126-G - Transfer of Assets between Certain Trusts: Subdivision 126-G of the ITAA 1997 provides for CGT roll-over relief in circumstances where there is a transfer of assets between certain trusts. Subsection 126-225(1) of the ITAA 1997 stipulates when a roll-over may be chosen: 126-225(1) A roll-over may be chosen for a CGT asset (the roll-over asset ) if: (a) the trustee of a trust (the transferring trust): (i) creates a trust (the receiving trust ), by declaration or settlement, over one or more CGT assets that include the roll-over asset; or (ii) transfers the roll-over asset to an existing trust (the receiving trust ); at a particular time (the transfer time ); and (b) if subparagraph (a)(ii) applies - the receiving trust has no CGT assets, other than small amounts of cash or debt, just before the transfer time; and (c) just after the transfer time: (i) each of the trusts has the same beneficiaries; and (ii) the receiving trust has the same classes of membership interests that the transferring trust had just before, and has just after, the transfer time; and (iii) the sum of the market values of each beneficiary's membership interests of a particular class in both trusts is substantially the same as the sum of the market values, just before the transfer time, of the beneficiary's membership interests of that class in both trusts; and (d) the requirement in section 126-230 is met; and (e) the exceptions in section 126-235 do not apply. The Explanatory Memorandum (EM) to the Tax Laws Amendment (2009 Measures No. 6) Bill 2009 (enacted as the Tax Laws Amendment (2009 Measures No. 6) Act 2010 ) states at 1.11: To be eligible, both trusts must have the same beneficiaries with the same entitlements and no material discretionary elements. Further, the receiving trust must be an 'empty trust', meaning: • a newly created trust; or • a trust with no CGT assets other than a small amount of cash or debt. Further guidance in relation to what is meant by the phrase 'same beneficiaries' is found in paragraph 1.46 of the EM which states that: Both trusts must have the same 'direct' beneficiaries. In other words, the same entities, acting in the same capacities, must be beneficiaries of both trusts. It is not sufficient that the 'indirect' or ultimate beneficiaries of both trusts are the same. [Schedule 1, item 9, subparagraph 126-225(1)(c)(i)] In addition as noted at paragraph 1.47 both trusts must have the same classes of membership interests. [Schedule 1, item 9, subparagraph 126-225(1)(c)(ii)] • Membership interests constitute a class if they have the same, or substantially the same, rights. [Schedule 1, item 10, subsection 995-1(1)] To determine whether beneficiaries have the same proportionate membership interests before and after the transfer the market value test is used. Under the market value test as started at paragraph 1.49: The total market value of each beneficiary's interests in the transferring trust of a particular class and their interests of the matching class in the receiving trust must be substantially the same just before and just after the transfer time. [Schedule 1, item 9, subparagraph 126-225(1)(c)(iii)] | Detailed Reasoning - Example 1.4: Trust One is an eligible trust with two beneficiaries: Sheila and Peter. There are two classes of units in the trust: • Class A units entitle the holder to a share of the rental income from properties held by the trust; and • Class B units entitle the holder to a share of the capital value of the properties held by the trust. Trust Two is also an eligible trust with the same beneficiaries. Trust Two has two classes of units labelled Class 1 and Class 2, which have the same rights as Classes A and B respectively. For each beneficiary, the number and market value of units in Trust One is shown in Table 1.1. Just before the transfer time, the market value of all units in Trust Two is effectively zero. | Detailed Reasoning - Total market value: Sheila Class A units Class B units 1,000 1,000 $100 $1,000 $100,000 $1,000,000 Peter Class A units Class B units 500 Nil $100 Nil $50,000 Nil The trustee of Trust One transfers two of its properties to the trustee of Trust Two for no consideration. As a result, the market values of Class A and Class B units fall and the market values of Class 1 and Class 2 units increase. The trustee of Trust One incurs fees in the transfer of $2,000, and is reimbursed from the capital of Trust One. | Detailed Reasoning - Total market value: Sheila Class A / 1 Class B / 2 $80,000 $898,000 $20,000 $100,000 $100,000 $998,000 Peter Class A / 1 Class B / 2 $40,000 Nil $10,000 Nil $50,000 Nil Roll-over is available because the total market value of the interests within each pair of the matching classes of units is substantially the same before and after the transfer time. | Detailed Reasoning - Application of Subdivision 126G of the ITAA 1997: It can be seen that if the proposed arrangement takes place, the beneficiaries of the new receiving unit trusts will collectively be the same as those of the transferring unit urust. However, it is considered that the wording of section 126-225 of the ITAA 1997 can only be met where a trust transfers assets to a single trust. Specifically, subparagraph 126-225(1)(a) states that one of the requirements for the roll-over to apply is that after the transfer, ' each of the trusts has the same beneficiaries' (emphasis added). Our view that section 126-225 of the ITAA 1997 can only apply to transfers of assets from one transferring trust to a single receiving trust is confirmed in paragraph 1.46 of the EM which states: "Both trusts must have the same 'direct' beneficiaries. In other words, the same entities, acting in the same capacities, must be beneficiaries of both trusts." The wording in both section 126-225 of the ITAA 1997 and the relevant EM only contemplates transfers from a single transferring trust to a single receiving trust. None of the wording in the provision or the EM discusses transfers to multiple receiving trusts. In the proposed arrangement, although the receiving trusts will collectively have the same beneficiaries as the transferring trust, 'each' of them will not as each of the receiving trusts will only have one of the beneficiaries of the transferring trust. Therefore, the requirement in subparagraph 126-225(1)(a) of the ITAA 1997 will not be met. Consequently, CGT roll-over relief under Subdivision 126-G of the ITAA 1997 is not available in relation to the proposed transfer of shares to the new unit trusts.

Relevant facts: The unit trust's only assets are shares in a company. | The unit holders each hold the same number of units in the unit trust. | The unit holders now wish to deal with their interests in different ways. | To alleviate this problem it has been proposed that the unit trust's assets be split equally so that each unit holder will hold their share in the company in a separate unit trust, with each unit holder holding the same underlying beneficial ownership as at present. | The receiving trusts will have no other CGT assets other than a small amount of cash. | The receiving trusts will each have one beneficiary who will be the beneficial owner of the units.