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Ruling

Subject: Interaction of Division 6B of the Income Tax Assessment Act 1936 (ITAA 1936) with the exit history rule in section 701-40 of the Income Tax Assessment Act 1997 (ITAA 1997).

Question 1:

Will the 'exit history rule' in section 701-40 of the ITAA 1997 operate in working out the net income or amount of any loss of Trust D in the period after its units are distributed to Company E shareholders?

Answer:

Yes.

Question 2:

If the answer to Question 1 is yes, will the consequence be that Trust D will not be a 'corporate unit trust' as defined in section 102J of the ITAA 1936?

Answer:

Yes.

Question 3:

If the answer to Question 2 is yes, will the Trustee of Trust D be assessed and liable to pay tax under section 102K of the ITAA 1936 and be subject to the provisions of section 102L of the ITAA 1936?

Answer:

No.

This ruling applies for the following periods:

2013 income year

The scheme commences during:

2013 income year

Relevant facts and circumstances

Company E is an Australian incorporated company which is listed on the Australian Securities Exchange (ASX).

Company E is a listed investment company as defined in section 115-290 of the ITAA 1997 and a resident of Australia for income tax purposes.

Company E is proposing to undertake a restructure so that, following the restructure, shareholders' interests in Company E's assets will be held through units in an unlisted unit trust (Trust D), rather than shares in Company E (the Restructure).

Company E proposes to implement the Restructure through the following key steps.

Register Trust D with the units in Trust D being wholly-owned by Company E.

Company E and the Trustee of Trust D will enter into an asset sale deed (Asset Sale Deed), under which Company E will transfer all of its assets to Trust D for market value, in consideration for Trust D issuing further units in Trust D.

Company E shareholders will meet to vote on the Asset Sale and a capital reduction, under which Company E will distribute 100% of the units in Trust D to Company E shareholders by way of an in specie capital return and, to the extent necessary, a special dividend (collectively, the In Specie Distribution).

If the resolutions are passed, the Asset Sale and In Specie Distribution will occur with the result that each Company E shareholder will hold one unit in Trust D for each share they currently hold in Company E.

Company E will be delisted from the ASX.

Following the Restructure, it is intended that Trust D will be operated in a manner akin to other unlisted managed funds, offering daily redemptions and subscriptions of units at a price that reflects net asset value per unit (less transaction charges).

Election to consolidate

Company E intends to make an election to form an income tax consolidated group from a date that is after the date on which Trust D is formed but before the Asset Sale Deed is entered into.

Assumptions

Company E will elect to form a consolidated group with the effect from a date that is after the date on which Trust D is formed but before the Asset Sale Deed is entered into.

Company E currently has more than 50 shareholders and does not have 20 or fewer shareholders holding 75% or more of the shares in Company E. The Commissioner is asked to assume that this will remain the case at all relevant times, and that this will also apply to the holding of units in Trust D on an ongoing basis following implementation of the Restructure.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 102D

Income Tax Assessment Act 1936 Section 102E

Income Tax Assessment Act 1936 Section 102F

Income Tax Assessment Act 1936 Section 102J

Income Tax Assessment Act 1936 Section 102K

Income Tax Assessment Act 1936 Section 102L

Income Tax Assessment Act 1997 Section 701-1

Income Tax Assessment Act 1997 Section 701-40

Income Tax Assessment Act 1997 Section 701-65

Reasons for decision

Question 1

The exit history rule is contained in section 701-40 of the ITAA 1997:

Exit history rule

701-40(1)

If the entity ceases to be a *subsidiary member of the group, this section has effect for the entity core purposes, so far as they relate to any thing covered by subsection (2) (an eligible asset etc.) after it becomes that of the entity because subsection 701-1(1) (the single entity rule) ceases to apply to the entity.

Assets, liabilities and businesses covered

701-40(2)

This subsection covers the following:

(a)   any asset;

(b)   any liability or other thing that, in accordance with accounting standards, or statements of accounting concepts made by the Australian Accounting Standards Board, is a liability;

(c)   any business;

that becomes that of the entity because subsection 701-1(1) (the single entity rule) ceases to apply to the entity when it ceases to be a *subsidiary member of the group.

Head company history inherited

701-40(3)

Everything that happened in relation to any eligible asset etc. while it was that of the *head company, including because of any application of section 701-5 (the entry history rule), is taken to have happened in relation to it as if it had been an eligible asset etc. of the entity.

Note 1: If the eligible asset etc. was brought into the group when an entity became a subsidiary member, section 701-5 (the entry history rule) would have had the effect that things happening to the eligible asset etc. while it was that of the entity would be taken to have happened as if it was that of the head company. Such things will in turn be taken by this subsection to have happened in relation to the eligible asset etc. as if it were that of the entity that takes the asset out of the group.  

Note 2: Other provisions of this Part may affect the tax history that is inherited (e.g. asset cost base history is affected by section 701-45).  

*denotes a term defined in section 995-1 of the ITAA 1997.

Subsection 701-40(1) of the ITAA 1997 details the circumstances in which the provision will have application. When determining the income or loss or net income of an entity that has ceased to be a member of a consolidated group because the single entity rule (SER) ceases to apply to it, the history of any of the items mentioned in subsection 701-40(2) of the ITAA 1997 that is to be taken into account, is determined by subsection 701-40(3) of the ITAA 1997.

The entity core purposes are determined in accordance with the SER in section 701-1 of the ITAA 1997.

Single entity rule

701-1(1)

If an entity is a *subsidiary member of a *consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the *head company of the group, rather than separate entities, during that period.

Entity core purposes

701-1(3)

The purposes covered by this subsection (the entity core purposes) are:

(a) working out the amount of the entity's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and

(b) working out the amount of the entity's loss (if any) of a particular *sort for any such income year.

Note: An assessment of the entity's liability calculated by reference to income tax for a period when it was not a subsidiary member of the group may be made, and that tax recovered from it, even whilst it is a subsidiary member.

According to paragraph 2.39 of the Explanatory Memorandum to the New Business Tax System (Consolidated) Bill (No.1) 2002 (Cth) (the EM), the exit history rule applies for the core purposes of working out the entity's income tax liability or loss for the period after it ceases to be a member of the consolidated group.

In the case of a trust or partnership, paragraph 2.15 of the EM states:

The single entity rule also applies to partnerships and trusts, which have net income rather than taxable income.

In this respect, section 701-65 of the ITAA 1997 provides:

Net income of partnerships and trusts

701-65(1)

If:

(a) another provision of this Division applies for the purpose of:

(i) working out the amount of the entity's liability (if any) for income tax calculated by reference to an income year; or

(ii) working out the amount of the entity's taxable income for an income year; and

(b) the entity is a trust or partnership;

the provision instead applies in a corresponding way for the purpose of working out the amount of the entity's net income, as defined in the Income Tax Assessment Act 1936, (if any) for the income year.

Consequently, subsection 701-65(1) of the ITAA 1997 extends the meaning of core purposes for a trust to include working out the amount of the trust's 'net income' as defined in the ITAA 1936, for the income year.

Question 2:

Trust D will be a 'corporate unit trust' in terms of section 102J of the ITAA 1936 if it is:

· an eligible unit trust in the year of income;

· a public unit trust; and

· a resident unit trust in the year of income.

Trust D would be a public unit trust as it would satisfy the conditions of section 102G of the ITAA 1936.

A trust is an 'eligible unit trust' as defined in section 102F of the ITAA 1936, if an item of property that, at any time during the year of income or a preceding year of income, was property of the unit trust became property of the unit trust in pursuance of an arrangement that is a prescribed arrangement in relation to a company and, at any time before the property became property of the unit trust, the property was the property of the company or an associate of the company. A prescribed arrangement is defined for Division 6B purposes in section 102E of the ITAA 1936.

Accordingly, Trust D would be an 'eligible unit trust' if any of the Trust's property became so under a prescribed arrangement in relation to a company and the property was previously that of the company or an associate of the company.

Under the proposed Restructure, Company E will distribute 100% of the units in Trust D to Company E shareholders by way of the In Specie Distribution. It is considered that the proposed Restructure will constitute a prescribed arrangement for the purposes of section 102E of the ITAA 1936.

However, the effect of the exit history rule is that any eligible asset etc. that leaves a tax consolidated group with an entity because the SER ceases to apply to that entity, will be treated as if it belonged to the leaving entity from the time it was acquired by the entity that held it at the time the SER began to apply.

Therefore, due to the operation of the exit history rule, the property of Trust D with which it exits the Company E income tax consolidated group will be treated as though it always belonged to Trust D.

Accordingly, even though there is a prescribed arrangement in terms of section 102E of the ITAA 1936, the conditions set down in section 102F of the ITAA 1936 cannot be met (i.e. the property cannot previously have been property of the company or an associate).

As Trust D is not an 'eligible unit trust' as defined in section 102F of the ITAA 1936, Division 6B of the ITAA 1936 will not apply to treat Trust D as a 'corporate unit trust'when it leaves the Company E income tax consolidated group.

Question 3:

Division 6B of the ITAA 1936 contains a number of provisions which modify the income tax provisions in respect of the taxation of a 'corporate unit trust' (or the trustee thereof).

Section 102D of the ITAA 1936 defines the meaning of 'net income' in relation to a corporate unit trust, and section 102K of the ITAA 1936 requires the trustee of a corporate unit trust to pay tax at the corporate rate on the 'net income' of a corporate unit trust. In addition section 102L of the ITAA 1936 specifies when a reference to a company includes a corporate unit trust or a unitholder in a prescribed trust estate.

As Trust D would not be a 'corporate unit trust' when it leaves the Company E income tax consolidated group, the Trustee would not be assessed and liable to pay tax under section 102K of the ITAA 1936 nor be subject to the provisions of section 102L of the ITAA 1936.

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