ATO Interpretative Decision

ATO ID 2005/202

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is roll-over relief available under section 40-340 of the Income Tax Assessment Act 1997 (ITAA 1997) for the transfer of depreciating assets from a discretionary trust to a unit trust?

Decision

No. To qualify for roll-over relief, the taxpayer must satisfy all of the conditions in either subsection 40-340(1) or subsection 40-340(3) of the ITAA 1997. The transfer of assets from a discretionary trust to a unit trust does not meet the conditions in either of these subsections.

Facts

The taxpayer conducts their business through a discretionary family trust.

The taxpayer decides to start carrying on the business through a unit trust which shares some beneficiaries with the discretionary trust.

As a result, there will be a transfer of depreciating assets from the discretionary trust to the unit trust.

Reasons for Decision

Subsection 40-340(1) of the ITAA 1997 provides automatic roll-over relief for certain disposals of depreciating assets:

•

as a result of a marriage breakdown

•

by an individual or a trustee to a wholly-owned company, and

•

by a company or partners in a partnership to a company that is a member of the same wholly-owned group.

As the transfer of assets to a unit trust from a discretionary trust is not a type of disposal covered by subsection 40-340(1) of the ITAA 1997, the transfer of assets in this case does not qualify for automatic roll-over relief under that section.

Subsection 40-340(3) of the ITAA 1997 provides an option to choose roll-over relief if two conditions are met.

Roll-over relief under subsection 40-340(3) of the ITAA 1997 can apply if:

1.

there is a balancing adjustment event for a depreciating asset because of subsection 40-295(2) of the ITAA 1997 (paragraph 40-340(3)(a) of the ITAA 1997), and

2.

the entities that had an interest in the asset before the change and the entity or entities that have an interest in the asset after the change jointly choose the roll-over relief (paragraph 40-340(3)(b) of the ITAA 1997).

Subsection 40-295(2) of the ITAA 1997 states that a balancing adjustment event occurs for a depreciating asset if:

•

there is a change in the holding of, or in the interest of entities in, the asset (paragraph 40-295(2)(a) of the ITAA 1997)

•

the entity or one of the entities that had an interest in the asset before the change has an interest in it after the change (paragraph 40-295(2)(b) of the ITAA 1997), and

•

the asset was a partnership asset before the change or becomes one as a result of the change (paragraph 40-295(2)(c) of the ITAA 1997).

In the facts of this case, prior to the change, the assets are held by a discretionary trust and after the change the assets will be held by a unit trust. Assets held under trust do not constitute partnership assets.

The depreciating assets to be transferred are not partnership assets before the change in the holding of the assets. Neither will they become partnership assets as a result of the change in the holding of the assets.

As the assets are not, and will not become, partnership assets a balancing adjustment event under subsection 40-295(2) of the ITAA 1997 does not occur. Therefore, the taxpayer is not entitled to choose roll-over relief under subsection 40-340(3) of the ITAA 1997.

Year of income:  Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007 Year ended 30 June 2008

Legislative References:
Income Tax Assessment Act 1997
   section 40-295
   subsection 40-295(2)
   paragraph 40-295(2)(a)
   paragraph 40-295(2)(b)
   paragraph 40-295(2)(c)
   paragraph 40-340(3)(a)
   paragraph 40-340(3)(b)
   subsection 40-340(3)
   section 40-345
   subsection 40-340(1)
   paragraph 40-340(1)(a)
   paragraph 40-340(1)(b)
   paragraph 40-340(1)(c)

Keywords
Balancing adjustment rollover relief
Balancing adjustments
Capital Allowances CoE
Dealings & transactions
Discretionary trusts
Disposal of assets
Unit trusts

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  15 July 2005

ISSN: 1445-2782