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Edited version of your written advice
Authorisation Number: 1013091463710
Date of advice: 21 September 2016
Ruling
Subject: Scrip-for-scrip rollover
Question 1
Will the first element of the cost base and reduced cost base of the interests in the Target Trusts held by Trust 2 be equal to the market value of the units redeemed in accordance with the application of section 110-25 and section 110-55 (respectively) of the ITAA 1997?
Answer
Yes.
Question 2
Will the capital proceeds in respect of the redemption of units in each of the Target Trusts held by Trust 2 equal the face value of the consideration received for the redemption of the units in the respective Trust in accordance with the application of section 116-20 of the ITAA 1997?
Answer
Yes.
This ruling applies for the following periods:
This ruling applies from 1 July 20XX to 30 June 20YY.
The scheme commences on:
The year ended 30 June 20YY.
Relevant facts and circumstances
The current structure comprises of Trust 2 and the Target Trusts.
Company X is the trustee of Trust 2 and the Target Trusts.
A reorganisation of the current structure is proposed.
The proposed reorganisation will be implemented in the 20XX financial year.
Under the proposed reorganisation, the investments held by the Target Trusts will be transferred to Trust 2. All unitholders in each Target Trust will receive units in Trust 2.
The proposed reorganisation involves a number of steps.
1. The Managers/Trustee of the Target Trusts will compulsorily redeem all units held by their unitholders. Trust 2 will issue units to the Target unitholders in satisfaction of the redemptions.
2. In consideration for the issue of its units to the Target unitholders, Trust 2 will be issued units in the Target Trusts.
3. The Target Trusts will be wound up. Their investments will be transferred at market value to Trust 2 with the consideration being left outstanding:
a. The Target Trusts will make a distribution to Trust 2 of the gains realised on the transfer of their investments to it to be satisfied by the cancellation of part of the debt owing to them in consequence of the transfer.
b. The units held by Trust 2 in each Target Trust will be redeemed. The redemption amount will be satisfied by the cancellation of the balance of the debt, being the aggregate cost base of the underlying investments.
Following the reorganisation, the liability to each Target Trust will be extinguished by Trust 2. All new investors will subscribe for units in Trust 2 and all new investments will be made by Trust 2.
Assumptions
• No Target Trust unitholder (or unitholder and its associates between them) has the right to receive 30% or more of any distribution of income or capital in their respective Target Trusts just before the arrangement starts.
• No Target Trust unitholder (or unitholder and its associates between them) has the right to receive 30% or more of any distribution of income or capital in Trust 2 just after the arrangement is completed.
• No Target Trust unitholder, or unitholder and one or more other entities, and their associates, between them have the right to receive 80% or more of any distribution of income or capital in the Target Trust just before the arrangement starts, and the right to receive 80% or more of any distribution of income or capital in Trust 2 just after the arrangement is completed.
Relevant legislative provisions
Income Tax Assessment Act 1997
Section 110-25
Section 110-55
Section 124-782
Section 124-784A
Section 124-783
Section 116-20
Relevant ATO view documents
Taxation Determination TD 2005/52: 'Income tax: capital gains: can money paid for the purposes of the first element of the cost base in subsection 110-25(2) of the Income Tax Assessment Act 1997 and the reduced cost base under section 110-55 of the Income Tax Assessment Act 1997 include the amount of a liability extinguished under the doctrine of set-off?'
Other references (non ATO view)
FC of T v. Steeves Agnew & Co (Vic) Pty Ltd (1951) 82 CLR 408
Reasons for decision
Question 1
Section 110-25
In general, the cost base of the original interests in a trust obtained by the acquiring entity is determined under the normal cost base rules in section 110-25.
Section 110-25 contains rules relating to the cost base of a CGT asset. A 'CGT asset' is provided a broad definition in section 108-5 to be:
(a) any kind of property; or
(b) a legal or equitable right that is not property.
Units in each of the Target Trusts fall within the broad definition of property and are therefore CGT assets.
The first element of the cost base of a CGT asset is prescribed as follows:
110-25(2) |
The first element is the total of:
(a) the money you paid, or are required to pay, in respect of acquiring it; and
(b) the market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition). |
In this case, Target units are to be acquired by Trust 2 in exchange for the issue by Trust 2 to the Target unitholders of units in Trust 2.
No other property or money will be paid for the Target units.
Pursuant to paragraph 110-25(2)(b), the first element of the cost base of a Target unit is the market value of the corresponding Trust 2 unit or units issued for it. The market value is worked out at the time Trust 2 acquires the Target units.
Subsection 110-55(2) provides that all the elements (except the third one) of the reduced cost base of a CGT asset are the same as those for the cost base. Therefore the first element of the reduced cost base of a Target unit will also be the market value of the corresponding Trust 2 units issued for it.
This general cost base rule is modified if the conditions in section 124-782 or section 124-784A apply.
Section 124-782
Subsection 124-782(1) provides: |
The cost base of an original interest acquired by an acquiring entity under the *arrangement from an original interest holder becomes the first element of the cost base and reduced cost base of the acquiring entity for the interest if:
(a) the original interest holder obtains a roll-over; and
(b) the holder is a significant stakeholder or a common stakeholder for the arrangement.
The 'original interest holders' in this case are the unitholders of the Target Trusts. While those unitholders may obtain a roll-over under Subdivision 124-M in respect of the exchange of their units in the Target Trusts for units Trust 2, they are neither 'significant stakeholders' nor 'common stakeholders' for the following reasons:
Significant stakeholder
• Subsection 124-783(1) provides:
An original interest holder is a significant stakeholder for an arrangement if it had:
(a) a significant stake in the original entity just before the arrangement started; and
(b) a significant stake in the replacement entity just after the arrangement was completed.
• A significant stake is defined in subsection 124-783(7) as follows:
An entity has a significant stake in a trust at a time if the entity, or the entity and the entity's associates between them, had at that time the right to receive 30% or more of any distribution to beneficiaries of the trust of income or capital of the trust.
• 'Arrangement' as referred to in subsection 124-783(1) is defined in section 995-1 as 'any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.'
Paragraph 11.23 of the Explanatory Memorandum to the New Business Tax System (Miscellaneous) Bill (No. 2) 2000 provides that:
What constitutes a single arrangement is a question of fact. Relevant factors in determining whether what takes place is part of a single arrangement would include, but not be limited to, whether there is more than one offer or transaction, whether aspects of an overall transaction occur contemporaneously, and the intention of the parties in all the circumstances as evidenced by objective facts.
The proposed steps of the reorganisation are intended to be implemented contemporaneously in respect of all the Target Trusts. The reorganisation is conceived of as a whole with a strategy that proposes various transactions affecting all the Target Trusts.
Consequently, with the exception of section 124-784A, the 'arrangement' for the purposes of Subdivision 124-M refers to the single proposal under the proposed steps as it applies to all the Target Trusts.
• Given the relevant assumption taken in this ruling, the condition in paragraph 124-783(1)(b) will not be satisfied. It follows that no original interest holder will be a 'significant stakeholder' under section 124-783.
Common stakeholder
• Subsection 124-783(3) provides:
An original interest holder is a common stakeholder for an arrangement if it had:
(a) a common stake in the original entity just before the arrangement started; and
(b) a common stake in the replacement entity just after the arrangement was completed.
• Subsection 124-783(10) defines 'common stake' as follows: |
If the original entity and the replacement entity are trusts, an entity, or 2 or more entities, have a common stake in the original entity just before the arrangement started and in the replacement entity just after the arrangement was completed if the entity or entities, and their associates, between them:
(a) had, just before the arrangement started, the right to receive 80% or more of any distribution to beneficiaries of the original entity of income or capital of the original entity; and |
(b) had, just after the arrangement was completed, the right to receive 80% or more of any distribution to beneficiaries of the replacement entity of income or capital of that entity. |
Given the relevant assumption taken in this ruling, the 'common stake' test in subsection 124-783(10) will not be satisfied. It follows that the condition in section 124-783(3) will not be met.
Consequently section 124-782 will not apply in this case.
Section 124-784A
Section 124-784A specifies the conditions for a restructure which, if satisfied, attracts the operation of the specific cost base and reduced cost base provisions in section 124-784B. The general conditions of such a restructure are outlined in subsection 124-784A(1), which provides as follows:
This section applies in relation to a single arrangement if: (a) the replacement entity for the arrangement knows, or could reasonably be expected to know: (i) that a roll-over under section 124-780 or 124-781 has been, or will be, obtained in relation to the arrangement; and (ii) that there is a common stakeholder for the arrangement (disregarding subsections 124-783(4) and (5)); and |
(b) subsection (2) is satisfied for the arrangement.
As discussed above, there is no 'common stakeholder' for the arrangement, and consequently paragraph 124-784A(1)(a)(ii) will not be satisfied.
It follows that section 124-784A will not apply in this case.
Question 2
General
Subsection 116-20(1) provides the following:
The capital proceeds from a CGT event are the total of: (a) the money you have received, or are entitled to receive, in respect of the event happening; and (b) the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event). |
The redemption of the Target units held by Trust 2 attracts the operation of CGT event C2, which happens 'if your ownership of an intangible CGT asset ends by the asset…being redeemed…': subsection 104-25(1). C2 applies in this case.
Trust 2 receives relevant consideration by way of the extinguishment of its liabilities to the Target Trusts.
The doctrine of set-off is recognised in FC of T v. Steeves Agnew & Co (Vic) Pty Ltd (1951) 82 CLR 408 in which Dixon J said at 420:
If cross-liabilities in sums certain of equal amounts immediately payable are mutually extinguished by an agreed set-off, that amounts to payment for most common-law and statutory purposes.
Taxation Determination TD 2005/52 'Income tax: capital gains: can money paid for the purposes of the first element of the cost base in subsection 110-25(2) of the Income Tax Assessment Act 1997 and the reduced cost base under section 110-55 of the Income Tax Assessment Act 1997 include the amount of a liability extinguished under the doctrine of set-off?' considers set-off in the context of the first element of the cost base in subsection 110-25(2) and reduced cost base under section 110-55. It holds the view that the amount of set-off 'constitutes money paid in respect of the acquisition of the asset for the purposes of the first element of the cost base in subsection 110-25(2)…'
Consistently with this view, if the consideration received by Trust 2 is the extinguishment of its P2 debts to each of the Target trusts by way of set-off, this amount - being the amount of set-off - constitutes 'money received' in respect of the redemption under the terms of paragraph 116-20(1)(a), and therefore the capital proceeds from the CGT event under subsection 116-20(1).
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