Edited version of private advice

Authorisation Number: 1051606118211

Date of advice: 7 November 2019

Ruling

Subject: Transfer of assets - roll over relief and single entity rule

Question

Question 1

Are the roll-over relief requirements under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) satisfied if certain CGT assets owned by a Trustee are transferred to the Trustee's wholly owned companies?

Answer

Yes

Question 2

Are the roll-over relief requirements under section 40-340 of the ITAA 1997 satisfied if certain depreciating assets owned by the Trustee are transferred to the Trustee's wholly owned companies?

Answer

Yes

Question 3

Will the transfer of certain business assets from the head company to its wholly owned subsidiary be disregarded under the single entity rule in section 701-1of the ITAA 1997?

Answer

Yes

This ruling applies for the following income year:

1 July 2019 to 30 June 2020

Relevant facts and circumstances

The Trustee operates a business through a discretionary trust, which holds significant business assets, including but not limited to trading businesses, plant & equipment, lessee rights over various business sites, inventory and significant intangible assets.

The Trustee proposes to undertake an internal restructure of its business by transferring certain business assets by implementing the following scheme:

Prior to the commencement of the restructure, the Trustee will be the sole shareholder of Company A, Company B and Company C with no substantial assets. Company D will be a wholly owned subsidiary of Company A, and will have no substantial assets.

Certain business assets that are 'CGT assets' (within the meaning of Division 108 of the ITAA 1997) ('CGT assets') will be transferred from the trust to either Company A or Company B in return for new ordinary shares in those companies. Neither company will discharge any liabilities in respect of the acquisition of the CGT assets.

At the same time, certain other business assets that are 'depreciating assets' (within the meaning of Division 40 of the ITAA 1997) will be transferred from the trust to either Company A or Company B in return for new ordinary shares in those companies.

Company A will elect, in accordance with section 703-50 of the ITAA 1997, to form a tax consolidated group (as defined in section 703-5 of the ITAA 1997) with effect from the date it acquired 100% of the shares in Company D. Company A will be the head company of the tax consolidated group.

Subsequent to forming the tax consolidated group, Company A will transfer the business assets it received from the Trustee to Company D in exchange for shares issued in Company D to Company A.

In each instance, the shares issued to the Trustee by Company A and Company B, will be ordinary shares and in all respect have equal rights and obligations to the ordinary shares issued on incorporation of those companies.

With respect to the transfer of each CGT asset the shares received in exchange for the transfer of the assets will reflect the market value of the assets transferred. Prior to the transfers, Company A and Company B will have no other assets other than $XXX in cash, being the initial share capital subscribed for in each of Company A and Company B upon incorporation (XXX ordinary shares of $X.XX each).

The market value of the CGT assets that are transferred to Company A and Company B by the Trustee will be such that, if roll-over relief were not to be chosen, a capital gain would arise on the disposal (i.e. the transfer).

Immediately following the transfer of the business assets, the Trustee will own all the shares in Company A and Company B.

All entities are Australian resident taxpayers.

Independent valuations will be obtained to determine the aggregate market value of the business assets transferred to each company, including the CGT assets and depreciating assets transferred, and the resulting market values of the shares issued as consideration to the Trustee.

In this case there is no capital loss or a deduction that will result on the disposal of the CGT assets from the Trustee to Company A and Company B.

Relevant legislative provisions

Section 40-340 ITAA 1997

Subdivision 122-A ITAA 1997

Section 701-1 ITAA 1997

Reasons for decision

Question 1

Summary

Roll-over relief under Subdivision 122-A of the ITAA 1997 is available for the transfer of CGT assets from the Trustee to Company A and Company B.

Detailed reasoning

CAPITAL GAINS TAX ROLL-OVER RELIEF

Generally, Subdivision 122-A of the ITAA 1997 allows for the roll-over of a capital gain or loss when an individual or trustee disposes of a capital gains tax (CGT) asset to a company in which, just after the disposal, the individual or trustee owns all the shares.

Disposal or creation of assets - wholly owned company

In order for an individual or trustee to obtain roll-over relief under Subdivision 122-A of the ITAA 1997, the CGT event which triggers the capital gain or loss must be one listed in the table of section 122-15. CGT event A1, being the disposal of a CGT asset, is one of the trigger events listed in the table.

Under subsection 104-10(1) of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. Under subsection 104-10(2), you dispose of a CGT asset if a change of ownership occurs from you to another entity.

Under this scheme, the Trustee will dispose of CGT assets to Company A and Company B. As the Trustee will dispose of CGT assets to Company A and Company B, CGT event A1 will happen in relation to each of the CGT assets disposed of by the Trustee.

However, the Trustee will not transfer all of the business assets to Company A and Company B as certain assets (such as trade debtors, cash and prepayments) will remain with the Trustee. Therefore, the relevant rollover is that relating to individual asset transfers, rather than that relating to the transfer of a whole business.

What is received for the trigger event

Subsection 122-20(1) of the ITAA 1997 provides that if the Trustee receives consideration for the disposal of the asset (or assets) to the company that consideration must be shares in the company, or shares in the company and that company undertaking to discharge one or more liabilities in respect of the asset or assets of the business.

The shares received as consideration cannot be redeemable shares (subsection 122-20(2) of the ITAA 1997) and must be substantially the same market value as those assets disposed of, less any liabilities the company undertakes to discharge in respect of the asset or assets (paragraph 122-20(3)(a)).

In this case, no liabilities will be transferred to or discharged by Company A and Company B in connection with the rollover under Subdivision 122-A of the ITAA 1997.

The consideration received by the Trustee will be the issues of new ordinary shares in Company A and Company B. Company A and Company B will each issue ordinary shares equivalent to the market value of the assets in return for the respective CGT assets being rolled over. The aggregate market value of the new shares issued in each company in return for the CGT assets will be substantially the same as the aggregate market value of the CGT roll-over assets disposed of by the Trustee to that company.

Independent valuations will be used to determine the market values of each CGT asset disposed of and the resulting market values of Company A and Company B shares issued as consideration to the Trustee. As the shares are to reflect the market value of assets transferred, section 122-20 of the ITAA 1997 would be satisfied.

Other requirements that must be satisfied

Section 122-25 of the ITAA 1997 lists further requirements that must also be satisfied for roll-over relief to be available under Subdivision 122-A, relevantly:

a)     The trustee must own all of the shares in the company just after the disposal of the asset (subsection 122-25(1) of the ITAA 1997).

In this case, while there were ordinary shares on issue in relation to Company A and Company B prior to the Trustee's disposal of asset or assets, those shares were owned by the Trustee. Consequently, when the ordinary shares are issued as consideration for the roll-over assets by Company A and Company B all shares just after the disposal of the asset or assets are also all owned by the Trustee, thereby satisfying this requirement.

b)     The CGT asset disposed of cannot be an asset excluded under subsections 122-25(2) to (4) of the ITAA 1997. Relevantly, Item 1 of the table in subsection 122-25(2) of the ITAA 1997 excludes the following assets from 122-A roll-over:

·                  A collectable or a personal use asset;

·                  A decoration awarded for valour or brave conduct

·                  A 'precluded asset'

·                  An asset that becomes trading stock of the company just after disposal or creation;&

·                  An asset that becomes a registered emissions unit.

A precluded asset is defined in section 122-25(3) of the ITAA 1997 as:

·                  A depreciating asset

·                  Trading stock

·                  A registered emissions unit: or

·                  An interest in the copyright in an Australian film referred to in section 118-30.

While the scheme involves the disposal of assets from Trustee to Company A and Company B which include the disposal of various precluded assets, including depreciating assets and trading stock, the roll-over in Subdivision 122-A of the ITAA 1997 will not apply to those assets; it will only apply to the relevant CGT assets (i.e. not the precluded assets).

c)     The company must not be an exempt entity (subsection 122-25(5) of the ITAA 1997)

Neither Company A and Company B are exempt entities.

d)     Either the trust must be a resident trust for CGT purposes and the company must be an Australian resident, or the asset must be a CGT asset of the trust that is taxable Australian property and the shares in the company mentioned in subsection 122-20(1) of the ITAA 1997 must be taxable Australian property (subsection 122-25(7)).

The trust is an Australian resident trust for CGT purposes and Company A and Company B are Australian residents for taxation purposes as they were incorporated in Australia.

Excluded assets

The remaining precluded assets (being trading stock and depreciating assets) will be ineligible for CGT rollover under Subdivision 122-A of the ITAA 1997. Trading stock will be transferred directly to Company D as a separate transaction shortly after the rollover of relevant CGT Assets has been effected.

Conclusion

In conclusion, the transfer of CGT assets from the Trustee to Company A and Company B, in the proposed arrangement, will enable the Trustee to choose to roll-over any capital gain or loss as specified in Subdivision 122-A of the ITAA 1997.

Question 2

Summary

Roll-over relief under section 40-340 of the ITAA 1997 is available for the transfer of depreciating assets from the Trustee to Company A and Company B.

Detailed reasoning

ROLL-OVER RELIEF

Under subsection 122-25(3) of the ITAA 1997, depreciating assets are 'precluded assets' and cannot be subject to a Subdivision 122-A CGT roll-over.

Subdivision 40-D of the ITAA 1997 contains the general balancing adjustment rules that apply to depreciating assets whose decline in value is worked out under the general provisions of Subdivision 40-B. Under these balancing adjustment rules, the difference between the asset's termination value and its adjustable value is either included in, or deducted from, the holder's assessable income for the income year in which the balancing adjustment event occurs (section 40-285).

A depreciating asset is defined in subsection 40-30(1) of the ITAA 1997 as follows:

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, except:

a. land; or

b. an item of trading stock; or

c. an intangible asset, unless it is mentioned in subsection 2 of section 40-30.

A balancing adjustment event occurs for a depreciating asset if you stop holding the asset (subsection 40-295(1) of the ITAA 1997).

Accordingly, a balancing adjustment event will occur when the Trustee disposes of the depreciating assets to each of Company A and Company B.

There is a roll-over provision in Division 40 of the ITAA 1997, which operates in parallel with the CGT roll-over provisions. Subsection 40-345(1) prevents section 40-285 from applying so that no balancing adjustment arises if the taxpayer meets the conditions for automatic roll-over relief set out in subsection 40-340(1).

Automatic roll-over relief

Pursuant to subsection 40-340(1) of the ITAA 1997 the conditions required to obtain automatic roll-over relief are:

there is a balancing adjustment event because an entity (the transferor) disposes of a depreciating asset in an income year to another entity (the transferee); and

the disposal involves a CGT event; and

the conditions in an item in this table are satisfied.

With reference to the table in section 40-340 of the ITAA 1997, the applicable type of CGT roll-over that qualifies for transferor relief is described at Item 1, which is the disposal of an asset to a wholly-owned company. The condition is that the transferor is able to choose a roll-over under Subdivision 122-A of the ITAA 1997 for the CGT event.

Subsection 40-340(2) states:

In applying an item in the table in subsection (1), disregard the following so far as they relate to the depreciating asset you disposed of:

a. an exemption in Division 118 (which contains the general exemptions from CGT); and

b. subsection 122-25(3) (which excludes certain assets from some kinds of CGT roll-over); and

c. subsection 124-870(5) (which excludes certain assets from roll-over relief under Subdivision 124-N).

Under the scheme, the Trustee stops hold depreciating assets and as a consequence there are balancing adjustment events because the transferor disposes of the depreciating assets to the transferees, being Company A and Company B. Further, given that subsection 40-340(2) of the ITAA 1997 provides that subsection 122-25(3) is to be disregarded, the requirements of Item 1 in the table in section 40-340 are satisfied as outlined above.

Subsection 40-340(8) of the ITAA 1997 provides that there is no roll-over relief if Subdivision 170-D of the ITAA 1997 applies to the disposal of the depreciating asset or the change in interests in it. Generally, Subdivision 170-D defers the recognition of a capital loss or a deduction where there has been a transfer of a CGT asset between companies in the same linked group (or between associates).

In this case there is no capital loss or a deduction that will result on the disposal of the assets from the Trustee to Company A and Company B.

Conclusion

In conclusion, the transfer of depreciating assets from the Trustee to Company A and Company B, in the proposed arrangement, will mean an automatic roll-over relief under section 40-340 of the ITAA 1997.

Question 3

Summary

The transfer of business assets from Company A to Company D would be disregarded under the single entity rule under section 701-1 of the ITAA 1997.

Detailed reasoning

SINGLE ENTITY RULE

Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax assessment Act 1997 sets out the Commissioner's view on what the single entity rule in section 701-1 of the ITAA 1997 is and how it applies to members of a consolidated group. Relevantly, it explains that:

3. Section 701-1 of the ITAA 1997 is a key provision of the consolidation regime. It is the means by which the members of a consolidated group are treated as a single entity (being the head company) for income tax purposes.

...

Consequences of the SER

7. For income tax purposes the SER deems subsidiary members to be parts of the head company rather than separate entities during the period that they are members of the consolidated group.

8. As a consequence, the SER has the effect that:

(a) the actions and transactions of a subsidiary member are treated as having been undertaken by the head company;

(b) the assets a subsidiary member of the group owns are taken to be owned by the head company (with the exception of intra-group assets) while the subsidiary remains a member of the consolidated group;

(c) assets where the rights and obligations are between members of a consolidated group (intra-group assets) are not recognised for income tax purposes during the period they are held within the group whether or not the asset, as a matter of law, was created before or during the period of consolidation (see also paragraph 11 and paragraphs 26-28); and

(d) dealings that are solely between members of the same consolidated group (intra-group dealings) will not result in ordinary or statutory income or a deduction to the group's head company.

9. An example of an intra-group dealing is the transfer of a capital gains tax (CGT) asset from one group member to another. This transfer is not treated for income tax purposes as a disposal or acquisition in the hands of the head company. Although the legal transfer of the CGT asset between the subsidiary members occurs at general law, it has no income tax consequences as the group's head company is taken to be the owner of the asset both before and after the transfer.

As Company A and its wholly owned subsidiary, Company D, willchoose to form a consolidated group in accordance with section 703-50 of the ITAA 1997, the members of the consolidated group will be Company A and Company D. The single entity rule in section 701-1 of the ITAA 1997 will apply from and including the day specified in the approved form. This will be effective from the date that Company A acquired 100% of the shares in Company D.

Conclusion

From and including the day on which the choice to consolidate is made, the single entity rule in section 701-1 of the ITAA 1997 will effectively allow for the business assets held by Company A to be transferred to Company D without income tax consequences.

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