Private ruling: Income Tax - Restructure
Date of advice: 26 September 2017
Published: February 2018
Ruling period: 1 July 2017 to 30 June 2018
Date scheme commenced: During the income year ended 30 June 2018

Ruling: Q1: Is the trustee of the Trust entitled to choose to obtain a rollover pursuant to Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the proposed transfer of shares held by the Trust in various related entities to either Company A or Company B? | A1: Yes | Q2: Will the proposed amendments to the trust deeds cause CGT event E1 under section 104-55 of the ITAA 1997 to happen due to either a termination of the relevant trust and the creation of a new trust for trust law purposes (a trust resettlement), or alternatively, due to the settling of certain trust property on the terms of a new trust? | A2: No | Q3: Will the proposed amendments to the trust deeds cause CGT event E2 under section 104-60 of the ITAA 1997 to happen due to the transfer of a CGT asset to an existing trust? | A3: No | Q4: Following Stages One and Two of the proposed Internal Restructure, will Company A, as the proposed ‘head company’, be entitled to make a choice to consolidate ‘Group A’ pursuant to section 703-50 of the ITAA 1997? | A4: Yes | Q5: Following Stages One and Two of the proposed Internal Restructure, will Company B, as the proposed ‘head company’, be entitled to make a choice to consolidate ‘Group B’ pursuant to section 703-50 of the ITAA 1997? | A5: Yes

Relevant facts and circumstances: The Taxpayer’s Group comprises numerous business interests and investments. The Taxpayer’s Group can be split into two divisions: ‘Group A’ and ‘Group B’ both of which comprise a combination of companies and discretionary trusts. The Trust is the sole shareholder of the companies and corporate trustees of Group A. The Trust is the sole shareholder of the companies of Group B. The trustee for the Trust is a company incorporated in Australia and is a resident of Australia pursuant to subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Internal Restructure The Taxpayer’s Group has proposed an internal restructure to create two consolidated groups as follows: (a) Group A; and (b) Group B. The creation of Group A will comprise the following steps: Stage One: Internal Share Restructure The trustee for the Trust will: (a) transfer all of its shares in each of the companies in Group A to Company A; (b) transfer all of its shares in the trustee companies for the trusts in Group A to Company A; and (c) choose to obtain a CGT rollover pursuant to Subdivision 122-A of the ITAA 1997 in relation to each of the proposed share transfers. Following the internal share restructure: (a) the trustee for the Trust will continue to hold all of the shares in Company A; and (b) Company A will hold all of the shares in each of the entities in Group A. Company A is incorporated in Australia and a resident of Australia pursuant to subsection 6(1) of the ITAA 1936. Stage Two: Trust Deed Amendments The trustees for the trusts in Group A will amend the trust deeds for those trusts to ensure the trusts in Group A are eligible to become a member of a consolidated group. Stage Three: Consolidation Once Stages One and Two have been completed, Company A, as the head company of Group A, will, pursuant to section 703-50 of the ITAA 1997, make an election to form a consolidated group with the entities in Group A as subsidiary members of the consolidated group. The creation of Group B will comprise the following steps: Stage One: Internal Share Restructure The trustee of the Trust will: (a) transfer all of its shares in each of the companies in Group B to Company B; and (b) choose to obtain a CGT rollover pursuant to Subdivision 122-A of the ITAA 1997 in relation to each of the proposed share transfers. Following the internal share restructure: (a) the trustee of the Trust will continue to hold all of the shares in Company B; and (b) Company B will hold all of the shares in each of the companies in Group B. Company B is incorporated in Australia and a resident of Australia pursuant to subsection 6(1) of the ITAA 1936. Stage Two: Trust Deed Amendments The trustees for the trusts in Group B (other than the Trust) will amend the trust deeds for those trusts to ensure the trusts in Group B are eligible to become a member of a consolidated group. Stage Three: Consolidation Once Stages One and Two have been completed, Company B, as the head company of Group B, will, pursuant to section 703-50 of the ITAA 1997, make an election to form a consolidated group with the entities in Group B (other than the Trust) as subsidiary members of the consolidated group. Outcome of the Internal Restructure The ultimate economic ownership of the Taxpayer’s Group will remain unchanged. Assumptions 1. If Company A provides consideration to the trustee of the Trust for the shares disposed of by the Trust to Company A, as per Stage One of the Internal Restructure, then such consideration will be limited to: (a) non-redeemable shares in Company A; or (b) non-redeemable shares in Company A, and that company undertaking to discharge one or more liabilities in relation to the disposed shares. 2. The market value of the shares the Trust receives (as referred to in Assumption 1 above) will be substantially the same as the market value of the shares disposed of by the Trust, less any liabilities that Company A undertakes to discharge in respect of those shares. 3. If Company B provides consideration to the trustee of the Trust for the shares disposed of by the Trust to Company B, as per Stage One of the Internal Restructure, then such consideration will be limited to: (a) non-redeemable shares in Company B; or (b) non-redeemable shares in Company B, and that company undertaking to discharge one or more liabilities in relation to the disposed shares. 4. The market value of the shares the Trust receives (as referred to in Assumption 3 above) will be substantially the same as the market value of the shares disposed of by the Trust, less any liabilities that Company B undertakes to discharge in respect of those shares.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-55 | Income Tax Assessment Act 1997 subsection 104-55(1) | Income Tax Assessment Act 1997 section 104-60 | Income Tax Assessment Act 1997 subsection 104-60(1) | Income Tax Assessment Act 1997 Subdivision 122-A | Income Tax Assessment Act 1997 section 122-15 | Income Tax Assessment Act 1997 section 122-20 | Income Tax Assessment Act 1997 subsection 122-20(1) | Income Tax Assessment Act 1997 subsection 122-20(2) | Income Tax Assessment Act 1997 paragraph 122-20(3)(a) | Income Tax Assessment Act 1997 section 122-25 | Income Tax Assessment Act 1997 subsection 122-25(1) | Income Tax Assessment Act 1997 subsection 122-25(2) | Income Tax Assessment Act 1997 subsection 122-25(4) | Income Tax Assessment Act 1997 subsection 122-25(5) | Income Tax Assessment Act 1997 subsection 122-25(7) | Income Tax Assessment Act 1997 section 122-35 | Income Tax Assessment Act 1997 section 703-10 | Income Tax Assessment Act 1997 subsection 703-15(2) | Income Tax Assessment Act 1997 section 703-50 | Income Tax Assessment Act 1997 subsection 703-50(2) | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Act 1936 subsection 6(1)

Reasons for decision: Summary: The trustee of the Trust will be entitled to choose to obtain a rollover pursuant to Subdivision 122-A of the ITAA 1997 in relation to the proposed transfer of shares held by the Trust in various related entities to either Company A or Company B. | Detailed Reasoning - Detailed reasoning: Section 122-15 of the ITAA 1997 provides that where a trustee disposes of a CGT asset, or all of the assets of a business, to a company (and a CGT event A1 happens to the trustee as a result), the trustee can choose to obtain a roll-over in the circumstances set out in sections 122-20 to 122-35 of the ITAA 1997. If the trustee receives consideration for the disposal of the asset (or assets) to the company that consideration must be shares in the company, or shares in the company and that company undertaking to discharge one or more liabilities in respect of the shares (subsection 122-20(1) of the ITAA 1997). The shares received as consideration cannot be redeemable shares (subsection 122-20(2) of the ITAA 1997) and must be substantially the same market value as those disposed of, less any liabilities the company undertakes to discharge in respect of the shares (paragraph 122-20(3)(a) of the ITAA 1997). Pursuant to section 122-25 of the ITAA 1997: ● the trustee must own all of the shares in the company just after the disposal of the asset (subsection 122-25(1)); ● the CGT asset disposed of cannot be an asset excluded under subsections 122-25(2) to ● (4); ● the company must not be an exempt entity (subsection 122-25(5)); and ● either the trust must be a resident trust for CGT purposes and the company must be an Australian resident, or the asset must be a CGT asset of the trust that is taxable Australian property and the shares in the company mentioned in subsection 122-20(1) must be taxable Australian property (subsection 122-25(7)). The Trust will be entitled to choose to obtain a rollover pursuant to Subdivision 122-A of the ITAA 1997 in relation to the proposed share transfers identified in this question as: ● the transfer will constitute a disposal of CGT assets by the Trust, resulting in a CGT event A1; ● the consideration to be received for the A1 event happening will, as assumed for the purposes of this ruling, satisfy the requirements of section 122-20 of the ITAA 1997; ● immediately following the proposed share transfers, the Trust will hold all of the shares in Company A and Company B; ● the shares disposed of by the Trust are not excluded under subsections 122-25(2) to (4) of the ITAA 1997; ● neither Company A or Company B are exempt entities; and ● the Trust is a resident trust for CGT purposes pursuant to subsection 995-1(1) of the ITAA 1997, and both Company A and Company B are Australian residents. | Summary: The proposed amendments to the trust deeds will not cause CGT event E1 under section 104-55 of the ITAA 1997 to happen due to either a termination of the relevant trust and the creation of a new trust for trust law purposes (a trust resettlement), or alternatively, due to the settling of certain trust property on the terms of a new trust. | Detailed Reasoning - Detailed reasoning: Subsection 104-55(1) of the ITAA 1997 provides that CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement. CGT event E1 will happen where changes made to a trust alter the nature and character of the trust relationship such that the original trust ceases to exist and a new trust is created. Consistent with the principles upon which the decision in Commissioner of Taxation v Clark [2011] FCAFC 5 (Clark’s case) was made, a trust will not be terminated provided that there is some continuity of property and membership of the trust, and any amendment to the trust is made in accordance with a power of amendment afforded to the trustee. In Taxation Determination TD 2012/21, the Commissioner acknowledges (at paragraph 24) that the principles established by Clark’s case are relevant to the question of the circumstances in which CGT event E1 and E2 may happen as a result of changes being made to the terms of an existing trust pursuant to a valid exercise of power in a deed (including a power to amend). In light of these principles, the ATO accepts that a valid amendment to a trust pursuant to an existing power (including an amendment to the deed of a trust) will not result in a termination of the trust and therefore will not result in CGT event E1 happening. It is evident on the facts that each of the trustees of the relevant trusts to which this question relates has a power of amendment in their respective trust deed to revoke, add to or vary the trust deed. The proposed amendments in accordance with Stage Two of the proposed Internal Restructure do not go beyond the scope of this power of amendment and will not cause there to be a break in the continuity of any of these trusts, resulting in a trust resettlement. The proposed amendments of the trust deeds will also not cause the respective trustees to begin to hold a particular asset on the terms of a new trust. As such, CGT event E1 under section 104-55 of the ITAA 1997 will not happen as a result of the proposed amendments to the trust deeds. | Summary: The proposed amendments to the trust deeds will not cause CGT event E2 under section 104-60 of the ITAA 1997 to happen due to the transfer of a CGT asset to an existing trust. | Detailed Reasoning - Detailed reasoning: Subsection 104-60(1) of the ITAA 1997 provides that CGT event E2 happens if you transfer a CGT asset to an existing trust. The proposed amendment of the trust deed for each of the relevant trusts to which this question relates, in accordance with Stage Two of the proposed Internal Restructure: ● will not cause the trustee to begin to hold a particular trust asset on the terms of a different, but existing trust; and ● do not have the effect of transferring a CGT asset to an existing trust. As such, CGT event E2 under section 104-60 of the ITAA 1997 will not happen as a result of the proposed amendments to the trust deeds. | Summary: Following implementation of Stages One and Two of the proposed Internal Restructure, Company A, as the proposed ‘head company’, will be entitled to make a choice to consolidate ‘Group A’ pursuant to section 703-50 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 703-50 of the ITAA 1997 provides that a company may make a choice in writing that a consolidatable group is taken to be consolidated on and after the day that is specified in the choice if the company was the head company of the group on the day specified. The choice is irrevocable pursuant to subsection 703-50(2) of the ITAA 1997. As: ● Company A will satisfy each of the requirements in item 1 of the table in subsection 703-15(2) of the ITAA 1997 and will therefore be eligible to be a head company of a consolidatable group or consolidated group; ● each of the applicable entities will satisfy each of the requirements in item 2 of the table in subsection 703-15(2) of the ITAA 1997 and will therefore qualify as a subsidiary member of a consolidatable group with Company A as the head company of that consolidatable group; and ● Company A and each of the other applicable entities together (as Group A) form a consolidatable group pursuant to section 703-10 of the ITAA 1997, Company A will be entitled to make a choice to consolidate ‘Group A’ pursuant to section 703-50 of the ITAA 1997. | Summary: Following implementation of Stages One and Two of the proposed Internal Restructure, Company B, as the proposed ‘head company’, will be entitled to make a choice to consolidate ‘Group B’ pursuant to section 703-50 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: As: ● Company B will satisfy each of the requirements in item 1 of the table in subsection ● 703-15(2) of the ITAA 1997 and will therefore be eligible to be a head company of a consolidatable group or consolidated group; ● each of the applicable entities will satisfy each of the requirements in item 2 of the table in subsection 703-15(2) of the ITAA 1997 and will therefore qualify as a subsidiary member of a consolidatable group with Company B as the head company of the consolidatable group; and ● Company B and each of the applicable entities together (as Group B) form a consolidatable group pursuant to section 703-10 of the ITAA 1997, Company B will be entitled to make a choice to consolidate ‘Group B’ pursuant to section 703-50 of the ITAA 1997.