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Edited version of your written advice
Authorisation Number: 1051314663736
Date of advice: 29 November 2017
Ruling
Subject: Proposed demerger
Question
Will an amount of income be assessable to the trustee for Unit Trust pursuant to the provisions of Division 6 of the ITAA 1936 or Division 115C of the ITAA 1997?
Answer
No
This ruling applies for the following period:
1 July 2017 to 30 June 2018
The scheme commences on:
1 July 2017
Relevant facts and circumstances
Overview of the Group
The corporate group consists of Australian resident and non-resident entities. The ultimate holding entity of the Group is the Unit Trust.
The units in Unit Trust are held equally by corporate trustees for multiple discretionary trusts. The units in the Unit Trust were acquired prior to 20 September 1985.
Unit Trust is a fixed trust and CGT Event E4 is capable of applying in respect of all of the units in the trust.
Unit Trust is not a complying superannuation entity for the purposes of subsection 125-65(2A) of the ITAA 1997.
Tax consolidated group
The tax consolidated group consists of an Australian group and an overseas group. The head company of the tax consolidated group (‘Head Co’) is wholly owned by the corporate trustee of the ultimate holding entity Unit Trust and is the head company of the tax consolidated group.
Holding Co is a subsidiary of the head company of the tax consolidated group and is the holding company of the overseas group. There is a distributable surplus in the accounts of Holding Co.
Holding Co owns all of the existing units in New Trust (a unit trust). New Trust has numerous subsidiaries which hold investments overseas (‘overseas subsidiaries’). The balance sheets of those subsidiaries in the relevant income year show that the investments make up the majority of the net assets.
New Trust is a fixed trust and CGT Event E4 is capable of applying in respect of all of the units in the trust.
New Trust is not a complying superannuation entity for the purposes of subsection 125-65(2A) of the ITAA 1997.
The proposed demerger
Under the proposed demerger:
● Holding Co will transfer all of its units in New Trust to the discretionary trusts for nil consideration.
● Following the transfer, the units in New Trust held by each trustee of each of the discretionary trusts will correspond to the same proportion of units held in Unit Trust.
● The discretionary trust will not resolve to distribute the New Trust units to their beneficiaries and no beneficiary will otherwise be presently entitled to any units in New Trust.
● The demerger of New Trust will be reflected in the stand-alone accounts of Holding Co through the following book entries:
● debit to accumulated gains/losses
● credit to investment in overseas subsidiaries
● The demerger of New Trust will be reflected in the consolidated accounts of Head Co through the following book entries:
● debit to retained earnings; and
● credit to underlying assets held by overseas subsidiaries
● The arm’s length value of the units in New Trust to be transferred to the discretionary trusts under the demerger, calculated in accordance with subsection 109C(4) of the ITAA 1936, will not exceed the distributable surplus of Holding Co at the time of the transfer.
● Unit Trust, as head entity of the demerger group, will not, under subsection 44(2) of the ITAA 1936, elect in writing, within one month after it directs that its unit holders (the discretionary trusts) will receive ownership interests in New Trust under the demerger, that subsections 44(3) and (4) do not apply to the total demerger dividend.
Reasons for demerger
A number of commercial reasons have been provided for the demerger.
Relevant legislative provisions
Income Tax Assessment Act 1936 (ITAA 1936)
Division 6
Income Tax Assessment Act 1997 (ITAA 1997)
Subdivision 115-C
Reasons for decision
Summary
No amount of income will be assessable to Unit Trust pursuant to the provisions of Division 6 of the ITAA 1936 or Subdivision 115C of the ITAA 1997.
Detailed reasoning
Division 6 of the ITAA 1936 has the effect that the “net income of the trust estate” (comprising amounts that would be assessable if derived by an Australian resident taxpayer, less losses and outgoings relating (relevantly) to the derivation of that income) may be treated as assessable income of the trustee in certain circumstances.
Similarly, Subdivision 115-C contains rules for assessing trustees in respect of a net capital gain included in the trust estate’s net income.
In the present case, the units New Trust are held by Holding Co and do not form part of the trust estate of Unit Trust. The units will be gifted directly to the beneficiaries of Unit Trust (the discretionary trusts) by Holding Co, and Unit Trust itself will not be entitled to receive any units in New Trust. Therefore, no income is derived by Unit Trust as a result of the gifting of the units, nor will any CGT events that occur as a consequence of the gifting of the units result in a gain assessable to the trustee of Unit Trust.
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