Private ruling: Income tax - Capital gains tax - Rollovers - Other
Date of advice: 5 March 2018
Published: October 2018
Ruling period: Income year ended 30 June 2018 | Income year ended 30 June 2019
Date scheme commenced: Income year ended 30 June 2018

Ruling: Q1: Will the Trustee of the 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 transfer of Assets by the Trust to New Trust under the New Trust Arrangement? | A1: Yes.

Relevant facts and circumstances: The Trustee of the Trust wishes to transfer its International Assets to the New Trust as part of its restructure. The Trust The Trust is an Australian unit trust which invests, directly and indirectly, in assets both in Australia and internationally. The Trust is a complying superannuation fund and a pooled superannuation trust (PST). The Trust has two separate classes of units on issue: ● Australian Units; and ● International Units. The assets (and liabilities) of the Trust are effectively ‘tagged’ to a unit class with the value and distribution entitlements of Australian Units being linked to Australian assets and the value and distribution entitlements of International Units being linked to non-Australian assets. The Trust intends to cease operating as a PST and a New Trust will be established by the Trustee with a settlement sum of $X. After the transfer date, the Trustee of the New Trust will issue: a. Australian Units in New Trust to holders of Australian Units in the Trust on a one for one basis. b. International Units in New Trust to holders of International Units in the Trust on a one for one basis; The units in the New Trust issued to beneficiaries will be automatically redeemed for their issue price (i.e. $X in aggregate) and The Trustee of the Trust will transfer all International Assets (including the right to any accrued but unpaid distribution entitlements in respect of the International Assets) other than an amount of cash equal to the liabilities tagged to the International Units to New Trust in exchange for trustee of the New Trust issuing units to unitholders of the Trust. APRA will be notified of the Trust’s intention to cease to operate the PST as a pooled superannuation fund. Assumptions The Trustees of the Trust and New Trust will each make a choice for rollover under section 126-225 in respect of the transfer of the International Assets. The New Trust will not be a ‘foreign trust for CGT purposes’ as defined in section 995-1 of the ITAA 1995. The applicant has requested the Commissioner to rule on the basis that New Trust will make all other necessary mirror choices, either at the transfer or by such time that paragraph126-235(4)(a) of the ITAA 1997 would apply.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 6 | Section 102K | Section 102S | Division 6B | Division 6C | Income Tax Assessment Act 1997 Subsection 104-60(2) | Subsection 104-60(3) | Subsection 104-70(1) | Subdivision 126-G | Section 126-225 | Subsection 126-225(1) | Subparagraph 126-225(1)(a) | Subparagraph 126-225(1)(a)(ii) | Paragraph 126-225(1)(b) | Paragraph 126-225(1)(c) | Subparagraph 126-225(1)(c)(i) | Subparagraph 126-225(1)(c)(ii) | Subparagraph 126-225(1)(c)(iii) | Paragraph 126-225(1)(d) | Paragraph 126-225(1)(e) | Subsection 126-225(3) | Section 126-230 | Subsection 126-230(1) | Subsection 126-230(2) | Subsection 126-230(3) | Subsection 126-230(4) | Subsection 126-235(1) | Subsection 126-235(2) | Subsection 126-235(3) | Subsection 960-130(1) | Subsection 960-135 | Subsection 995-1(1)

Reasons for decision: Summary: The Trustee, as trustee for the Trust will be eligible to choose the roll-over available under section 126-225 of the ITAA 1997 in relation to the transfer of the International Assets by the Trust to New Trust under the New Trust Arrangement. | Detailed Reasoning - Detailed reasoning: Subdivision 126-G – Transfer of Assets between Certain Trusts Subdivision 126-G of the ITAA 1997 provides CGT roll-over relief for the transfer of assets between certain trusts. Subsection 126-225(1) of the ITAA 1997 lists the eligibility requirements for obtaining the roll-over: 126-225(1) A rollover 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 immediately before the transfer time, (i) other than small amounts of cash or debt,; (ii) its rights under an arrangement, if (collectively) those rights only facilitate the transfer of assets to it from the transferring trust; 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.’ For the trustee of the Trust to be eligible for roll-over relief under Subdivision 126-G, the conditions in subsection 126-225(1) of the ITAA 1997 must be satisfied Paragraph 126-225(1)(a) - Transfer of roll-over asset Subparagraph 126-225(1)(a)(ii) of the ITAA 1997 requires the trustee of the transferring trust to transfer a CGT asset, known as the "roll-over asset", to the trustee of an existing trust (the receiving trust) at a particular time (the "transfer time"). The International Assets to be transferred are CGT assets (being units in trusts and cash held in the bank account) and will be transferred by the Trustee of the Trust (the transferring trust) to the trustee of the New Trust (the receiving trust), which will be an existing trust. Based on the facts, the New Trust will be established as a new trust prior to the transfer of the CGT assets. As a result, the roll-over assets will be transferred to an existing trust and the requirements of subparagraph 126-225(1)(a)(ii) of the ITAA 1997 will be satisfied. Paragraph 126-225(1)(b) – Receiving trust has no CGT assets, other than small amounts of cash or debt before Transfer Time As the International Assets are being transferred to an existing trust, paragraph 126-225(1)(b) of the ITAA 1997 must also be satisfied. This requires the receiving trust (the New Trust) to hold no CGT assets, other than small amounts of cash or debt just before the transfer time. Just before the International Units are transferred, the New Trust will hold $X of cash. Accordingly, the condition in paragraph 126-225(1)(b) will be satisfied. Paragraph 126-225(1)(c) – the beneficiaries Paragraph 126-225(1)(c) of the ITAA 1997 requires that, just after the transfer time, three conditions must be satisfied in relation to the beneficiaries (the unit holders) of the Trust and the New Trust. Subparagraph 126-225(1)(c)(i) - Same beneficiaries Subparagraph 126-225(1)(c)(i) of the ITAA 1997 requires that each of the trusts has the same beneficiaries just after the transfer time. Further guidance in relation to what is meant by the phrase 'same beneficiaries' is found in paragraph 1.46 of 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 ). It 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.’ Immediately prior to the transfer time, units in the New Trust will be issued to current unitholders of the Trust and the units issued to Trust Investors and other unitholders on establishment of the New Trust will be automatically redeemed for their issue price (i.e. $X in aggregate). The trustee of the New Trust at transfer time will issue: (1) Australian Units in New Trust to holders of Australian Units in the Trust on a one for one basis. (2) International Units in New Trust to Holders of International Units in the Trust on a one for one basis. The Trustee of the New Trust will redeem the units issued to the initial investors for their issue price; and the Trustee of the Trust will transfer all International Assets, other than an amount of cash equal to the liabilities tagged to the International Units, to New Trust in exchange for the issue of units in New Trust to unitholders of the Trust as described in previous paragraph (above). As such, the unit registers of New Trust and the Trust will be identical. As a result of these steps, the identity of the unitholders will be identical for each trust. Accordingly, just after the transfer time, the transferring trust and the receiving trust will have the same beneficiaries such that subparagraph 126-225(1)(c)(i) of the ITAA 1997 will be met. Subparagraph 126-225(1)(c)(ii) - Same classes of ownership Subparagraph 126-225(1)(c)(ii) of the ITAA 1997 requires that, just after the transfer time, the receiving trust (i.e. the New Trust) has the same classes of membership interests that the transferring trust (i.e. the Trust) had just before, and has just after, the transfer time. A membership interest in an entity will arise for each interest by virtue of which you are a member of the entity (section 960-135 of the ITAA 1997). The Trust has 2 classes of units, being the Australian units and the International Units. The New Trust will have 2 classes of units, being the Australian and the International Units. The terms of each unit class will be identical on the basis that the Trust and New Trust will have: ● Identical trust deeds; and ● The Restructure Implementation Deed will confirm the investment strategies will remain the same. There will no change in the rights attached to the membership interests in either trust as a result of transferring the relevant interests to the New Trust. Therefore, it is considered that the requirements of subparagraph 126-225(1)(c)(ii) of the ITAA 1997 will be satisfied. Subparagraph 126-225(1)(c)(iii) - Market value of the Unitholders units Subparagraph 126-225(1)(c)(iii) of the ITAA 1997 requires that 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. The EM provides: ‘1.48 The market value test determines whether beneficiaries have the same proportionate membership interests before and after the transfer. 1.49 Under this test, 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.’ Both trusts (i.e. the Trust and the New Trust) will have two classes of membership interests (Australian Units and International Units) which will be owned by the same unitholders. The units in both the Trust and the New Trust will carry the same rights and each unitholder will hold the same proportionate interest in each class of units, just before and just after the transfer time in the Trust and New Trust. As confirmed by paragraph 1.48 of the EM, these are the primary considerations under subparagraph 126-225(1)(c)(iii) of the ITAA 1997. Therefore, it is considered that the three conditions of paragraph 126-225(1)(c) of the ITAA 1997 will be satisfied. Paragraph 126-225(1)(d) - Requirement in section 126-230 is met Paragraph 126-225(1)(d) of the ITAA 1997 requires that the tests set out in section 126-230 of the ITAA 1997 must be satisfied. Under subsection 126-230(1) of the ITAA 1997, two requirements must be satisfied. ‘126-230(1) The conditions in subsections (2) and (3) must be met: (a) if subsection 126-225(2) applies - at all times during the period: (i) starting at the start time; and (ii) ending at the transfer time; and (b) otherwise - at the transfer time. 125-230(2) The first condition is met at a particular time if, at that time, *CGT event E4 is capable of happening to all of the *membership interests in each of the trusts. 125-230(3) The second condition is met at a particular time, if at that time, the manner or extent to which each beneficiary of each trust can benefit from the trust is not capable of being significantly affected by the exercise, or non-exercise, of a power.’ (i) CGT event E4 is capable of happening Subsection 126-230(2) of the ITAA 1997 is met at a particular time if, at that time, CGT Event E4 is capable of happening to all of the membership interests in each of the transferring trust and the receiving trust. Under subsection 104-70(1) of the ITAA 1997, CGT Event E4 happens if: (a) the trustee of a trust makes a payment to you in respect of your unit or your interest in the trust (except for CGT event A1, C2, E1, E2, E6 or E7 happening in relation to it); and (b) some or all of the payment (the non-assessable part) is not included in your assessable income. The membership interests in the Trust and New Trust each constitutes units in a unit trust. The Trust will not be a PST at the transfer time. However, even if the Trust and New Trust were PSTs at the transfer time the requirement would be satisfied because, CGT Event E4 is capable of happening to all of the membership interests (being units) in both of the trusts and the conditions in subsection 126-230(2) of the ITAA 1997 will be satisfied. (ii) Beneficiaries’ entitlements not discretionary Subsection 126-230(3) of the ITAA 1997 requires that the manner or extent to which each beneficiary of each trust can benefit from the trust cannot be capable of being significantly affected by the exercise (or non-exercise) of a power. The beneficiaries’ interest in the Trust and New Trust are not discretionary as it is not capable of being significantly affected by the exercise (or non-exercise) of a power. This is because there are no powers under the respective trust deeds to: ● appoint the beneficiary’s interest in the income or capital to another beneficiary; ● characterise receipts or expenses as income or capital; or to accumulate trust income to capital (unless those otherwise entitled to the income of the trust have the same interests in the capital); ● add new beneficiaries (other than by issuing new units or interests in a way that does not significantly affect the value of existing interests); ● appoint any part of the trust property to a new trust with different beneficiaries; ● issue new interests with rights attached to existing interests; and ● amend the trust deed to include a power capable of materially altering a beneficiary’s membership interests. Subsection 126-230(4) is not relevant in the present case as the trusts are not managed investment trusts. Considering that subsections 126-230(1) and 126-230(2) are met at the transfer time, paragraph 126-225(1)(d) is satisfied. Paragraph 126-225(1)(e) - Exceptions in section 126-235 do not apply Paragraph 126-225(1)(e) of the ITAA 1997 requires that none of the exceptions in section 126-235 apply. There are three exceptions. (i) Foreign Trusts Under subsection 126-235(1) of the ITAA 1997, an exception will apply where the receiving trust is a foreign trust for CGT purposes , and the roll-over asset is not taxable Australian property just after the transfer time. The term ‘foreign trust for CGT purposes’ is defined in subsection 995-1(1) of the ITAA 1997 as a trust that is not a resident for CGT purposes. Subsection 995-1(1) of the ITAA 1997 provides that a unit trust is a resident trust for CGT purposes for an income year if: ● either any property of the trust is situated in Australia or the trust carries on business in Australia and ● either the central management and control of the trust is in Australia or Australian residents hold more than 50% of the beneficial interests in the income or property of the trust. In this case, the applicant has confirmed that the New Trust is a resident trust for CGT purposes. The exception in subsection 126-235(1) of the ITAA 1997 in respect of foreign trusts therefore will not apply. (ii) Corporate Unit Trusts and Public Trading Trusts Subsection 126-235(2) of the ITAA 1997 provides an exception where either of the transferring trust or receiving trust is a corporate unit trust (within the meaning of section 102K of the ITAA 1936) or a public trading trust (within the meaning of 102S of the ITAA 1936) for the income year that includes the transfer time. In this case, neither the Trust nor the New Trust will be a corporate unit trust or public trading trust for the income year that includes the transfer time. The exception in subsection 126-235(2) of the ITAA 1997 will therefore not apply. (iii) Mirror Choices Subsection 126-235(3) of the ITAA 1997, as qualified by subsections 126-235(4) and (5) of the ITAA 1997, provides in broad terms that an exception applies if both trusts do not have the same tax choices (or elections) in force, just after the transfer time. The applicant has requested the Commissioner to rule on the basis that New Trust will make all other necessary mirror choices, either at the transfer or by such time that paragraph126-235(4)(a) would apply. Paragraph 126-225(1)(e) of the ITAA 1997 will therefore be met as none of the exceptions in section 126-235 of the ITAA 1997 will apply. | Detailed Reasoning - Conclusion regarding CGT roll-over under Subdivision 126-G: On the basis of the above analysis, it is considered that all of the requirements in subsection 126-225(1) of the ITAA 1997 will be met. Therefore the New Trust will be eligible to choose CGT roll-over relief under Subdivision 126-G of the ITAA 1997 in relation to the transfer of the International Assets by the Trust to New Trust under the New Trust Arrangement. However, under subsection 126-225(3) of the ITAA 1997, the roll-over will only happen if the trustees of both the transferring trust and receiving trust choose to obtain it. As the trustee of both the Trust and the New Trust will choose to obtain the roll-over, subsection 126-225(3) of the ITAA 1997 will allow the roll-over to happen.