Edited version of private ruling

Authorisation Number: 1011512929128

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Ruling

Subject: Transfer of trading stock at book value

Question

Subject to the conditions listed in subsections 70-100(7) and 70-100(8) of the Income Tax Assessment Act 1997 (ITAA 1997), can an election be made under subsection 70-100(4) of the ITAA 1997, which allows the transfer of land that is trading stock to the unit holders at tax or book value?

Answer

Yes.

Relevant facts and circumstances

Trust A carries on a business of land development.

Trust A owns land which was acquired for the purpose of subdivision and development. This land is being held by Trust A as trading stock.

Trust A has three equal unit holders (X, Y and Z).

The unit holders no longer wish to develop the land jointly. Therefore, it is proposed that the property be subdivided into a number of lots. Trust A will be vested and pursuant to a clause of Trust A's trust deed, Trust A will transfer, in specie, lot 1 to unit holder X and lot 2 to unit holders Y and Z jointly in satisfaction of each unit holder's share in Trust A. Both lots will be developed by unit holders in the course of carrying on a business of land development and will be held as trading stock.

Trust A's trust deed states each unit entitles the registered holder to a beneficial interest in the Trust Fund as an entirety. The trust deed also states that Trust A's trustee may, at their discretion, at the request of any unit holder, transfer any part of the trust fund in specie in full or partial satisfaction of that unit holder's share in the trust fund at the market value of that part of the trust at the vesting date.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 70-100

Reasons for decision

Under subsection 70-100(1) of the ITAA 1997 a partial change in the ownership of trading stock is treated as a notional disposal of the trading stock at market value. A partial change of ownership under section 70-100 of the ITAA 1997 occurs if, after the change, a new owner and the old owner or at least one of the old owners has an ownership interest in the trading stock.

However, under subsections 70-100(4) and (5) of the ITAA 1997 the old owners and new owners may agree that the trading stock is to be taken to have disposed of at its tax value, not at its market value. This result can only occur if the transferor and transferee make an election. Under subsection 70-100(6) of the ITAA 1997 an election can only be made if:

(a) immediately after the item stops being trading stock on hand of the transferor, it is an asset of a business carried on by the transferee; and

(b) immediately after the item stops being trading stock on hand of the transferor, the entities that owned it immediately beforehand have (between them) interests in the item whose total value is at least 25% of the item's market value on that day; and

(c) the value elected is less than that market value; and

(d) the item is not a thing in action.

(a) Immediately after the item stops being trading stock on hand of the transferor, it is an asset of a business carried on by the transferee.

The information provided shows that the trading stock will stop being trading stock of the holder, and will then immediately be an asset of a business carried on by the transferee.

(b) Immediately after the item stops being trading stock on hand of the transferor, the entities that owned it immediately beforehand have (between them) interests in the item whose value is at least 25% of the item's market value on that day.

Trust A has legal ownership of the trading stock. The beneficial interest in the trading stock is held by the unit holders.

It has been held in various court cases that unit holders may also have a proprietary interest in the assets held by a trust (for example, Charles v FC of T (1954) 90 CLR 598 and Costa & Duppe Properties Pty Ltd v Duppe (1986) VR 90(Costa's case)). This will depend on how the unit trust is set up.

In Costa's case, his Honour, after referring to number of authorities, including New Zealand Insurance Co. Ltd v. Commissioner of Probate Duties (Vic) (1973) VR 647, Charles v. Federal Commissioner of Taxation (1954) 90 CLR 598 and Octavo Investments Pty Ltd v. Knight (1979) 144 CLR 360, said at page 96:

To my mind, having regard to the New Zealand Insurance Case, the Octavo Investments Case and what is said in Charles v. Federal Commissioner of Taxation, the conclusion is inescapable that the unit-holders in the Costa & Duppe Properties Unit Trust have a proprietary interest in all the property which is for the time being subject to the trust deed. This proprietary interest is recognised by cl. 7(a) of the deed. Clauses 7(a) and 8(a) cannot mean that the unit-holders, while having a proprietary interest in the whole, have no such interest in any of the constituent parts. If there is a proprietary interest in the entirety, there must be a proprietary interest in each of the assets of which the entirety is composed: cf. Smith v. Layh (1953) 90 CLR 102, at pp. 108-9. What cl. 8(a) recognises is that no unit-holder can claim to have any particular asset appropriated to his share or transferred to him otherwise than in accordance with the deed.

It is worth noting that writers on the unit trust treat unit-holders as having a proprietary interest in the trust estate; HAJ Ford, "Unit Trust", (1960) 23 Mod. LR 129 at pp. 131-2 and 141; MJ Walsh, "Unit Trusts Structure, Management and Taxation", (1976) 10 TIA 534 at pp. 537-8 and 550; TW Magney, "A Comparative Analysis of Estate Planning Vehicle Part 2", (1977) 12 TIA 222 at p. 226; Grbich Munn & Reicher, "Modern Trusts and Taxation", (1979) pp. 36-7 and 40-1.

The unit trust in the above case has similarities to Trust A. The information provided shows that the unit holders do have a proprietary interest in the assets of Trust A.

Taxation Determination TD 96/4 shows that section 36A(2) of the Income Tax Assessment Act 1936 (equivalent to subsection 70-100(6) of the ITAA 1997) can apply if a partnership transfers trading stock to the trustee of a unit trust in which the former partners of the partnership hold at least 25% of the units, provided that the trust deed specifies the unit holders have a proprietary interest in the underlying assets of the trust. TD 96/4 accepts that for the purpose of subsection 70-100(6) of the ITAA 1997 some transfers of trading stock which involve unit trusts can satisfy the 25% test where the unit holders own a proprietary interest in the assets of the unit trust and other conditions are satisfied.

The unit holders have a proprietary interest in the trading stock immediately before the transfer and then after the transfer retain more than 25% interest in the stock.

(c) The value elected is less than the market value

The value elected will be less than the market value.

(d) The item is not a thing in action (for example, shares or debentures)

The land is not a thing in action.

Conclusion

The information provided shows that subsection 70-100(6) of the ITAA 1997 would be satisfied. Therefore an election can be made under subsection 70-100(4) of the ITAA 1997. The method of making the election is provided in subsections 70-100(7) and (8) of the ITAA 1997.

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