Edited version of your written advice

Authorisation Number: 1051321415993

Date of advice: 15 December 2017

Ruling

Subject: Disposal of units held by a Family Trust to a Company

Question 1

Did CGT event A1 happen when the trustee for the Family Trust disposed of its one third interests in three Unit Trusts to Company B?

Answer

Yes

Question 2

Is the timing of the CGT event taken to be the time that the Unit Transfer Deed was entered into, being 30 June 2017?

Answer

Yes

Question 3

Will subsection 116-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to replace the capital proceeds from the CGT event to market value?

Answer

Yes

This ruling applies for the following period:

01/07/2016 to 30/06/2017

The scheme commences on:

30 June 2017

Relevant facts and circumstances

1. The Family Trust was settled in late 200X with Company A listed as the Trustee (the taxpayer).

2. The beneficiaries of the taxpayer include but are not limited to four individuals.

3. Prior to the restructure the taxpayer held one third interest in each of the following unit trusts:

(a) Unit Trust 1(UT1), settled in late 200X

(b) Unit Trust 2 (UT2), settled in mid 201Y

(c) Unit Trust 3 (UT3), settled in late 201Y

4. UT1, UT2 and UT3 each operate an individual store.

5. The two other unitholders, each also hold a one third interest in each of the three unit trusts. These unitholders are not related to the taxpayer and will retain their one third interests in each unit trust.

6. In mid 201Z, the taxpayer underwent a reorganisation of its own affairs whereby the taxpayer entered into a Unit Transfer Deed (the Deed) to dispose of its one third interests in UT1, UT2 and UT3 to Company B.

7. In the Private Ruling Application, the applicant states:

The ownership structure as it presently stands is no longer appropriate and we are seeking to reorganise the existing group for asset protection and changes in the business model.

8. Company B was registered in early 201Z with the taxpayer being issued with one ordinary share in Company B and is the sole shareholder.

9. Clause 12(3) of the Deed creating the Family Trust states:

The Trustee has the power to change or vary any investment forming part of the trust fund.

10. The taxpayer also entered into a Deed of Variation and Accession in mid 201Z with all the unitholders of the three unit trusts and Company B to vary the Unitholders Deeds governing UT1 and UT2. The purpose of entering into the Deed of Variation and Accession is to relieve the taxpayer of all rights and obligations in respect of such trusts and to confer all such rights and obligations upon Company B in its place.

11. In consideration for the transfer of units, Company B agreed to be indebted to the taxpayer for the following amounts (consideration) on the terms contained in the Deed:

(a) UT1 - $XXX

(b) UT2 - $XXX

12. UT3 - $XX

13. The consideration for the transfer of the units to Company B has been calculated, according to the applicant, by determining a one third percent interest of the Net Asset value for UT1, UT2 and UT3. Fair market values of assets are used in calculating the Net Asset of the unit trusts and liabilities include the balance of the Beneficiaries Current Account to recognise the unpaid present entitlement as debt amounts. Clause 5 of the Deed states:

(a) The parties hereby acknowledge that as of the date of this Deed Company B is indebted to Company A in the amount of $XXX (“the Principal Sum”) in respect of the transfers of the units pursuant to the terms of this Deed, subject to the outcome of the Private Ruling contemplated herein.

(b) The parties agree that Principal Sum and its repayment shall be the subject of the following terms:

(i) No interest shall accrue on the Principal Sum.

(ii) The Principal Sum shall become due and payable, in whole or in part, upon written notice being served by Company A to Company B in which not less than thirty (30) days notice is provided.

14. Clause 7 of the Deed states:

Company A hereby authorises and directs Company B to amend any such Transfers provided to it by Company A in such manner is necessary to ensure that the stated consideration reflects the determinations of the Private Rulings described in this Deed.

15. The applicant stated the following in an email sent in late 201Z:

We do confirm that the proposed indebtedness will be satisfied and extinguished in full via the loan converting to share capital.

We also confirm that the share issued to the Family Trust is an ordinary share and there is certainly no intention or desire to issue a further share class.

16. The original valuations by the applicant were based on financials dated early 201Z. The applicant updated the market values to align with the valuation date of mid 201Z. In an email dated late 201Z the applicant advised that the values were adjusted to:

(a) UT1 - $XXX

(b) UT2 - $XXX and

(c) UT3 - $XX.

17. Following additional information that referenced the financial statements of UT1 and UT2 as at mid 201Z, the consideration for the units transferred were revised in consultation with the ATO. The revised value for each respective unit trust is as follows:

(a) UT1 - $XXX

(b) UT2 - $XX

18. In calculating the revised consideration, the applicant confirmed that amounts that are unpaid and shown in the balances of the Beneficiaries Current Accounts are included in working out the total liabilities in determining the Net Asset value.

19. Prior to mid 201Z the taxpayer would distribute income to the beneficiaries as per the Deed.

Relevant legislative provisions

Subsection 100-20(1) of the Income Tax Assessment Act 1997

Division 104 of the Income Tax Assessment Act 1997

Section 104-5 of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Subsection 104-10(1) of the Income Tax Assessment Act 1997

Subsection 104-10(2) of the Income Tax Assessment Act 1997

Subsection 104-10(3) of the Income Tax Assessment Act 1997

Section 108-5 of the Income Tax Assessment Act 1997

Subsection 108-5(1) of the Income Tax Assessment Act 1997

Subsection 108-5(2) of the Income Tax Assessment Act 1997

Division 116 of the Income Tax Assessment Act 1997

Section 116-30 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Summary

20. CGT event A1 happened when the taxpayer disposed of its one third interests in each of the three unit trusts to Company B.

Detailed reasoning

21. Pursuant to the Deed, the taxpayer agreed to transfer all units held by it in UT1, UT2 and UT3 to Company B in consideration for the sums of money defined in the Deed.

22. Subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states:

A CGT asset is:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

23. The note contained in subsection 108-5(2) of the ITAA 1997 provides examples of CGT assets and includes shares in a company and units in a unit trust.

24. It is the Commissioner’s view that the units the taxpayer transferred to Company B would fall within the definition of a CGT asset in subsection 108-5(1) of the ITAA 1997.

25. Subsection 100-20(1) of the ITAA 1997 states that you can make a capital gain or loss only if a CGT event happens.

26. Division 104 of the ITAA 1997 sets out all the CGT events for which you can make a capital gain or loss. Section 104-5 of the ITAA 1997 provides a summary of the CGT events.

27. Section 104-10 of the ITAA 1997 states:

(1) CGT event A1 happens if you *dispose of a CGT asset.

(2) You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

28. From the information provided, it is the Commissioner’s view that CGT event A1 in section 104-10 of the ITAA 1997 happened when the taxpayer disposed of its one third interests in each of the three unit trusts to Company B. By the taxpayer disposing of its interests to Company B a change of ownership occurred.

Question 2

Summary

29. CGT event A1 happened when the taxpayer entered into the Deed, dated mid 201Z, to dispose of its one third interests in the three unit trusts to Company B.

Detailed reasoning

30. Where CGT event A1 happens to a CGT asset, subsection 104-10(3) of the ITAA 1997 states:

The time of the event is:

(a) when you enter into the contract for the *disposal; or

(b) if there is no contract - when the change of ownership occurs.

31. The taxpayer disposed of its one third interests in each of the three unit trusts by entering into the Deed, dated mid 201Z. As the taxpayer entered into a contract to dispose of its interests to Company B, the time of the event will be when the Deed was entered into, i.e. mid 201Z.

Question 3

Summary

32. Subsection 116-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to replace the capital proceeds from the CGT event to market value.

Detailed reasoning

33. Division 116 of the ITAA 1997 explains how to work out the capital proceeds from a CGT event. Generally, the capital proceeds from a CGT event are the total of the money you have received or are entitled to receive and the market value (worked out as at the time of the event) of any other property you have received or entitled to receive in respect of the CGT event happening.

34. In some cases, the market value substitution rule may apply to take the market value as the capital proceeds. The rule is contained in section 116-30 of the ITAA 1997. In particular subsection 116-30(2) of the ITAA 1997 states:

The *capital proceeds from a *CGT event are replaced with the *market value of the *CGT asset that is the subject of the event if:

(a) some or all of the proceeds cannot be valued; or

(b) those capital proceeds are more or less than the market value of the asset, and:

(i) you and the entity that *acquired the asset from you did not deal with each other at *arm's length in connection with the event; or

(ii) the CGT event is CGT event C2 (about cancellation, surrender and similar endings).

(The market value is worked out as at the time of the event.)

35. The applicant advised that for the purpose of the disposal of the units in the unit trusts, the parties are assumed to not be dealing at arm’s length (email sent in late 201Z). On that basis, the applicant estimated the following market value of one third interests in each of the unit trust.

(a) UT1 - $XXX

(b) UT2 - $XX

(c) UT3 - $XX

36. The estimated market values of the units are calculated as one third proportion of the Net Asset value of each of the unit trust. Net Asset amount is the value of the assets shown on the balance sheet of the unit trusts as at mid 201Z (at fair market value) minus their total liabilities.

37. The applicant confirmed that in calculating the Net Asset value, amounts that are unpaid and shown in the balances of the Beneficiaries Current Accounts are included in working out the total liabilities.

38. From the information provided, the Commissioner is of the view that the value attributed to the units disposed to Company B represents the market value of units for the purpose of subsection 116-30(2) of ITAA 1997 in working out the capital proceeds provided for the disposal of the units.

39. In respect to issuing share capital in satisfaction of the loan resulting from the disposal, the Commissioner also accepts the market value of the shares interest as the value of the units for the purpose of subsection 116-30(2).

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