House of Representatives

Taxation Laws Amendment Bill (No. 4) 2002

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 2 - Trust to company roll-over

Outline of chapter

2.1 This chapter details amendments to the ITAA 1997 to provide a CGT roll-over where:

·
a trust disposes of all of its assets to a company; and
·
the beneficiaries interests in the trust are exchanged for shares in the company.

The roll-over will be available for both the trust and its beneficiaries.

2.2 The trust will be required to cease to exist within 6 months from the disposal of the first asset to the company. In limited circumstances the 6 month period can be extended. The benefits of the roll-over will be removed if the trust fails to cease to exist within that time. This is achieved by inserting a new CGT event.

2.3 In this chapter:

·
interests refers to units and interests in the trust; and
·
a trust restructure refers to a trust disposing of all of its assets to a company and the beneficiaries interests in that trust are being exchanged for shares in the company.

Context of amendments

2.4 This measure was originally intended as transitional relief for trust restructures undertaken in response to the proposed entities regime. Exposure draft legislation for that regime, including the transitional roll-over, was released on 11 October 2000. Later, Treasurers Press Release No. 8 of 27 February 2001 stated that the entities regime would not proceed as proposed. Treasurers Press Release No. 16 of 22 March 2001 then stated that the proposed transitional roll-over was no longer necessary.

2.5 Subsequently, Treasurers Press Release No. 77 of 5 October 2001 announced a new CGT roll-over to facilitate the transfer of assets from certain trusts to a company from 11 November 1999. The roll-over will increase the commercial flexibility available for a trust in selecting an appropriate business form.

2.6 Schedule 2 to this bill gives effect to the Governments announcement by inserting Subdivision 124-N and a new CGT event J4 into the ITAA 1997.

Summary of new law

2.7 The following are key features of Subdivision 124-N:

·
a trust disposes of all of its assets to a company;
·
CGT event E4 (section 104-70) must be capable of applying to all of the interests in the trust;
·
all the beneficiaries must own shares in the company in the same proportion as they owned interests in the trust;
·
the market value of the beneficiaries interests in the trust and the market value of the shares in the company must be at least substantially the same;
·
generally, the company is a shelf company at the time the asset disposals commence; and
·
the entities involved choose the roll-over.

2.8 The roll-over will defer a capital gain or capital loss made on:

·
a trust disposing of an asset to a company; and
·
a beneficiarys interest in the trust being exchanged for a share in the company.

2.9 Consistent with other same-asset roll-overs in the CGT provisions, the trust will not be able to roll-over an asset that is trading stock of the trust or an asset that is trading stock of the company on acquiring it from the trust.

2.10 Similarly, the roll-over is not available for a beneficiarys interest in a trust that is trading stock of the beneficiary or where the interest is replaced with a share that is trading stock of the beneficiary at the time the beneficiary acquires the share.

2.11 The benefits of the roll-over will be reversed by new CGT event J4 if the trust does not cease to exist within 6 months from when the trust disposed of the first asset to the company, or at the end of an extended period if the reasons for the delay are beyond the trustees control.

Comparison of key features of new law and current law
New law Current law
CGT roll-over is provided for both a trust and its beneficiaries where there has been a trust restructure. Trust restructures that do not fit within the existing CGT roll-over measures (e.g. within the same-asset roll-over for the transfer of an asset from a trust to a company under Subdivision 122-A of the ITAA 1997) may result in a CGT liability arising for the trust.

There is no existing roll-over for a beneficiary having their interest cancelled and replaced with a share in a company under a trust restructure.

Where a trust fails to cease to exist after the trust restructuring period, the benefits of the roll-over will be reversed by CGT event J4. There is no equivalent CGT event.

Detailed explanation of new law

2.12 As a trusts business develops, it may seek to undertake a trust restructure to increase its efficiency and take full advantage of its future potential. Subdivision 124-N provides a CGT roll-over to facilitate such a restructure.

2.13 In general terms, the CGT roll-over is provided where:

·
a trust disposes of all of its assets to a company; and
·
all beneficiaries interests in the trust are exchanged for shares in the company.

[Schedule 2, item 1, subsection 124-855(1)]

2.14 The CGT roll-over is available where 2 or more trusts restructure into a single company. If more than one trust restructures into the same company the interests in each of the trusts must be owned by the same beneficiaries in the same proportions [Schedule 2, item 1, subsection 124-855(2)] . The requirement that the beneficiaries own their interests in each of the trusts in the same proportions is consistent with the policy that a roll-over is only available where the beneficiaries economic ownership in the assets of each of the trusts remain unchanged on completion of the restructuring of the trust into a single company.

Example 2.1 Simon and Jane each own 50% of the units in the Benarman Unit Trust and Julian Unit Trust. All of the assets of both trusts are disposed of to Ida Pty Ltd. Both Simons and Janes economic ownership of the trusts assets before the restructure and of the companys assets after the restructure is maintained at 50% each. As a result, they may choose to roll-over any capital gain or capital loss in respect of the restructure if the other conditions of the roll-over are satisfied.

Example 2.2 To modify Example 2.1, if Simon and Jane each owned 50% of the units in the Benarman Unit Trust and Simon owned 40% and Jane owned 60% of the units in the Julian Unit Trust the economic ownership will not be maintained. After the trust restructure, Simon owns 45% of the shares in the company and Jane owns 55% of the shares in Ida Pty Ltd. Simon and Jane would not be able to disregard a capital gain or capital loss under the roll-over.2.15 A condition of the roll-over is that CGT event E4 (capital payment for trust interest) must be capable of applying to all of the interests in the trust [Schedule 2, item 1, paragraph 124-855(1)(b)] . A trust where all the beneficiaries interests have a fixed capital component and a discretionary income component will satisfy this requirement. A trust where all the beneficiaries interests have a discretionary capital component and a fixed income component will not be eligible for roll-over. It follows that the roll-over does not apply where the trust is a discretionary trust.

Subdivision 124-N - requirements for the roll-over

Requirement 1: disposal of trust assets

2.16 All of the CGT assets (other than assets that come to an end) of the trust must be disposed of to the company during the trust restructuring period [Schedule 2, item 1, subsection 124-860(1)] . This allows for a staggered transfer of the assets or a single transfer of all of the assets of the trust. The trust restructuring period starts just before the first asset is disposed of to the company and ends on the last asset being disposed of to the company under the trust restructure. Therefore the assets that must be disposed of are all the assets owned by the trust just before the disposal of the first asset to the company, including any assets acquired by the trust up to and until the last asset is disposed of to the company. Assets disposed of before the start of the trust restructuring period are ignored for the purposes of the roll-over.

Example 2.3 PDB Unit Trust decides to restructure into a company - SGA Pty Ltd. However, the trust owns shares in a listed company, XYZ Pty Ltd, that it does not want to dispose of to SGA Pty Ltd. Therefore, on 15 November 1999 the trust disposes of its shares in XYZ Pty Ltd on market with the existing CGT rules applying. The trust then disposes of the first asset to SGA Pty Ltd on 20 November 1999 under a trust restructure. The start of the trust restructuring period for PDB Unit Trust will be 20 November 1999. The shares in XYZ Pty Ltd will be ignored in testing whether all the assets of the trust are disposed of to SGA Pty Ltd under the trust restructure.

2.17 There is an exception to the requirement that all the assets have to be disposed of to the company. Assets that are specifically retained in the trust for the purposes of discharging existing or expected debts can be ignored for the purpose of determining whether all the assets of the trust have been disposed of to the company. [Schedule 2, item 1, subsection 124-860(1)]

2.18 However, the value of those retained assets are not ignored in testing whether the market value test in paragraph 124-860(6)(b) is satisfied. The market value test requires that the market value of the interests the beneficiaries of the trust own just before the trust restructuring period, be at least substantially the same as the market value of the shares those former beneficiaries own in the company just after the end of the trust restructuring period. As a result, the trust may fail this test if the assets it does not dispose of to the company cause the market value of the shares in the company to be less than the market value of the beneficiaries interests in the trust.

Requirement 2: trust restructuring period

2.19 The start of the trust restructuring period is just before the first asset is disposed of to the company under a trust restructure. That disposal must be on or after 11 November 1999. [Schedule 2, item 1, paragraph 124-860(2)(a) and item 17]

2.20 The trust restructuring period ends just after the last CGT asset is disposed of to the company [Schedule 2, item 1, paragraph 124-860(2)(b)] . Just after this time all the interests in the trust must have been exchanged for shares in the company.

Requirement 3: characteristics of the company

2.21 The company must satisfy the following requirements:

·
it is not an entity exempt from income tax [Schedule 2, item 1, subsection 124-860(3)] ;
·
it has never carried on any commercial activities [Schedule 2, item 1, paragraph 124-860(4)(a)] ;
·
it has no CGT assets other than small amounts of cash, on hand or in a bank account [Schedule 2, item 1, paragraph 124-860(4)(b)] ; and
·
it has no losses of any kind [Schedule 2, item 1, paragraph 124-860(4)(c)] .

2.22 Losses of any kind include capital losses, net capital losses, revenue losses the company may have or any deductions that the company may have claimed or can claim.

2.23 There may be situations in which the trustee of the trust is itself a company (a corporate trustee). Rather than requiring the trust to set up a new company for the purposes of the roll-over, the trust can dispose of its assets to the corporate trustee and be eligible for the roll-over. [Schedule 2, item 1, subsection 124-860(5)]

2.24 The corporate trustee must, in its capacity as the company acquiring the assets from the trust, comply with each of the other requirements in section 124-860 (other than paragraphs 124-860(4)(a) to (c)). If the corporate trustee already owns CGT assets before the start of the trust restructuring period, the proportionate interest test in subsection 124-860(6) may not be satisfied. This is because the value of those assets may be such that the market value of the interests in the trust will be less than the market value of the shares in the company.

Requirement 4: proportional interest must be maintained

2.25 Just after the trust restructuring period, the shareholders must have the same proportionate ownership in the company as they owned interests in the trust.

2.26 The test compares the proportionate ownership of interests in a trust just before the trust disposes of its first asset to a company under a trust restructure with the proportionate ownership of shares in the company just after the trust restructuring period. [Schedule 2, item 1, paragraph 124-860(6)(a)]

Example 2.4 Shamsa and Ingrid own 40% and 60% of the interests in Capital Unit Trust respectively just before the trust restructuring period. Just after the trust restructuring period Shamsa must own 40% and Ingrid must own 60% of the shares in the company to satisfy the proportionate interest test.

2.27 Further, the market value of the shares just after the trust restructuring period must be at least substantially the same as the market value of the interests in the trust just before the start of the trust restructuring period. [Schedule 2, item 1, paragraph 124-860(6)(b)]

Exception to proportionate interest tests

2.28 As the company may be a shelf company, a nominal number of shares may be owned by entities other than the beneficiaries in the trust before the first asset is disposed of to the company. It is also a requirement that the entities that own shares in the company just before the start of the trust restructuring period only own up to 5 shares collectively at that time [Schedule 2, item 1, paragraph 124-860(7)(a)] . Those shares initially issued in the shelf company may be ignored for the purposes of the proportionate interest tests if it would be reasonable to treat the beneficiaries of the trust as if they owned all the shares in the company. Those shares can be ignored where the market value of the shares owned in the company before the trust restructuring period is so insignificant that the beneficiaries of the trust, just before the trust restructuring period, can be considered to own all the shares in the company just after the end of that period [Schedule 2, item 1, paragraph 124-860(7)(b)] .

Example 2.5 Felicity owns 2 shares in ESS Pty Ltd (a shelf company) before the trust restructure. Immediately after the trust restructure period, 10,000 shares are issued to the members of the trust that restructured into ESS Pty Ltd. All the shares have equal market value. The shares owned by Felicity can be ignored in applying the proportionate interest test.

Requirement 5: the company must be an Australian resident

2.29 The company into which the trust is restructuring must be an Australian resident. [Schedule 2, item 1, subsection 124-860(8)]

Requirement 6: choosing the roll-over

2.30 Both the trust and the company under the trust restructure must choose the roll-over. [Schedule 2, item 1, section 124-865]

2.31 The beneficiaries of the trust must choose the roll-over to disregard a capital gain or capital loss arising on their interests in the trust being exchanged for shares in the company [Schedule 2, item 1, subsection 124-870(1)] . The trust beneficiaries may choose the roll-over regardless of whether the trust and company choose the roll-over.

2.32 The trust, the company and the beneficiaries of the trust choose the roll-over on an asset by asset basis [Schedule 2, item 1, subsection 124-870(2)] . In addition, where the trust restructuring period occurs over more than one income year, the trust and each beneficiary who chooses roll-over will need to amend their income tax assessments for the years prior to the ending of the trust restructure. Roll-over can only be chosen once the trust restructure is completed.

2.33 A non-resident beneficiary of the trust can only choose to obtain the roll-over if the replacement share in the company they receive in exchange for their interest in the trust has the necessary connection with Australia [Schedule 2, item 1, subsection 124-870(3)] . Section 136-25 of the ITAA 1997 lists which shares have the necessary connection with Australia. For example, a share in a company that is a private company and a resident of Australia will qualify as having the necessary connection with Australia.

Consequences of roll-over for trust and company

Capital gains and losses disregarded

2.34 Where the requirements for the roll-over have been satisfied, the trust can disregard the capital gain or loss from a CGT event A1 happening on the disposal of an asset to the company [Schedule 2, item 1, subsection 124-875(1)] . This roll-over is not negated by CGT event J4 later happening to that asset. CGT event J4 is discussed in paragraphs 2.45 to 2.54.

Cost base is transferred

2.35 The cost base and reduced cost base of the CGT asset for the trust becomes the first element of the cost base or reduced cost base, respectively, of the asset for the company. [Schedule 2, item 1, subsection 124-875(2)]

Pre-CGT assets retain their status

2.36 Consistent with other CGT same-asset roll-overs, the company will be taken to have acquired an asset from the trust before 20 September 1985 if the trust acquired that asset before 20 September 1985 [Schedule 2, item 1, subsection 124-875(3)] . If the trust fails to cease to exist within the required time (generally 6 months from the disposal of the first asset to the company) the company will no longer be taken to have acquired that asset before 20 September 1985 [Schedule 2, item 1, subsection 124-875(4)] .

Roll-over not available for trading stock

2.37 The roll-over provided by Subdivision 124-N applies only to capital gains and capital losses. If the CGT asset is trading stock of the trust or if the CGT asset becomes trading stock of the company on acquisition of the asset, the roll-over in Subdivision 124-N is not available. [Schedule 2, item 1, subsection 124-875(5)]

2.38 The roll-over will apply to a trust asset that is disposed of to the company that is a right or option to acquire an asset. If the right or option is exercised by the company and the company as a result acquires an item of trading stock, then any capital gain or capital loss on the exercise of the right or option will not be disregarded. This rule will be inserted in Division 134-1. [Schedule 2, item 13]

Example 2.6 Chitra Unit Trust runs a horse breeding business. It owns an option to acquire 20 horses. During the trust restructuring period, the option to acquire the horses is disposed of to Lina Pty Ltd. Lina Pty Ltd satisfies the conditions of subsection 124-860(4). Just after the trust restructuring period, Lina Pty Ltd exercises the option. The horses acquired under the option become trading stock of Lina Pty Ltd on exercise of the option. The roll-over will be available for the disposal of the option to Lina Pty Ltd though any capital gain or capital loss on exercise of the option will not be disregarded for Lina Pty Ltd.

Consequences for beneficiaries in a trust receiving shares

Roll-over consequences under Subdivision 124-A

2.39 The consequences for a beneficiary who chooses the Subdivision 124-N roll-over are set out in Subdivision 124-A (replacement-asset roll-overs, general rules) of the ITAA 1997. [Schedule 2, item 1, subsection 124-870(1), note 1]

2.40 The consequences are:

·
the capital gain or capital loss made from the interest in the trust being replaced with a share is disregarded;
·
for interests acquired before 20 September 1985, the shares received in exchange for the interests will also be taken to have been acquired before that date under subsections 124-10(4) and 124-15(4) and (5);
·
if CGT event J4 happens to a share then the pre-CGT status of the share is lost, resulting in the share being acquired after 19 September 1985 under the acquisition rules in Division 109; and
·
the cost base or reduced cost base of interests in the trust acquired after 20 September 1985 are evenly spread across the first element of the cost base or reduced cost base, respectively, of the shares under subsections 124-10(3) or 124-15(3) and (6).

This roll-over is not negated by CGT event J4 later happening to that asset. CGT event J4 is discussed in paragraphs 2.45 to 2.54.

Capital loss not available during trust restructuring period

2.41 The beneficiaries of the trust are prevented from making a capital loss on their interests in that trust during the trust restructuring period. [Schedule 2, item 1, subsection 124-870(4)]

2.42 This integrity measure is intended to prevent any capital losses arising on the cancellation or other CGT event happening to the interests in the trust, while the assets of the trust are being disposed of to the company.

Roll-over not available for trading stock

2.43 The roll-over provided in section 124-870 for the beneficiary applies only to capital gains and capital losses on their interests in the trust. The roll-over is not available where the beneficiarys interest in the trust is trading stock or the share becomes trading stock of the beneficiary acquiring it. [Schedule 2, item 1, subsection 124-870(5)]

2.44 The roll-over will apply to rights or options to acquire units in the trust that are exchanged for rights or options to acquire shares in the company. If the right or option is then exercised and as a result the entity owning the right or option acquires the shares as trading stock, then any capital gain or loss on the exercise of the right or option will not be disregarded. This rule will be inserted in Division 134-1. [Schedule 2, item 13]

Trust fails to cease to exist - CGT event J4

2.45 CGT event J4 will happen where:

·
a roll-over in Subdivision 124-N is chosen for an asset disposed of to a company during the trust restructuring period;
·
the trust fails to cease to exist within a certain time frame (generally 6 months after the first asset transfer); and
·
the company owns the asset when the failure happens.

As a result the effect of the roll-over is reversed. [Schedule 2, item 4, subsection 104-195(1)]

2.46 CGT event J4 will also be triggered where:

·
a Subdivision 124-N roll-over is chosen by a beneficiary of the trust in respect of their interest in the trust that was exchanged for a share under a trust restructure;
·
the trust fails to cease to exist within the required time; and
·
the beneficiary still owns the share in the company.

The effect of the roll-over will also be reversed for the beneficiary. [Schedule 2, item 4, subsection 104-195(2)]

Time frame for trust ceasing to exist

2.47 In most cases, the trust must cease to exist within 6 months after the trust first disposed of an asset to the company under a trust restructure. CGT event J4 may be triggered if the trust fails to cease to exist within this time frame. [Schedule 2, item 4, subparagraphs 104-195(1)(b)(i) and (2)(b)(i)]

2.48 CGT event J4 will happen at the end of the 6 month period. [Schedule 2, item 4, subsection 104-195(3)]

2.49 The 6 month period will be extended where the trust fails to cease to exist and that failure was caused by circumstances that were beyond the control of the trust and the trust then ceases to exist as soon as practicable after that time. If the trust does not cease to exist as soon as practicable after this time CGT event J4 may still be triggered. The time of the CGT event J4 in this case is at the end of the extended period. [Schedule 2, item 4, subparagraphs 104-195(1)(b)(ii) and (2)(b)(ii) and subsection 104-195(3)]

When a company makes a capital gain or capital loss

2.50 If a trust obtained a roll-over for an asset it disposed of to a company under Subdivision 124-N and the company still owns the asset the company, and not the trust, will make a capital gain or capital loss under CGT event J4. The capital gain is the excess of the assets market value at the time the company acquired the asset from the trust over the cost base of the asset at that time. The company will make a capital loss if the market value is less than the assets reduced cost base at the time the company acquired the asset. Division 109 will apply to determine the acquisition time for the asset. [Schedule 2, item 4, subsection 104-195(4)]

When a shareholder makes a capital gain or capital loss

2.51 As with the company, the shareholder will make a capital gain under CGT event J4 if the shares market value at the time the shareholder acquired it under the trust restructure is more than the shares cost base at that time. A capital loss is made if the shares market value is less than the shares reduced cost base at that time. Instead, Division 109 will apply to determine the acquisition time for the share. [Schedule 2, item 4, subsection 104-195(6)]

Cost base of assets

2.52 The first element of the cost base or reduced cost base of the CGT asset for the company or of the share for the shareholder after the application of CGT event J4, will be the market value of the asset or the share respectively at the time it was acquired under the trust restructure. [Schedule 2, item 4, subsections 104-195(5) and (7)]

2.53 If CGT event J4 happens in respect of an asset of the company that was taken to have been acquired before 20 September 1985, that asset will no longer have that acquisition date. Instead, Division 109 will apply to determine the acquisition time for the asset. The same applies for shareholders who have CGT event J4 happen in respect of a share they own in the company that was received in exchange for their pre-CGT interest in the trust. [Schedule 2, items 11 and 12, subsections 124-10(5) and 124-15(7)]

Exception

2.54 If the trust restructuring period ends before Royal Assent is received for this bill, and a trust fails to cease to exist after that date, CGT event J4 will not apply [Schedule 2, item 4, subsection 104-195(8)] . For this exception to apply, everything that was required under Subdivision 124-N must have occurred apart from having made a choice to disregard the capital gain or capital loss. This includes the first asset being disposed of to the company under a trust restructure on or after 11 November 1999, all the assets of the trust having been disposed of to the company and shares in the company being received by the beneficiaries in exchange for all their interests in the trust before Royal Assent is received.

Application and transitional provisions

2.55 The transitional provision allows those trusts that have commenced to restructure into a company on or after 11 November 1999, but before Royal Assent was received for this bill, to amend their income tax assessments for the 1999-2000, 2000-2001 and 2001-2002 income years [Schedule 2, item 16] . For trusts to obtain a Subdivision 124-N roll-over they will need to make a choice within 12 months after the day on which that bill receives Royal Assent before they can amend their respective tax assessments.

2.56 The new Subdivision 124-N roll-over and the new CGT event J4, along with the transitional and consequential amendments, will apply to CGT events happening on or after 11 November 1999. [Schedule 2, item 17]

Consequential amendments

2.57 A signpost is added to section 102-20 to highlight that a capital loss cannot be made on a CGT event happening to a beneficiarys interest in the trust during a trust restructuring period [Schedule 2, item 2] . This is relevant for calculating a capital loss under section 102-20.

2.58 A new item is added to the Guide in section 104-5 to summarise CGT event J4. The summary includes the time of the event and how to calculate a capital gain or loss that is made from that event. [Schedule 2, item 3, section 104-5, item J4 in the table]

2.59 A new CGT event is inserted into Division 104. CGT event J4 is discussed in paragraphs 2.45 to 2.54. [Schedule 2, item 4, Subdivision 104-J]

2.60 Item 8 of section 109-55 will be amended to reflect the acquisition rule for pre-CGT assets in Subdivision 124-N. [Schedule 2, item 5]

2.61 A new item is added to the Guide in section 112-45 to specify the cost base modifications that apply under CGT event J4. [Schedule 2, item 6, section 112-45, item J4 in the table]

2.62 A reference to Division 124 is inserted into the table in section 112-115 listing all the replacement-asset roll-overs. [Schedule 2, item 7, section 112-115, item 14B in the table]

2.63 A reference to Subdivision 124-N is inserted into section 112-140 recognising that the trust to company roll-over is a same-asset roll-over. [Schedule 2, item 8, section 112-140]

2.64 A reference to Subdivision 124-N is inserted into the table in section 112-150 listing all the same-asset roll-overs. [Schedule 2, item 9, section 112-150, item 4A in the table]

2.65 Subsection 124-5(1) (How to find your way around this Division) is amended to include a reference to Subdivision 124-N. [Schedule 2, item 10]

2.66 Subsections 124-10(5) and (7) are inserted to undo the operation of subsection 124-10(4) as a result of a CGT event J4 happening. In the circumstances the normal acquisition rules in Division 109 will apply. [Schedule 2, items 11 and 12, subsections 124-10(5) and (7)]

2.67An exception will be made to subsection 134-1(4) which disregards a capital gain or a capital loss that a grantee of a right makes on exercising that right. This exception will only apply to a right a company acquired as a result of a trust restructure if on exercise of the right the company acquires an item of trading stock. [Schedule 2, item 13]

2.68 A new item is added to the table in section 136-10 to identify when a non-resident makes a capital gain or a capital loss from a CGT event happening during a trust restructuring period. [Schedule 2, item 14, section 136-10, item J4 in the table]

2.69 The definition of a trust restructuring period is to be inserted into the dictionary in subsection 995-1(1). [Schedule 2, item 15, definition of trust restructuring period in the ITAA 1997]

REGULATION IMPACT STATEMENT

Policy objective

2.70 As a business develops, it may seek to restructure to increase its efficiency and take full advantage of its future potential. The policy objective of this measure is to provide a CGT roll-over to increase the commercial flexibility available in selecting an appropriate business structure for the needs of business.

Implementation options

2.71 This measure was originally announced in Treasurers Press Release No. 74 of 11 November 1999 as part of the entities tax regime, as recommended in the Review of Business Taxation. The original announcement provided for transitional relief for those entities restructuring from a fixed trust to a company. Exposure draft legislation, including the CGT roll-over provisions, was released on 11 October 2000. The Treasurer announced on 22 March 2001 (Press Release No. 16) that the transitional roll-over was no longer necessary following the announcement on 27 February 2001 (Treasurers Press Release No. 8) that the proposed entities tax regime would not proceed.

2.72 Treasurers Press Release No. 77 of 5 October 2001 announced that for asset transfers from 11 November 1999, roll-over would, in general, be available where:

·
a trust (other than a discretionary trust) disposes of all its assets to a company and the trust ceases to exist; and
·
the beneficiaries of the trust have all their interests exchanged for shares in the company and own those shares in the same proportions as they owned interests in the trust.

2.73 The provisions contained in this bill develop the exposure draft legislation. Under the new CGT roll-over the CGT liability that would have otherwise arisen on disposal of an asset from a trust to a company is deferred until a later CGT event happens to the asset. The same cost base is transferred from the trust to the company. Therefore, when the asset is later sold by the company, any increase in value of the asset while it was still in the trust will be captured at the time of the later sale by the company.

2.74 The roll-over will be optional and available for both the trust and for the beneficiaries of the trust.

2.75 The beneficiaries can choose to apply the roll-over regardless of whether the trust and company choose the roll-over on the disposal of the asset to the company. This is equally true for the trust and company who can choose the roll-over independently of whether the beneficiaries choose the roll-over on having their trust interest replaced with a share.

Assessment of impacts

Impact group identification

Trustees of trusts and companies involved in restructure

2.76 The proposed amendments will affect the trustee of a trust. Both the trustee and the company will need to choose the roll-over in respect of assets that are transferred from the trust to the company. The trustee will also be responsible for notifying the members of the trusts about the restructure and of their new interests in the company.

2.77 It is estimated that there are at least 80,000 trusts in Australia that may choose the benefit of the proposed roll-over.

Members of eligible trusts

2.78 The members of eligible trusts will need to be aware of the tax implications of the restructure because they must choose the roll-over in respect of their interests in the trust before they can defer a capital gain or capital loss.

Pure discretionary trusts and their members

2.79 The roll-over is only available to trusts whose members interests have a fixed capital component. Therefore, pure discretionary trusts (i.e. where the beneficiaries have no right to the capital or income of the trust until the trustee exercises its discretion) are excluded. If a discretionary trust decides to undertake a trust restructure, it may incur some CGT liability.

Analysis of costs and benefits associated with each implementation option

Compliance costs

2.80 Taxpayers must choose to take advantage of the roll-over. Where the taxpayer chooses to use the roll-over, this choice is indicated from the amount of capital gains included in their income tax assessment in the particular income year in which the trust restructure takes place. The taxpayer does not have to send any further paperwork to the ATO. This is consistent with the existing choice rules for CGT.

2.81 There will be no increase in record keeping costs for the taxpayers involved as the current substantiation rules continue to apply.

2.82 Taxpayers may require further consultation with their tax agent or legal adviser in the year of the trust restructure. The taxpayer may incur additional costs in obtaining information relating to the roll-over requirements and the Corporations Act 2001 requirements for incorporation of a company.

2.83 As the affairs of each trust vary the exact cost of compliance cannot be quantified. Examples of the types of costs that may be incurred by either the trustee of the trust or the company include:

·
setting up the company structure;
·
changing accounting and record keeping systems to allow for the change from making distributions out of the trust to paying dividends out of the company;
·
providing members with information required for the members to comply with their taxation obligations; and
·
complying with any Corporations Act 2001 requirements.

Administrative costs

2.84 The proposed amendments do not require any systems changes for the ATO.

2.85 The ATO information booklets will need to be modified to include a reference to the proposed roll-over. Also, it is ATO practice to produce information sheets and, where required, update the website to reflect the amendments ahead of printing the new booklets. The ATO is constantly updating information on its website and its booklets, return forms, schedules and guides are updated annually. The administration effects of these amendments will be folded into that process. Therefore, there should be minimal costs to administration in this respect.

2.86 ATO staff will need to be trained on the proposed roll-over in order to deal with any requests for advice. This training will be part of ongoing internal training, therefore administration costs in this respect will be minimal.

Revenue costs

2.87 Those trusts that had restructured using the exposure draft legislation as guidance were required to include any capital gains or capital losses from the restructure in their returns. Depending on the circumstances of the trust, the various CGT concessions may have dramatically reduced the capital gain that would have otherwise been payable. Accordingly, there will be an insignificant impact on revenue as a result of backdating the proposed roll-over to 11 November 1999.

2.88 The proposed roll-over provides a simpler and more flexible way of transferring the assets of a fixed trust into a company than under the current law. To the extent that more trusts may roll-over in response to this more flexible mechanism, the additional cost is likely to be small but unquantifiable.

Economic benefits

2.89 Eligible taxpayers will benefit from a deferral of a CGT liability.

2.90 Taxation will not be an impediment to the restructure of a business from a fixed trust to a company. This is because the potential for a CGT liability on that restructure occurring will now be deferred.

Other issues - consultation

2.91 In the development of this measure, tax practitioners were consulted. In particular, advisers of clients who have restructured or are considering restructuring have been consulted.

Conclusion

2.92 The proposed roll-over will provide greater commercial flexibility for certain trusts disposing of assets to a company. This measure was backdated to 11 November 1999 so as not to disadvantage those entities that undertook restructuring from that date.


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