Private ruling: Restructure of retirement village business and availability of rollovers on transfers
Date of advice: 31 January 2018
Published: July 2018
Ruling period: The income year in which the business sales agreement is executed.
Date scheme commenced: Unknown at this time. Accordingly, the law may change between now and implementation of the proposed restructure, in which case the advice in this ruling will no longer apply.

Ruling: Q1: Will CGT event A1 happen on the transfer of the assets of the retirement village (the Assets) from the Partnership, being partnership of trusts, to a company (NewCo) wholly owned by the Partnership? | A1: Yes | Q2: If the Partnership receives shares in NewCo as consideration for the transfer of the Assets, will section 116-20 apply to deem the Partnership's capital proceeds to equal the market value of the shares issued by NewCo? | A2: Yes, and the capital proceeds may then be increased pursuant to section 116-55 | Q3: Will the partners of the Partnership be eligible for capital gains tax rollover under subdivision 122-B on the transfer of the Assets that are not depreciating assets to NewCo? | A3: Yes, provided that the conditions in subdivision 122-B continue to be met, including that the market value of the shares received for the trigger event will be substantially the same as the market value of the Assets disposed of, and the Assumed Liabilities will not exceed the cost case of the Assets. | Q4: Will the partners of the Partnership be eligible for rollover relief under section 40-340 on the transfer of the Assets that are depreciating assets to NewCo? | A4: Yes

Relevant facts and circumstances: The two partners of the Partnership own majority and minority partnership interests in the Assets respectively and are both resident trusts for CGT purposes. The Partnership operates six separate retirement villages, including the one being restructured. It is proposed that the Partnership will transfer the Assets, consisting of the following assets, to NewCo, a company wholly owned by the Partnership: a. right to receive payments at the end of leases to residents; b. plant and equipment; and c. retirement village property and land under development. NewCo will be a newly incorporated Australian resident company. As consideration for the transfer, NewCo will issue shares in itself as well as assume the liabilities defined in the business sales agreement. The Assets are not pre-CGT assets. Assumptions We assume there are no additional or new facts to those set out and referred to in Attachments A, B, C and D of the application for private ruling. If additional or new facts come to light, then our decision may change. This could include if the Proposed Restructure is part of a larger transaction, if Assumed Liabilities were to substantially change, or if there are reasons for the Proposed Restructure in addition to moving to an incorporated model, of which we are unaware. We assume that the law will remain unchanged between the date of this decision and the income year that the Proposed Restructure is implemented. We expect you to take into account a number of factors that may affect market value when you value an unlisted share, including many of the factors involved in valuation of a business, as set out in “market valuation for tax purposes” on ato.gov.au.

Relevant legislative provisions: CGT event A1 – subsections 104-10(1) and (2) | Section 116-20 | Section 116-55 | Subdivision 122-B – sections 122-125, 122-130, 122-135 | Section 40-340

Reasons for decision: Summary: CGT event A1 will happen on the transfer of the Assets by the Partnership to NewCo: subsection 104-10(1). | Detailed Reasoning - Detailed reasoning: A change in ownership of the Assets will occur on transfer by the Partnership to NewCo and this transfer will constitute a disposal under subsection 104-10(2). | Detailed Reasoning - Question 2: If the Partnership receives shares in NewCo as consideration for the transfer of the Assets, will section 116-202 apply to deem the Partnership's capital proceeds to equal the market value of the shares issued by NewCo? | Summary: Under section 116-20, the capital proceeds received by the Partnership from the CGT event will be the market value of the shares in NewCo that the Partnership receives. The capital proceeds may then be increased by the amount of any assumed liabilities that are security over the Assets pursuant to section 116-55. | Detailed Reasoning - Detailed reasoning: When NewCo issues shares as consideration for the transfer of the Assets, section 116-20 will deem the Partnership’s capital proceeds for the transfer to equal the market value of the shares issued by NewCo. Section 116-20 broadly provides that the capital proceeds from a CGT event are the total of: a. the money received or to be received in respect of an event happening; and b. the market value of any other property received or to be received in respect of the event happening. When the Partnership receives shares in NewCo as consideration for the transfer, these shares will constitute property received in respect of the transfer. Section 116-55 provides that the capital proceeds from a CGT event are increased if another entity acquires the CGT asset subject to a liability by way of security over the asset. | Detailed Reasoning - Question 3: Will the partners of the Partnership be eligible for capital gains tax rollover under subdivision 122-B on the transfer of the Assets that are not depreciating assets to NewCo? | Summary: The partners in the Partnership will be eligible for CGT rollover under subdivision 122-B on the transfer of the Assets to NewCo (other than depreciating assets), provided that the conditions in subdivision 122-B continue to be met, including that: ● the market value of the shares received for the trigger event will be substantially the same as the market value of the Assets disposed of; and ● the assumed liabilities will not exceed the cost case of the Assets. | Detailed Reasoning - Detailed reasoning: Section 122-125 provides that all of the partners in a partnership can choose to obtain a rollover under subdivision 122-B if one of the CGT trigger events in that section happens and the conditions in sections 122-130 to 122-140 are satisfied. The first item in the table refers to CGT event A1 happening where the partners dispose of their interest in a CGT asset of a partnership, or all the assets of a business carried on by a partnership, to a company. As the transfer of the Assets will give rise to CGT event A1, the partners will be entitled to a rollover under subdivision 122-B if the relevant conditions in sections 122-130 to 122-140 are satisfied. Subsection 122-130(1) requires that the consideration the partners receive must be only shares in the company, or shares in the company and a discharge of liabilities. This subsection will be satisfied as the only consideration the partners will receive are shares in NewCo and NewCo undertaking to discharge the assumed liabilities as provided by the business sales agreement. Subsection 122-130(2) requires that the shares cannot be redeemable shares. This subsection will be satisfied as NewCo will not be issuing redeemable shares under the Proposed Restructure. Subsection 122-130(3) requires that the market value of the shares received for the trigger event must be substantially the same as the market value of the asset disposed of, less any relevant liabilities. This subsection will be satisfied as the market value of NewCo shares which the Partners will receive will be the same as the market value of the Assets transferred to NewCo, given NewCo has no other assets or liabilities. Subsection 122-135(1) requires that the partners must own all the shares in the company just after the time of the trigger event. This subsection will be satisfied as NewCo will be wholly owned by the Partnership. Subsection 122-135(2) requires that each partner must own the shares the partner receives for the trigger event in the same capacity that the partner owns its interests in the assets to be transferred to the company. This subsection will be satisfied as the Partners will hold a 73% and 27% interest respectively in NewCo. Subsection 122-135(3) further states that subdivision 122-B does not apply to the disposal of certain assets, including collectables or personal use assets, precluded assets and trading stock. A precluded asset is defined in section 122-25(3) as including a depreciating asset. Assets that are depreciating assets are therefore ineligible for rollover. The transfer of these depreciating assets however should be subject to rollover relief under section 40-340 as discussed further in question 4 below. Subsection 122-135(4) will not be relevant as the assets to be transferred are not rights, options, convertible interests or exchangeable interests. Subsection 122-135(5) states that the ordinary income and statutory income of the company must not be exempt from income tax because it is an exempt entity for the income year of the trigger event. This subsection will be satisfied as NewCo is not an exempt entity and its income is not exempt. Subsection 122-135(6) will not apply as the partners are trustees of a trust at the time of the trigger event. Subsection 122-135(7)(a) broadly requires that where the partners are trustees of a trust, the trust will be a resident trust for CGT purposes and the company an Australian resident at the time of the trigger event. This requirement will be satisfied. Section 122-140 broadly requires that where the company undertakes to discharge liabilities in respect of interests in post-CGT assets, the liabilities cannot exceed the cost base of the interest. This requirement will be satisfied as the assumed liabilities assumed by NewCo will not exceed the cost base of the Assets transferred to NewCo. As the relevant conditions in sections 122-130 to 122-140 are satisfied, the partners in the Partnership will be eligible to choose rollover under subdivision 122-B. Subsection 122-150 states that if rollover is chosen, any capital gain or loss from the trigger event is disregarded. Accordingly, the CGT event A1 arising from the Partnership’s disposal of the Assets should be disregarded. | Detailed Reasoning - Question 4: Will the partners of the Partnership be eligible for rollover relief under section 40-340 on the transfer of the Assets that are depreciating assets to NewCo? | Summary: The partners in the Partnership will be eligible for rollover relief under section 40-340 in relation to the transfer to NewCo of Assets that are depreciating assets. | Detailed Reasoning - Detailed reasoning: Section 40-340 provides automatic rollover relief where: a. there is a balancing adjustment event because of the disposal of a depreciating asset; b. the disposal involves a CGT event; and c. one of the conditions in an item of the table in subsection 40-340(1) is satisfied. The transfer of depreciating assets will satisfy requirements a. and b. above. The conditions contained in item 2 of the table in subsection 40-340 are satisfied where partners of a Partnership are able to choose a rollover under subdivision 122-B for the disposal by the partners of CGT assets consisting of their interests in Partnership property. As the partners in the present case will be eligible for rollover under subdivision 122-B, the condition outlined in item 2 of the table in subsection 40-340 will be satisfied. Accordingly, the requirements under subsection 40-340(1) will be satisfied and the partners in the Partnership will be eligible for automatic rollover relief in relation to the transfer of Assets that are depreciating assets.

Question 1: Will CGT event A1 happen upon the transfer of the assets of the retirement village (the Assets) from the Partnership, being partnership of trusts, to a company (NewCo) wholly owned by the Partnership?