Edited version of your written advice

Authorisation Number: 1013125238265

Date of advice: 16 December 2016

Ruling

Subject: Roll-over under Division 615 of the Income Tax Assessment Act 1997 and consolidation

Question 1

Will the company be required to make a choice under subsection 615-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the proposed transaction?

Answer:

Yes

Question 2

If the answer to Question 1 is yes, will section 703-70 of the ITAA 1997 apply such that the tax cost base of the assets held by the trust will not be required to be reset under Division 701 of the ITAA 1997 upon it becoming a member of the consolidated group with the company as head entity?

Answer:

Yes

This advice applies for the following period:

1 July 201X - 30 June 201X

The arrangement commences on:

1 July 201X

Relevant facts and circumstances

1. Investment Trust A (TRUST A) was established in 200X and operates multiple medical treatment practices in XXX.

2. ABC Pty Ltd (ABC) is the current trustee of TRUST A (Trustee).

3. TRUST A is owned and operated by Medical Professionals who work in the business as well as by members of the management team.

4. TRUST A is governed by the Trust Deed entitled “Sixth Deed of Amendment - Investment Trust A” dated DD MM YY (Trust Deed).

5. TRUST A has been filing income tax returns as a public trading trust under Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936) since the income year ended 30 June 200X. As a result, the Trustee has been and is subject to income tax on TRUST A net income at the corporate tax rate.

6. TRUST A has one wholly owned Australian subsidiary, ABC which was incorporated on DD MM YY.

7. TRUST A has issued the different types of units catering for different unitholders as follows:

● Class A units, and Class A1 and A2 stapled units: issued to Medical Professionals or their nominated self-managed superannuation funds (SMSF) or family trusts.

● Class B units: issued to the Chief Executive Officer's nominated SMSF and family trust.

● Class C and D units: issued to Medical Professionals and/or their nominated SMSF or family trusts.

● Class E units: issued to senior management's nominated SMSF.

● Class F: issued to senior management's nominated family trust.

8. The Trustee proposes to undertake a reorganisation in order to simplify the current unit classes on issue in order to facilitate the interposition of a new Company between TRUST A and its unitholders for the purpose of corporatising the structure of the TRUST A business (Proposed Reorganisation).

9. The purpose of corporatising TRUST A's structure is to facilitate a disposal by the unitholders of their X0% interest in the business to a prospective buyer.

10. Relevant for the purposes of this advice, the Proposed Reorganisation comprises the following particular steps.

Step 1:

Pursuant to section 713-130 of the ITAA 1997, the Trustee makes a choice to form a consolidated group under section 703-50 of the ITAA 1997 with TRUST A being the head entity and ABC the subsidiary (TRUST A Tax Consolidated Group).

The TRUST A Consolidated Group will be taken to exist on July 201X.

Step 2:

ABC is incorporated with 1 share on issue. The share is issued to a nominee shareholder who is not a unit holder of TRUST A units.

Step 3:

The Trustee will redeem Class A1 and A2 units and issue Class A units in exchange.

Step 4:

The Trustee will redeem Class C, Class D and Class F units at $X each.

Step 5:

The Trustee will enter into new employment contracts with the Medical Professionals, and relevant senior management.

Step 6:

The rights attached to Class B units will be varied to remove the right to Residual income.

Step 7:

The rights attached to Class A, B and E units will be varied to change from a fixed income entitlement to profit distribution.

Step 8:

Class A, B and E unitholders will exchange each of their Class A, B and E units for one ordinary share in ABC and nothing else. The unitholders will choose roll-overs under Division 615 of the ITAA 1997 to apply to the disposal of their interests in TRUST A for shares in ABC.

11. Immediately after the exchange of Class A, B and E units for ABC's shares, the initial ABC share held by a nominee shareholder will be brought back by ABC such that Class A, B and E unitholders will own all the shares in ABC.

12. The Class A, B and E unitholders will satisfy the requirements in section 615-5 and Subdivision 615-B of the ITAA 1997.

Assumption

TRUST A qualifies as a public trading trust under Division 6C of Part III of the ITAA 1936 on July 201X.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 615-30 and

Income Tax Assessment Act 1997 section 703-70

Reasons for decision

Question 1

Summary

ABC must make a choice under subsection 615-30(2) of the ITAA 1997 in relation to the business restructure of the TRUST A.

Detailed reasoning

Roll-over under Division 615 of the ITAA 1997 enables a member of a company or a trust to disregard a capital gain or capital loss from a share or a unit that is either disposed of, or redeemed or cancelled, as part of a reorganisation of the affairs of the entity, where the member becomes the owner of new shares in another company in exchange.

A restructure that can come within the Division 615 of the ITAA 1997 roll-over will essentially involve the interposition of a company between either shareholders of an existing company or unitholders in an existing unit trust where the shareholders or unitholders (the exchanging members) exchange their shares or units in that entity (the original entity) for shares in the interposed company. The interposed company becomes the shareholder of the original entity.

In this case, upon the Trustee making a choice to form a tax consolidated group on July 201X, section 713-135 of the ITAA 1997 will apply. Subsection 713-135(1) states:

If the trust makes the choice, the law (the applied law) described in subsection (2) applies in relation to the trust in a way corresponding to the way in which that law applies to a company. The applied law applies in that way in relation to the trust or trustee (as appropriate)...

Paragraph 713-135(2)(a) defines the 'applied law' to include 'this Act' (which by definition pursuant to subsection 995-1(1) includes both the ITAA 1997 and ITAA 1936).

As a result of TRUST A being treated as a company from July 201X, the units in the TRUST A will be taken as shares in a company and the unitholders will be taken to be holding 'shares' in TRUST A for all purposes of the income tax law.

The Class A, B and E unitholders will have satisfied the requirements under section 615-5 of the ITAA 1997 and are taken to have chosen to obtain the roll-over.

Section 615-5 of the ITAA 1997 also requires additional conditions relating to the interposed company to be satisfied, one of which is the particular choice under section 615-30 of the ITAA 1997.

Section 615-30 of the ITAA 1997 states that:

615-30   Interposed company must make a particular choice  

(1) Unless subsection (2) applies, the interposed company must choose that section 615-65 applies.

(2) The interposed company must choose that a consolidated group continues in existence at and after the completion time with the interposed company as its head company, if:

(a) immediately before the completion time, the consolidated group consisted of the original entity as head company and one or more other members (the other group members); and

(b) immediately after the completion time, the interposed company is the head company of a consolidatable group consisting only of itself and the other group members.

Note: Sections 703-65 to 703-80 deal with the effects of the choice for the consolidated group.

(3) A choice under subsection (1) or (2) must be made:

(a) within 2 months after the completion time, if the choice is under subsection (1); or

(b) within 28 days after the completion time, if the choice is under subsection (2); or

(c) within such further time as the Commissioner allows.

The choice cannot be revoked.

(4) The way the interposed company prepares its income tax returns is sufficient evidence of the making of the choice.

Immediately before the completion time, TRUST A (the original company) is the head company of the TRUST A Tax Consolidated Group and immediately after the completion time, ABC (the interposed company) will become the head company of a consolidatable group consisting of itself and the members of the TRUST A Tax Consolidated Group.

On this basis, subsection 615-30(2) of the ITAA 1997 requires ABC to choose that the former TRUST A Tax Consolidated Group continue to exist at and after the completion time, with ABC as its head company (ABC Tax Consolidated Group). The choice must be made in accordance with subsections 615-30(3) and 615-30(4) of the ITAA 1997.

Question 2

Summary

Section 703-70 of the ITAA 1997 applies such that the tax cost base of the assets held by TRUST A will not be required to be reset under Division 701 of the ITAA 1997 on TRUST A Trust becoming a member of the consolidated group with ABC as head entity.

Detailed reasoning

Sections 703-70 to 703-80 of the ITAA 1997 set out the effects if the interposed company chooses under subsection 615-30(2) that a consolidated group continues in existence at the completion time.

Section 703-70 of the ITAA 1997 states that:

(1) The consolidated group is taken not to have ceased to exist under subsection 703-5(2) because the company referred to in subsection 615-30(2) as the original entity ceases to be the head company of the group.

(2) To avoid doubt, the interposed company is taken to have become the head company of the consolidated group at the completion time, and the original entity is taken to have ceased to be the head company at that time.

Note: A further result is that the original entity is taken to have become a subsidiary member of the group at that time. Section 703-80 deals with the original entity's tax position for the income year that includes the completion time.

(3) A provision of this Part that applies on an entity becoming a subsidiary member of a consolidated group does not apply to an entity being taken to have become such a member as a result of this section, unless the provision is expressed to apply despite this subsection.

Note: an example of the effect of this subsection is that there is no resetting under section 701-10 of the tax cost of assets of the original entity that become assets of the interposed company because of subsection 701-1(1) (the single entity rule).

(4) To avoid doubt, subsection (3) does not affect the application of subsection 701-1(1) (the single entity rule).

The application of section 703-70 of the ITAA 1997 results in the following:

● The TRUST A Tax Consolidated Group be taken not to have ceased to exist under subsection 703-5(2) of the ITAA 1997,

● ABC is taken to have become the head company of the TRUST A Tax Consolidated Group at the completion time,

● the provisions in Part 3-90 of the ITAA 1997 (Consolidated Groups) that apply on an entity becoming a subsidiary member of a consolidated group do not apply to TRUST A being taken to have become such a member as a result of section 703-70 of the ITAA 1997.

Consequently, under section 703-70 of the ITAA 1997, the tax cost base of the assets held by TRUST A is not required to be reset under Division 701 of the ITAA 1997 on TRUST A becoming a member of the ABC Tax Consolidated Group.

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