Edited version of private ruling

Authorisation Number: 1011736399419

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Ruling

Subject: Transfer of Unit Trust Units - CGT Implications

Issue 1

Question 1

In the event of a transfer to Unit Trust A unit holders (unit holder) of the units in the Unit Trust B, to which that unit holder is beneficially entitled, as a consequence of a distribution in specie, would the capital gains tax provisions of the Income Tax Assessment Act 1997 (ITAA 1997) apply to such transfer?

Answer

Yes

Question 2

If capital gains tax (CGT) does apply, please specify the CGT event which would give rise to any such CGT liability and is the trustee for Unit Trust A or its unit holders assessed on any CGT liability?

Answer

CGT Event A1 arises and the unit holders are assessed on any CGT gain made.

This ruling applies for the following period:

Income Tax Period ended 30 June 2013

The scheme commences on:

1 July 2012

Issue 2

Question 1

If CGT is payable by the trustee in the Unit Trust A is the CGT discount allowed to the trustee in the calculation of the net capital gains for the CGT event applicable to that trustee in such circumstances?

Answer

Not applicable as the unit holders are being assessed on any capital gain made by Unit Trust A via section 97 of the ITAA 1997.

Question 2

If CGT is payable by the Unit Trust A unit holder, is the CGT discount allowed to the unit holder in the calculation of the net capital gains for the CGT event applicable to that unit holder in such circumstances?

Answer

Yes, for the unit holders that is a trust or a complying superannuation entity on the capital gain that is derived from the transfer of Unit Trust B units that has been held for more than 12 months by the trustee of Unit Trust A. This ruling does not determine whether the beneficiaries of these unit holders are eligible for the CGT discount.

No, for the unit holders that is a company.

This ruling applies for the following period:

Financial year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it.

The fact sheet has more information about relying on your private ruling

The primary asset of the Unit Trust A is a holding of units in the Unit Trust B.

Under the scheme, there would be a distribution in specie to each of the unit holders of Unit Trust A of those units in the Unit Trust B in the proportions which they are presently entitled. This is done with a view to rationalising the two trusts.

The distribution in specie will be executed upon the signing of a deed of consent, a vesting deed and a deed of covenant between the trustee and the unit holders of Unit Trust A.

The deed of consent will be signed by the trustee and all the unit holders of the Unit Trust A for the agreement of the distribution of specie to be distributed by the trustee to all unit holders in accordance with their beneficial entitlements in the Unit Trust B.

Each of Unit Trust A unit holders acquired the units in the Unit Trust A for valuable consideration.

Unit Trust A unit holder will receive their distribution in specie at a time to suit each of them. There will not be only one omnibus distribution in specie to all unit holders at one time.

No consideration will pass from the Unit Trust A unit holders to the trustee of Unit Trust A at the time of the distribution in specie. The units in the Unit Trust B will be received by each Unit Trust A unit holders in satisfaction of the beneficial entitlement of each Unit Trust A unit holders to those units.

The most recent allotment of units in the Unit Trust B to individual unit holders was completed on 1 July 2012. All other allotments have occurred more than 12 months prior to 30 June 2013.

The business operations of the Unit Trust A are solely as an investment structure that owns a holding of units in Unit Trust B.

The trustee of Unit Trust A acquired the units in Unit Trust B for investment purposes only and does not buy and sell units in unit trusts regularly for income purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10,

Income Tax Assessment Act 1997 section 108-5,

Income Tax Assessment Act 1997 section 116-30,

Income Tax Assessment Act 1997 section 115-10,

Income Tax Assessment Act 1997 section 115-25,

Income Tax Assessment Act 1997 section 112-20 and

Income Tax Assessment Act 1997 Subdivision 115-C.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you understand how we reached our decision.

These reasons for decision accompany the Notice of private ruling for the trustee and the unit holders of the Unit Trust A.

Issue 1

Question 1

Summary

Yes, the capital gains tax provisions under ITAA 1997 will have application to this transfer.

Detailed reasoning

The capital gains tax provisions will have application on the transfer of the units of the Unit Trust B from the trustee of the Unit Trust A to its unit holders. The units of the unit trust are a CGT asset, as defined in section 108-5 of the ITAA 1997, and its transfer will attract the application of the capital gains tax provisions.

The transfer of units is not assessed under ordinary income provisions of section 6-5 of the ITAA 1997 because the business operations of the Unit Trust A are solely as an investment structure that owns a holding of units in the Unit Trust B. The trustee of Unit Trust A acquired the units in Unit Trust B for investment purposes only and does not buy and sell units in unit trusts regularly for income purposes.

Question 2

Summary

CGT Event A1 arises and the unit holders are assessed on any CGT gain made.

Detailed reasoning

CGT event A1 under section 104-10 of the ITAA 1997 occurs if you dispose of a CGT asset and there is a change of ownership from you to another entity because of some act or event: subsection 104-5(2) of the ITAA 1997. In this case the distribution in specie, the trustee of the Unit Trust A would be a transfer of the units in the Unit Trust B to its unit holders.

Although the unit holders of Unit Trust A have the beneficial ownership of the Unit Trust B units under general law, they do not hold the units for capital gains tax purposes. It is the unit in the unit trust that is the relevant CGT asset irrespective of any interest the unit holder has in the property of the unit trust.

Taxation Determination TD 2000/32 Income tax: capital gains: for capital gains purposes is the unit held by a unit holder in a unit trust the relevant CGT asset? states:

The scheme of the Income Tax Assessment Act 1997 is to treat units in a unit trust as the relevant asset for capital gains purposes rather than any interest a unit holder might have in the underlying property of the unit trust. Section 108-5 of the ITAA 1997 specifically identifies units in a unit trust as an example of CGT assets.

Therefore, the distribution in specie by the trustee will trigger CGT event A1, as there is a change in the ownership of the units in the Unit Trust B from the trustee of the Unit Trust A to its unit holders

CGT event A1 occurs when you enter into a contract for the disposal or if there is no contract when the change of ownership occurs: subsection 104-10(3) of the ITAA 1997. In this case, the trustee of the Unit Trust A enters into the deed of consent with its unit holders to enable the distribution in specie i.e. the contract for the disposal of the units. The other contracts i.e. the vesting deed and the deed of covenant are the mechanism for the transfer of the units, when the change of ownership of the units occurs.

Hence, CGT event A1 occurs when the deed of consent is signed as this is when the parties i.e. trustee and unit holders agree that the Unit Trust B units will be transferred in a distribution in specie by the trustee. This is when the contract of disposal occurs not when the actual distribution is made to each of the unit holders.

The applicable taxing provision under which the income of Unit Trust A is taxed is section 97 of the Income Tax Assessment Act 1936 (ITAA1936), as the unit holders are all presently entitled to a share of the trust's income. This provision states that the income of the trust (which includes any capital gain made) is assessable to its presently entitled beneficiaries (the unit holders).

Issue 2

Question 1

Summary

Not applicable as the unit holders are being assessed on any capital gain made by the Unit Trust A via section 97 of the ITAA 1997.

Detailed reasoning

Unit Trust A is a unit trust where the unit holders have fixed entitlements and are presently entitled to the income of the unit trust. Therefore, any capital gains made by the Unit Trust A are assessable to the unit holders via section 97 of the ITAA 1997.

Question 2

Summary

Yes, for the unit holders that is a trust or a complying superannuation entity on the capital gain that is derived from the transfer of Unit Trust B units that has been held for more than 12 months by the trustee of Unit Trust A. This ruling does not determine whether the beneficiaries of these unit holders are eligible for the CGT discount.

No, for the unit holders that is a company.

Detailed reasoning

If the trustee of the Unit Trust A generates a CGT gain on the transfer of the Unit Trust B units to its unit holders, each unit holder as beneficiary will receive capital gains in their assessable income in the income year that the CGT event occurs. Note, in determining the assessable capital gain made by the Unit Trust A, the gross capital gain is reduced by the CGT discount. However, if any of the units were held for less than 12 months prior to the distribution in specie, the CGT discount is not available in respect of those units.

Subdivision 115-C of the ITAA 1997 applies to the unit holder to determine the amount of capital gain included in the unit holder's assessable income as the concessions, including the CGT discount, apply to the trustee and may not be available to the unit holders. The unit holder as beneficiary will be able to apply capital losses against the capital gains and apply the appropriate discount percentage if they are eligible for a CGT discount.

A beneficiary who is not under a legal disability and who is presently entitled to a share of the income of a trust must include in their assessable income their share of the net income of the trust estate: section 97 of the ITAA 1936. Hence, the unit holders will be required to include their share of the capital gain i.e. in accordance to the number of units they were to be transferred under the contract/s for transfer with the trustee.

Subdivision 115-C of the ITAA 1997 sets out rules that affect the calculation of a beneficiary's net capital gain if the beneficiary is assessed on a share of the net income of the trust which includes a capital gain.

Section 115-215 of the ITAA 1997 treats a beneficiary as having capital gains in addition to those they have from a CGT event happening. For each part of a trust capital gain that was reduced by the CGT discount and which is included in the beneficiary's income under section 97 of the ITAA 1936, the beneficiary is treated as having made a capital gain equal to twice that amount: paragraph 115-215(3)(b) of the ITAA 1997. The beneficiary is then able to apply appropriate capital losses and apply any eligible CGT discount when calculating their CGT liabilities. Hence, the unit holders will have to consider the above when calculating their capital gains liabilities from the transfer.

Section 115-10 of the ITAA 1997 lists the entities that are eligible for a CGT discount.

Unit holder A is a company and is not eligible for the CGT discount.

Unit holder B is a complying superannuation entity and is eligible for 33 1/3% CGT discount and not 50%.

The other unit holders C, D and E are trusts and are eligible for the 50% CGT discount.

The CGT discount flows through to the unit holders who are trusts but whether their beneficiaries can claim the CGT discount in their income tax returns will depend on whether these beneficiaries are themselves an entity listed under section 115-10 of the ITAA 1997. This is not determined by this private ruling.

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