Edited version of private advice

Authorisation Number: 1051538601776

Date of advice: 18 July 2019

Ruling

Subject: Subdivision 122-B Roll-over

Question 1

Do all of the partners meet the eligibility requirements to choose the roll-over underSubdivision 122-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The taxpayers are three discretionary trusts who carry on a business in partnership (the Partnership).

Each partner taxpayer has a fixed entitlement to a one third share of income and capital of the Partnership.

The Partnership carries on a business.

The Partnership has been conducting the business for several years. The Partnership Agreement has been supplied and forms part of these facts.

For each of the partners in the Partnership, the partner's interests in the assets of the business were acquired on or after 20 September 1985.

Details of Partners

Partner 1

The trustee for the Trust A (Trust A) is a non-fixed family trust with a corporate trustee, G Pty. Ltd.

Individual J is the sole shareholder and officeholder of G Pty. Ltd.

Trust A has made a Family Trust Election and all individual beneficiaries of this trust are members of the family group.

Individual J is the test individual and the husband of Individual K. He wishes, through the Trust A, to maintain his one-third interest in the business.

Partner 2

The trustee for the Trust B (Trust B) is a non-fixed family trust with a corporate trustee, H Pty. Ltd.

Individual K is the sole shareholder and officeholder of H Pty. Ltd.

Trust B has made a Family Trust Election and all individual beneficiaries of this trust are members of the family group.

Individual K is the test individual and the wife of Individual J. She wishes, through the Trust,B to retain her one-third interest in the business.

Partner 3

The trustee for Trust C (Trust C) is a non-fixed family trust with a corporate trustee, L Pty. Ltd.

Individual M is the sole director. Individual M and spouse are equal shareholders of L Pty. Ltd.

Trust C has made a Family Trust Election and all individual beneficiaries of this trust are members of the family group.

Individual M is the test individual. She wishes, through the Trust C to maintain her one-third interest in the business.

Proposed Transaction

The partners propose to dispose of all the partners interest in the CGT assets of the Partnership to a new trading Pty Ltd company (NewCo) and dissolve the Partnership.

All the shares issued in NewCo will be non-redeemable shares.

A market valuation will be obtained of the partner's interest in the business assets. The market value of the NewCo shares issued will be substantially the same as the market value of the partner's interest in the assets disposed.

The partners will own all of the shares in NewCo just after the time of the trigger event pursuant to subsection 122-135(1) of ITAA 1997.

Each partner will own the shares in the company in the same capacity the partner owned the partner's interest in the assets that the company will own. Each former partner will own one third of the issued equity in NewCo. Each partner will be issued the same class of share.

The partners (including its corporate trustees) and NewCo are Australian residents.

All partners will choose to apply rollover relief under Subdivision 122-B for disposing of their capital gains tax (CGT) assets consisting of their interests in the partnership to a new wholly-owned trading company.

Partners Reasons for the Restructure:

The business has experienced consistent growth and faces certain challenges moving forward. As such the partners no longer believe the current structure is the most appropriate. The main reasons for reaching this conclusion are:

(a)  The partnership of discretionary trusts carries with it a significant administrative burden and adds complexity and confusion when negotiating tenders and other commercial agreements. The partners believe this complexity leaves them more vulnerable when pitching for new work.

(b)  The partnership is subject to joint and severally liability and each partner wishes to limit this liability to the extent available under the law.

(c)  The partnership of discretionary trusts is not a structure the partners believe will help facilitate the innovation and growth of the business, particularly with respect to capital requirements to fund future growth.

(d)  The partners believe a new corporate structure will allow for better managerial control and better separation regarding remuneration based on employment duties versus return on investment for the owners.

Additional information was provided in email. The following information was provided:

·         Balance Sheet for the partnership business for the year ended 30 June 20XX; and

·         Copy of the Partnership Agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 103-25

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 106-5

Income Tax Assessment Act 1997 Subdivision 122-B

Income Tax Assessment Act 1997 section 122-20

Income Tax Assessment Act 1997 section 122-125

Income Tax Assessment Act 1997 section 122-130

Income Tax Assessment Act 1997 subsection 122-130(1)

Income Tax Assessment Act 1997 subsection 122-130(2)

Income Tax Assessment Act 1997 subsection 122-130(3)

Income Tax Assessment Act 1997 section 122-135

Income Tax Assessment Act 1997 subsection 122-135(1)

Income Tax Assessment Act 1997 subsection 122-135(2)

Income Tax Assessment Act 1997 subsection 122-135(3)

Income Tax Assessment Act 1997 subsection 122-135(4)

Income Tax Assessment Act 1997 subsection 122-135(5)

Income Tax Assessment Act 1997 subsection 122-135(6)

Income Tax Assessment Act 1997 subsection 122-135(7)

Income Tax Assessment Act 1997 paragraph 122-135(7)(a)

Income Tax Assessment Act 1997 section 122-140

Income Tax Assessment Act 1997 section 122-170

Income Tax Assessment Act 1997 section 122-205

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

The relevant legislation is the Income Tax Assessment Act 1997 (ITAA 1997). All references to legislation are to the ITAA 1997, unless otherwise stated.

The disposal of a capital gains tax (CGT) asset will cause CGT event A1 to occur under section 104-10. A capital gain is the difference between your capital proceeds and the cost base of your CGT asset. The time of the CGT event is the date when the contract to end the ownership of the asset was entered into, or if there is no contract when the change of ownership occurs.

Section 106-5 provides that any capital gain from a CGT event happening in relation to a partnership or one of its CGT assets is made by the partners individually. Each partner's gain is calculated by reference to the partnership agreement. Subdivision 122-B (sections 122-120 to 122-205) sets out when the partners in a partnership can obtain a roll-over when transferring a capital gains tax ("CGT") asset, or all the assets of a business, to a company. It also deals with the creation of an asset in a company. There are consequences for the company also.

The conditions in Subdivision 122-B that must be satisfied for the roll-over to be available to partners in a partnership that transfer all of the assets of the business to a company are set out below:

1.    One of the CGT events specified in the table in section 122-125 happens involving the partners and a company.

2.    The consideration the partners receive is only shares in the company or shares in the company together with the company undertaking to discharge one or more liabilities in respect of their interests (subsection 122-130(1)).

3.    The shares cannot be redeemable shares (subsection 122-130(2)). Redeemable shares are defined in subsection 995-1(1) as shares that are liable to be redeemed, including at the option of the issuing company;

4.    The market value of the shares each partner receives must be substantially the same as the market value of interests in the assets the partner disposed of, less any liabilities the company undertakes to discharge in respect of the interests in the asset (subsection 122-130(3)).

5.    The partners must own all the shares in the company just after the time of the trigger event (subsection 122-135(1)).

6.    Each partner must own the shares the partner received in the same capacity that the partner owned the partner's interests in the assets that the company now owns (subsection 122-135(2)). In particular, if a partner's interests were owned as trustee, the partner must receive shares as trustee.

7.    The asset transferred or created must not be a personal use asset, a collectible, or a precluded asset (subsection 122-135(3)).

8.    If the asset in question is a right, option, or convertible note, the asset acquired by the company on the exercise or conversion of the right, etc., must not become trading stock of the company just after acquisition (subsection 122-135(4)).

9.    The company acquiring the asset(s) cannot be an exempt entity (subsection 122-135(5)).

10.  The partners and the company must be an Australian resident at the time of the trigger event. Where the partner is a trustee of a trust at the time of the trigger event, the trust must be a resident trust for CGT purposes. If any of the partners, or the company, is not an Australian resident, the roll-over is confined to those assets that have the necessary connection with Australia (subsections 122-135(6) and (7)).

11.  All of the partners must choose the roll-over (section 122-170). Section 103-25 (regarding making a choice under the CGT provisions) applies to each of the partners.

Application to your circumstances

For the roll-over to apply, the conditions set out in Subdivision 122-B must be satisfied

Based on the facts you have provided, the relevant CGT event is A1, because the partners will be disposing of their interests in the CGT assets of the Partnership to a company (section 122-125).

The partners will receive non-redeemable shares (ordinary shares) in consideration for the transfer of the assets of the partnership. Each of the partners will receive the same number of ordinary shares in NewCo and each will own one-third of the ordinary shares in NewCo. Each partner has a one-third interest in the assets of the partnership.

The market value of each partner's interest in the partnership assets is one-third of the market value of the partnership assets. The market value of the shares each partner receives in NewCo will be substantially the same as the market value of the interests each partner has in the partnership assets (one-third of the value of the assets). Section 122-130 will be satisfied.

Furthermore, subsection 122-135(1) will be satisfied, as the partners will own all the shares in NewCo just after the trigger event, and each partner will hold the same percentage of shares in NewCo, as their interests in the Partnership to satisfy subsection 122-135(2).

The conditions required under subsection 122-135(3) are not applicable to this trigger event.

The CGT asset or any of the assets of the Partnership business will not be a right, option, convertible interest or exchangeable interest. Therefore, the condition under subsection 122-135(4) is not applicable to this trigger event.

The ordinary income and statutory income of NewCo will not be exempt from income tax for the income year of the trigger event. Therefore, the condition under subsection 122-135(5) is satisfied.

As the partners are trustees of a trust at the time of the trigger event, the condition under subsection 122-135(6) is not applicable.

The partners, being trustees of discretionary trusts, are all resident trusts for CGT purposes. NewCo will also be an Australian resident company. Therefore, paragraph 122-135(7)(a) is satisfied.

Finally, regarding any capital gain or capital loss realised by the partners, section 122-170 states:

If the partners choose a roll-over for *disposing of their interests in all the assets of a *business to the company, a *capital gain or *capital loss any partner makes from the disposal is disregarded.

The above will apply, as the all the partners will choose the roll-over under Subdivision 122-B.

Conclusion

It is considered that all of the partners of the Partnership will meet the requirements to be eligible to choose the roll-over under Subdivision 122-B.

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