Private ruling: Exchange of units in a unit trust for shares in a company
Published: September 2011

Ruling: Q1: Will a disposal of units in the Unit Trust to the Company qualify for rollover relief pursuant to subdivision 124-H of the Income Tax Assessment Act 1997 ? | A1: Yes. The proposed arrangement satisfies the conditions for roll-over relief provided for in subdivision 124H of the Income Tax Assessment Act 1997. Facts The Unit Trust operates as an unregistered managed investment scheme (MIS). To operate as an unregistered MIS pursuant to the Corporations Act the Trust may only have up to 20 'retail clients'. During the Unit Trust's audit for the 2007-2008 financial year it became apparent that the Unit Trust inadvertently had 22 retail clients. Therefore the Unit Trust may technically be in breach of the requirement in the Corporations Act to register as a MIS. The breach was reported to ASIC who required remedial action to be taken. After carefully considering all of the alternatives, a meeting of unit holders decided to restructure the Unit Trust into a company (and therefore fall outside the MIS requirements), subject to the ATO confirming the restructure qualifies for rollover relief under subdivision 124-H of the Income Tax Assessment Act 1997 and the Stamp Duty Commissioner confirming no stamp duty arises from the restructure. Under the restructure the company will offer to all unit holders of the Unit Trust a number of ordinary shares in exchange for the same number units. A copy of the Prospectus setting out the proposed arrangement has been provided. · The rulee is one of the unit holders in the Unit Trust. · The rulee is an Australian resident for income tax purposes.



Reasons for decision: Summary: Subdivision 124-H of the Income Tax Assessment Act 1997 ('ITAA 1997') provides roll-over relief where there is an exchange of units in a unit trust for shares in a company. It enables a unit holder of a unit trust to disregard a capital gain or loss from a unit that is disposed of as part of a reorganisation of the affairs of the trust where the unit holder becomes the owner of new shares in a company. The roll-over provisions in Subdivision 124-H of the ITAA 1997 relating to an exchange of units in a unit trust for shares in a company contain a number of conditions for eligibility to choose roll-over relief. The conditions in a disposal case that are relevant are: · there must be more than one entity that owns all the units in the unit trust (paragraph 124-445(b) of the ITAA 1997) · there must be a scheme for reorganising the trust's affairs and consideration on disposal of the units must consist of shares in the company and nothing else (paragraph 124-445(c) of the ITAA 1997) · the company must own all the units in the unit trust just after all the exchanging members have disposed of their units in the unit trust (the completion time) (subsection 124-450(1) of the ITAA 1997) · just after completion time, each unit holder must own a whole number of shares in the company (paragraph 124-450(2(a) of the ITAA 1997) · just after the completion time, each unit holder must own a percentage of the shares in the company that were issued to all unit holders that is equal to the percentage of the units in the unit trust that the unit holder owned (paragraph 124-450(2)(b) of the ITAA 1997) · the ratio of the market value of each exchanging member's shares in the company to the market value of all the shares in the company must equal the ratio of the market value of that member's units in the unit trust to the market value of all the units in the unit trust that were disposed of to the company (subsection 124-450(3) of the ITAA 1997) · the unit holders must be Australian residents, or if they are a foreign resident the units and shares must be taxable Australian property (refer subsection 124-450(4) of the ITAA 1997) · the shares issued in the company must not be redeemable shares (subsection 124-465(1) of the ITAA 1997) · each exchanging member must own the shares from the time they are issued to the completion time (subsection 124-465(2) of the ITAA 1997) · just after the completion time the unit holders must own all the shares in the company, or entities other than those unit holders must own no more than 5 shares in the company and the market value of those shares is such that it is reasonable to treat the unit holders as owning all the shares (refer subsection 124-465(3) of the ITAA 1997) · the company must choose that the rules in section 124-470 of the ITAA 1997 apply and the choice must be made within 2 months after the completion time (subsection 124-465(5) of the ITAA 1997) Application to your circumstances Conditions to be satisfied in section 124-445 of the ITAA 1997 The entities (the exchanging members) own all the units in the Unit Trust. According to the Prospectus supplied there is a proposal for the exchanging members to dispose of their units in the Unit Trust in exchange for shares in the company. There will be no other consideration paid for the units in the unit trust. The applicant is one of the exchanging members. Based on the information provided, it is considered that the conditions set out in section 124-445 of the ITAA 1997 will be satisfied. Conditions to be satisfied in section 124-450 of the ITAA 1997 The proposed arrangement will only proceed if all members of the Unit Trust accept the offer. Therefore all members must participate in the exchange of units in the Unit Trust for shares in the company. As a result the company will own all the units in the Unit Trust. Under the restructure the company will offer to all unit holders of the Unit Trust ordinary shares in exchange for the same number units. Therefore, just after completion each exchanging member will own a whole number of shares in the company and the percentage of each member will be identical. A further condition is that the ratio of the market value of each exchanging member's shares in the company to the market value of the shares in the company issued to all the exchanging members (worked out just after the completion time) must equal the ratio of the market value of that member's units in the Unit Trust that were disposed of to the company to the market value of all the units that were disposed of to the company (worked out just before the first disposal). Each unit in the Unit Trust will be exchanged for a share in the company. The rights of each ordinary share will be assimilated to the rights of the units. Therefore the market value of the units and shares must be identical and the ratio must be unchanged. The last condition is that all the members of the unit trust are Australian residents at the time they dispose of their units in the Unit Trust. The applicant has confirmed that it is an Australian resident. Accordingly, the conditions in section 124-450 of the ITAA 1997 will be satisfied. Conditions to be satisfied in section 124-465 of the ITAA 1997 A requirement under this section is that the shares issued in the company must not be redeemable shares. The applicant has stated that the shares to be issued will not be redeemable shares. The applicant has also confirmed that each exchanging member who is issued shares in the company will own them from the time they are issued to the completion time (when all of the unit holders have disposed of their units). Also, just after the completion time the exchanging members must own all of the shares in the company or entities other than those members must own no more than 5 shares in the company and the market value of those shares expressed as a percentage of the market value of all the shares in the company is such that it is reasonable to treat the exchanging members as owning all the shares. In this instance the exchanging members will own all of the shares in the company other than a very small number of shares held by the original shareholders. These other shareholders own no more than 5 shares and the market value as a percentage of the market value of all the shares in the company is such that it is reasonable to treat the exchanging members as owning all the shares in the company. Finally, the company must choose that the rules in section 124-470 of the ITAA 1997 apply. It must make the choice within 2 months after the completion time, or within such further time as the Commissioner allows. The applicant has confirmed that the company will make the choice if the conditions for roll-over relief are satisfied. It is considered that the conditions in section 124-465 of the ITAA 1997 have been satisfied. Summary As the conditions in sections 124-445, 124-450 and 124-465 of the ITAA 1997 will be satisfied, the unitholder will be eligible for roll-over relief under Subdivision 124-H of the ITAA 1997 on the disposal of units in the unit trust in exchange for shares in the company.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.