Edited version of private advice

Authorisation Number: 1051564227104

Date of advice: 14 August 2019

Ruling

Subject: Application of Subdivision 126-G of the Income Tax Assessment Act 1997

Question

Can the rollover under section 126-225 of the Income Tax Assessment Act 1997 be chosen in relation to the transfer of the assets currently held by Entity A Testamentary Trust to the Unit Trust?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2020

Year ending 30 June 2021

The scheme commences on:

1 July 2019

Relevant facts and circumstances

XYZ's last Will and Testament

Prior to 20 September 1985, XYZ acquired land. This land (and other acquired assets) subsequently came to be known as Entity A.

XYZ also acquired some additional assets in relation to the Entity A, some of which were acquired after 20 September 1985.

XYZ passed away after 1985.

Probate was granted with respect to XYZ's last Will and Testament few months after death.

Pursuant to XYZ's last Will and Testament, the Entity A was passed to XYZ's trustees for the benefit of the children of XYZ's sibling, as tenants in common.

Specifically, the primary beneficiaries of the resultant trust which formed under XYZ's last Will and Testament in relation to the Entity A were several children of the sibling of XYZ.

Accordingly, each of the primary beneficiaries became entitled to equal (and fixed) share in the land and assets of Entity A, as tenants in common.

All primary beneficiaries are now aged above 60.

Formation of Testamentary Trust

XYZ's last Will and Testament established a testamentary trust in respect of Entity A (subsequently referred to as Entity A Testamentary Trust).

Several years after XYZ's death, one of the beneficiaries was appointed as an additional trustee of the Testamentary Trust by way of Deed of Appointment of Additional Trustee.

One of the beneficiaries passed away in recent years and their two children are the executors and sole beneficiaries of the Estate. As a result:

1. The Estate now holds beneficiaries interest in the Testamentary Trust; and
2. Two of the beneficiaries are the trustees of the Testamentary Trust

The Testamentary Trust did not have a trust deed which governed its operation. It was governed pursuant to an unwritten set of conditions which were agreed amongst the stakeholders stated in the Last Will and Testament of XYZ which governed the operation of the Entity A Testamentary Trust. It was recently reduced into a written form document as The Entity A Testamentary Trust Constitution of Understanding (herein after as the Entity A Constitution). The Entity A Constitution does not change any previous powers and responsibilities of the trustees or entitlements of the beneficiaries stated in XYZ's Last Will and Testament.

Change of trustees

Pursuant to a Deed of Appointment and Retirement, two of the beneficiaries retired as trustees of the Testamentary Trust.

Pursuant to the Deed of Appointment and Retirement, a new corporate trustee (Trustee Co) was appointed trustee of the testamentary trust.

The Testamentary Trust carries on a leasing enterprise in respect of Entity A. That is, the Testamentary Trust does not operate the Entity itself.

In other words, the Testamentary Trust is a passive investor and does not carry on business in any capacity.

Establishment of Unit Trust

Given the age profile of the primary beneficiaries of the Testamentary Trust, it is the desire of the involved Family to tidy up the group structure in order to more easily facilitate succession planning and avoid unnecessary estate complication in future.

As a result, the Family are in the process of establishing a new unit trust, the Entity A Unit Trust (the Unit Trust).

It is intended that the Unit Trust would acquire the Testamentary Trust CGT assets from the Testamentary Trust for no consideration.

Prior to the transfer of the Testamentary Trust CGT assets, the Unit Trust will have no CGT assets or cash other than a very small settled sum.

The trustee of the Unit Trust is identical to the current trustee of the Testamentary Trust, i.e., Trustee Co.

The Unit Trust has an identical beneficiary profile to that of the Testamentary Trust.

The Unit Trust also has identical terms, trustee rights and powers and beneficiary rights, powers and entitlements as that of the Testamentary Trust.

Testamentary Trust CGT assets

The CGT assets listed above were acquired by the Testamentary Trust at two key times:

1. the date of XYZ's death, being the date on which the initial Testamentary Trust CGT assets were transferred to the Testamentary Trust pursuant to XYZ's last Will and Testament; and
2. after the date of death, whereby the Testamentary Trust has acquired subsequent CGT assets, e.g., the additional assets etc.

Choices

Neither the Entity A Testamentary Trust nor the Unit Trust has made any choices under the tax law that might have an effect on the calculation of either entity's net income or taxable income at the transfer time or later income year.

Both the Entity A Testamentary Trust and the Unit Trusts have chosen to obtain roll-over of the CGT assets currently held by the Testamentary Trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-70

Income Tax Assessment Act 1997 section 126-225

Income Tax Assessment Act 1997 section 126-230

Income Tax Assessment Act 1997 section 126-235

Income Tax Assessment Act 1997 section 960-130

Reasons for decision

All legal references are to the Income Tax Assessment Act 1997 unless otherwise specified.

Summary

Subdivision 126-G will apply to the transfer of CGT assets currently held by Entity A Testamentary Trust to a Unit Trust in the income year ended 30 June 20XX.

Detailed reasoning

Subdivision 126-G provides for CGT roll-over relief in circumstances where there is a transfer of assets between certain trusts. A roll-over relief under this Subdivision may be chosen if the conditions of section 126-225 are satisfied.

Subsection 126-225(1):

Subsection 126-225(1) states that roll-over may be chosen:

(a) the trustee of a trust (the transferring trust):

(i) creates a trust (the receiving trust), by declaration or settlement, over one or more CGT assets that include the roll-over asset; or

(ii) transfers the roll-over asset to an existing trust (the receiving trust);

at a particular time (the transfer time); and

(c) just after the transfer time:

(i) each of the trusts has the same beneficiaries; and

(ii) the receiving trust has the same *classes of *membership interests that the transferring trust had just before, and has just after, the transfer time; and

(iii) the sum of the *market values of each beneficiary's membership interests of a particular class in both trusts is substantially the same as the sum of the market values, just before the transfer time, of the beneficiary's membership interests of that class in both trusts; and

(d) the requirement in section 126-230 is met; and

(e) the exceptions in section 126-235 do not apply.

The Testamentary Trust will be eligible to choose roll-over relief under section 126-225 in relation to the transfer of the Testamentary Trust CGT assets to the Unit Trust if the above conditions stated in subsection 126-225(1) are satisfied. We now look at each condition in relation to the facts presented.

In the present case, the Testamentary Trust is the transferring trust, the Unit Trust is the receiving trust and the Testamentary Trust CGT assets are the roll-over assets.

1. Paragraph 126-225(1)(a): the trustee of a trust transfers roll-over asset to an existing trust at a particular time

The Unit Trust will be established prior to the transfer of the Testamentary Trust CGT assets currently held by the Testamentary Trust. Therefore, the roll-over assets will be transferred to an existing trust and the requirement of paragraph 126-225(1)(a) will be satisfied.

2. Paragraph 126-225(1)(b): the receiving trust has no CGT assets, other than small amounts or cash or debt, just before the transfer time

The Unit Trust is in the process of being established with nominal funds. Accordingly, just before the transfer of the roll-over assets from the Testamentary Trust to the Unit Trust, the later will have no CGT assets or cash other than a very small settled sum. Therefore, paragraph 126-225(1)(b) will be satisfied.

3. Paragraph 126-225(1)(c): the beneficiaries

This paragraph requires that just after the transfer time, three conditions must be satisfied in relation to the beneficiaries of the transferring and the receiving trusts as follows:

Subparagraph 126-225(1)(c)(i): same beneficiaries after the transfer time

Just after the transfer time, the Unit Trust will have identical beneficiaries to the Testamentary Trust. More specifically, the unitholders of the Unit Trust will have identical proportionate entitlements to that which they hold in the Testamentary Trust. Furthermore, the unitholders will hold their interest in the Unit Trust in the same capacity in which they held their interest in the Testamentary Trust.

Subparagraph 126-225(1)(c)(ii): same class of membership interests

The word, "class" is defined in subsection 995-1(1) as

Membership interests in a company or trust from a class if the interests have the same, or substantially the same rights.

Section 960-135 defines "Membership interest" as

If you are a member of an entity:

(a)   each interest, or set of interests, in the entity; or

(b)   each right, or set of rights, in relation to the entity;

by virtue of which you are a member of the entity is a membership interest of your in the entity.

According to subsection 960-130(1), a member of a trust (excluding a corporate unit trust or a public trading trust) includes a beneficiary, unitholder or object of the trust.

The beneficiaries of the Testamentary Trust are members as per the above definition. These members have defined interest, i.e., membership interest, in the Testamentary Trust. After the transfer time, the same members will have the same interest in the Unit Trust, in same proportion and entitlements to income and capital.

Subparagraph 126-225(1)(c)(iii): beneficiaries must have the same interests - the market value test

The proposed restructure will involve a transfer of all CGT assets held by the Testamentary Trust to the Unit Trust for no consideration. The net asset value should therefore remain substantially the same just before and just after the transfer time. Hence, the market value of the beneficiaries interests should therefore remain the same just before and after the transfer time.

4. Paragraph 126-225(1)(d) - the requirement in section 126-230 is met

Section 126-230 states as follows:

126-230(1) The conditions in subsections (2) and (3) must be met:

(a) if subsection 126-225(2) applies - at all times during the period:

(i) starting at the start time; and

(ii) ending at the transfer time; and

(b) otherwise - at the transfer time.

CGT event E4 is capable of happening

126-230(2) The first condition is met at a particular time if, at that time, *CGT event E4 is capable of happening to all of the *membership interests in each of the trusts.

Note: a roll-over cannot be chosen if either trust is a discretionary trust.

Beneficiaries' entitlements not discretionary

126- 230(3) The second condition is met at a particular time if, at that time, the manner or extent to which each beneficiary of each trust can benefit from the trust is not capable of being significantly affected by the exercise, or non-exercise, of a power.

126-230(4) However, if both trusts are *managed investment trusts, disregard a power if the power's existence at that time does not significantly affect the *market value at that time of each *membership interest in each of the trusts.

Since subsection 126-225(2), which deals with the situation where roll-over assets are already transferred, does not apply. Therefore, the conditions of subsections (2) and (3) need to be met at the transfer time.

CGT event E4 is capable of happening

Subsection 126-230(2) is met at a particular time if, at that time, CGT event E4 is capable of happening to all of the membership interests in each of the trusts. The note to subsection 126-230(2) states that "A roll-over cannot be chosen if either trust is a discretionary trust."

CGT event E4 is not capable of happening if the trust is a discretionary trust as the payment in relation to the beneficiaries' interests is uncertain and depends on the trustee's discretion. Conversely where the trust is a fixed one, the trustee has no such discretion but to distribute the net income of the trust to all presently entitled beneficiaries in accordance with their fixed entitlement.

Under subsection 104-70(1), CGT event E4 happens if:

(a)   The trustee of a trust makes a payment to you in respect of your unit or your interest in the trust (with some exceptions); and

(b)   Some or all of the payment (the non-assessable part) is not included in your assessable income.

Subsection 126-230(2) does not require that CGT event E4 must actually happen to the transferring trust and the receiving trust. It is a notional test, establishing whether CGT event E4 is capable of happening to an interest in a trust.

Further guidance in relation to CGT event E4 can be obtained from paragraph 1.29 of the Explanatory Memorandum to the Tax Laws Amendment (2009 Measure No. 6) Bill 2009 (enacted as the Tax Laws Amendment (2009 Measure No. 6) Act 2010) where it is stated:

"This requirement ensures that so-called discretionary trusts cannot access the roll-over. This is because it is difficult to establish with any degree pf certainty, the real underlying ownership of the assets of a discretionary trust. Therefore, it is equally difficult to test whether that ownership has been maintained."

In the present case, since the interest of the beneficiaries of the Testamentary Trust and the Unit Trusts are fixed, CGT event E4 is capable of happening to all membership interests in the transferring and the receiving trusts at the transfer time. Accordingly, subsection 126-230(2) will be met at the transfer time.

Beneficiary's entitlements not discretionary

The beneficiaries' interests in the Testamentary Trust and the Unit Trusts are fixed to both income and capital of the Trusts.

Subsection 126-230(4) is not relevant in the present case as the trusts are not managed investment trust.

Considering that subsections 126-230(1) and 126-230(2) are met at the transfer time, paragraph 126-225(1)(d) is satisfied.

5. Paragraph 126-225(1)(e): the exceptions in section 126-235 do not apply

Under section 126-235, there are three exceptions for obtaining roll-over.

Foreign trusts

Subsection 126-235(1) provides that an exception for roll-over applies for a CGT asset if:

(a)   the receiving trust is a foreign trust for CGT purposes for the income year that includes the transfer time; and

(b)   the rollover asset is not taxable Australian property just after the transfer time.

Foreign trust for CGT purposes is defined under subsection 995-1 as a trust that is not a resident for CGT purposes. Subsection 995-1(1) states that a unit trust is a resident trust for CGT purposes for an income year, if at any time during the income year, any property of the trust is situated in Australia and the central management and control of the trust is in Australia.

The CGT assets of the Testamentary Trust are in Australia and its central management and control is also in Australia. It will be the same in relation to the Unit Trust.

Public trading trusts

Another exception applies under subsection 126-235(2) if either trust is a trust to which section 102S of the Income Tax Assessment Act 1936 (ITAA 1936) applies for the income year that includes the transfer time.

Section 102S of the ITAA 1936 relates to public trading trust. The Testamentary Trust and the Unit Trusts are not public trading trusts.

Choices

Subsection 126-235(3), provides that an exception applies if, just after the transfer time, a choice under a provision of a taxation law is in force for either trust in relation to particular circumstances, a mirror choice is not in force for the other trust, and the absence of the mirror choice would or could have an income tax effect.

In the present case, neither the Testamentary Trust nor the Unit Trust has made any choice for the purposes of tax law that could have an income tax effect.

Paragraph 126-225(1)(e) is satisfied as none of the exceptions in section 126-235 applies.

Therefore, all the conditions of section 126-225 are satisfied.

Subsection 126-225(2):

Subsection 126-225(2) deals with the situation where the roll-over asset is already transferred. This does not apply to the present case as the roll-over assets are not yet transferred from the Testamentary Trust to the Unit Trust.

Subsection 126-225(3):

Subsection 126-225(3) states that roll-over only happens if both the trustee of the transferring trust and the trustee of the receiving trust choose to obtain it.

In this case, both the trustee of the Testamentary Trust and the trustee of the Unit Trust choose to obtain the roll-over in relation to the CGT asset currently held by the Testamentary Trust.

Since all the conditions of section 126-225 are satisfied in the present case, roll-over under section 126-225 can be chosen in relation to the transfer of the CGT asset currently held by Testamentary Trust to the Unit Trust.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).