Private ruling: trust restructuring and capital gains tax (CGT) roll-over under Subdivision 124-N of the Income Tax Assessment Act 1997
Published: October 2013
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Will Company A be entitled to choose to obtain roll-over relief under Subdivision 124-N of the Income Tax Assessment Act 1997 (ITAA 1997 ) to disregard any capital gains arising from the cancellation of units in a Unit Trust? | A1: Yes

Relevant facts and circumstances: The Unit Trust was established by a Trust Deed which appointed the Trustee as trustee. The Unit Trust carries on trading activities. The unit holders of the Unit Trust and their respective unit holdings are: · Unit Holder 1: one A class unit · Unit Holder 2: one A class unit · Company A: XXX,000 B class units. Each A class unit and B class unit was acquired by the relevant unit holder for $X per unit. The unit holders are Australian residents for tax purposes. The Trust Deed provides that the Trustee shall distribute the income of the Unit Trust in accordance with instructions from the Committee of Management appointed by the A class unit holders. In the absence of any instructions from the Committee of Management A class unit holders become default beneficiaries to the income of the Unit Trust in the same proportions as their unit holdings. Trust Deed provides that upon termination of the Unit Trust, the A class and B class unit holders are entitled to a distribution of surplus assets (after payments of expenses and liabilities) pro-rata to the number of units held. The Trust Deed also provides the basis upon which the Trustee can redeem units and requires that the redemption price per unit is determined by taking the market value of the Unit Trust's assets net of liabilities '….divided by the number of units issued to all registered holders….'. There is no other power for the Trustee to make capital distributions to the Unit Holders in the Trust Deed. The Trustee proposes to restructure the Unit Trust into a company by undertaking the following steps: · A new company, an Australian resident private company limited by shares, will be established · The new company will be incorporated with one single B class share on issue owned by Unit Holder 3 · The Trustee and the new company will enter into a contract under which the Trustee will transfer ownership of all assets in the Unit Trust to the new company and the new company will assume all liabilities of the Unit Trust as at the transfer date · On the same date and under the same contract, the new company will issue additional shares as set out below: - Unit Holder 1: one A class share - Unit Holder 2: one A class share - Company A: XXX,000 B class shares · The rights attached to the different classes of shares in the new company are substantially the same as the rights attached to the different classes of units in the Unit Trust · The Trustee will cancel all units in the Unit Trust and cease to exist within 6 months of the initial transfer of assets to the new company. · No monetary consideration will be received by the Unit Holders upon cancellation of their units. · CGT assets of the Unit Trust are goodwill and intangibles. Company A holds its unit in the Unit Trust on capital account and will hold its replacement interest in the new company on capital account. Company A will not realise a capital loss after the assets of the Unit Trust have been disposed to the new company and before shares in the new company are issued to it. Company A will choose to obtain roll-over under Subdivision 124-N of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 124-N | Income Tax Assessment Act 1997 Section 124-855 | Income Tax Assessment Act 1997 Section 124-860 | Income Tax Assessment Act 1997 Section 124-870

Reasons for decision: Summary: Subdivision 124-N of the ITAA 1997 provides a CGT roll-over for a trust restructuring into a company. Subdivision 124-N of the ITAA 1997 provides that entities can choose to obtain a roll-over if a trust disposes of all of its assets to a company and units and interest in the trust are replaced by shares in the company. Subsection 124-855(1) of the ITAA 1997 states that: 124-855 (1) A roll-over may be available for a restructuring (a trust restructure ) if: (a) a trust, or 2 or more trusts, (the transferor ) *dispose of all of their *CGT assets to a company limited by *shares (the transferee ); and (b) *CGT event E4 is capable of applying to all of the units and interests in the transferor; and (c) the requirements in section 124-860 are met. Paragraph 124-855 (1)(a) will be satisfied as the Trustee proposes to dispose of all CGT assets in the Unit Trust to the new company, a company limited by shares. Paragraph 124-885(1)(b) will be satisfied as the unit holders of the Unit Trust have a fixed entitlement to the capital and a non-fixed entitlement to the income of the Unit Trust in accordance with the terms of the Trust Deed. Therefore, CGT event E4 is capable of applying to all of the units in the Unit Trust. Paragraph 124-885(1)(c) requires that the following requirements in section 124-860 of the ITAA 1997 are met. (a) all of the CGT assets owned by the transferor (except CGT assets retained to pay existing or expected debts of the transferor) must be disposed of to the transferee during the 'trust restructuring period' specified in subsection 124-860(2) of the ITAA 1997 (b) the transferee must satisfy the following requirements: (i) the transferee must not be an exempt entity (ii) the transferee must be a company that has never carried on commercial activities* (iii) the transferee must be a company that has no CGT assets other than small amounts of cash or debt* and (iv) the transferee must be a company that has no losses of any kind*. (c) just after the trust restructuring period, each entity that owned interests in a transferor just before the start of the trust restructuring period must own replacement interests in the transferee in the same proportion as it owned those interests in that transferor. In addition, the market value of the replacement interests each of those entities owns in the transferee just after the trust restructuring period will be substantially the same as the market value of the interests it owned in the transferor just before the start of the trust restructuring period. * This condition does not apply to a transferee that is the trustee of the transferor. Based on the information provided in the private ruling application the requirements in section 124-860 of the ITAA 1997 will be met. As the requirements under subsection 124-885(1) of the ITAA 1997 have been met, a roll-over for the restructure is available if an entity that owns units or interests in a trust chooses to obtain it where the entity satisfies the requirements under section 124-870 of the ITAA 1997. The facts in the ruling application indicate that Company A will satisfy the requirements under section 124-870 of the ITAA 1997. (a) the entity owns units or interests in the transferor (the entity's original interests), and (b) the ownership of all of its units or interests ends under a trust restructure in exchange for shares in the transferee (the entity's replacement interests), (c) the entity must make the choice to obtain roll-over for each of its original interests, (d) an entity that is not an Australian resident cannot choose a roll-over unless the replacement interests acquired in the transferee have the necessary connection with Australia just after their acquisition, and (e) if the entity chooses a roll-over, it cannot make a capital loss from a CGT event that happens to its original interests during the trust restructuring period. In addition, an entity is not entitled to obtain a roll-over for its ownership of an original interest ending if: · the interest was an item of the entity's trading stock and the corresponding replacement interest becomes an item of the its trading stock when acquired, or · the interest was not an item of the entity's trading stock but the corresponding replacement interest becomes an item of trading stock when acquired (subsection 124-870(5) of the ITAA 1997). The facts in the ruling application indicate that Company A will satisfy all the requirements (a) to (e) above and neither its unit holding in the Unit Trust nor its share holding in the new company is trading stock. The requirements under section 124-870 of the ITAA 1997 are therefore, satisfied. Therefore, Company A will satisfy the requirements to choose a replacement-asset roll-over in Subdivision 124-N of the ITAA 1997. The roll-over consequences for Company A are set out in Subdivision 124-A of the ITAA 1997.