Edited version of private advice

Authorisation Number: 1051961757581

Date of advice: 18 March 2022

Ruling

Subject: Capital gains tax

Question 1

Will Body A be exempt from income tax on any capital gain made under Part 3-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) when its basis of incorporation changes to a company limited by guarantee under the Corporations Act 2001 (Cth) (CA)?

Answer

Yes

Question 3

Does Body B make a capital gain (or capital loss) as a consequence of Body A changing its basis of incorporation to a company limited by guarantee under the CA?

Answer

No

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.            The entity group consists of Body A and Body B.

2.            Body A holds assets on trust for charitable purposes and undertakes activities.

3.            Body B does not have a beneficial interest in those assets.

4.            The trust (of which Body A is trustee) is registered with the ACNC as a charity.

5.            The trust (of which Body A is trustee) is endorsed as exempt from income tax.

Relevant legislative provisions

Division 6 of Part III of the Income Tax Assessment Act 1936

Section 95 of the Income Tax Assessment Act 1936

Section 6-15 of the Income Tax Assessment Act 1997

Section 6-20 of the Income Tax Assessment Act 1997

Section 10-5 of the Income Tax Assessment Act 1997

Division 50 of the Income Tax Assessment Act 1997

Section 50-1 of the Income Tax Assessment Act 1997

Part 3-1 of the Income Tax Assessment Act 1997

Section 100-20 of the Income Tax Assessment Act 1997

Section 102-5 of the Income Tax Assessment Act 1997

Division 104 of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Section 108-5 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Detailed reasoning

The capital gains tax (CGT) provisions in Part 3-1 of the ITAA 1997 (the CGT regime) apply where a taxpayer makes a capital gain or loss from a CGT event that happens in respect of a CGT asset (section 100-20 of the ITAA 1997). Section 102-5 of the ITAA 1997 provides that your assessable income includes your net capital gain for the income year. Division 104 of the ITAA 1997 sets out various CGT events that can happen to CGT assets including event A1 which happens when you dispose of an asset (section 104-10 of the ITAA 1997). Subsection 104-10(2) provides that you dispose of an asset if a change of ownership occurs from you to another entity.

The trust (of which Body A is trustee) is endorsed as exempt from income tax under Division 50 of the ITAA 1997. Section 50-1 of the ITAA 1997 provides that the ordinary and statutory income of an entity covered by Division 50 is exempt from income tax. Section 6-20 of the ITAA 1997 states that 'an amount of ordinary and statutory income is exempt income if it is made exempt from income tax by a provision of this Act...'. Subsection 6-15(2) of the ITAA 1997 states that 'if an amount is exempt income, it is not assessable income'. A capital gain which arises under the CGT regime is an item of statutory income (section 10-5 of the ITAA 1997).

The Taxation of Trusts regime is contained in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) and turns upon the existence of net income as defined in section 95 of the ITAA 1936. Section 95 provides that 'net income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions'.

All ordinary and statutory income of the trust (of which Body A is trustee) is exempt income and not assessable income. As such, if a CGT event were to occur when the basis of incorporation changes to a company limited by guarantee, there would be no assessable income from the CGT event as any capital gain of the trust would be exempt income and not assessable income. This means there could be no section 95 of the ITAA 1936 'net income' and therefore, no incidence of taxation that could arise to Body A as trustee because of Division 6 of Part III of the ITAA 1936.

Question 3

Detailed reasoning

Refer to question 1 for a discussion of the CGT provisions.

Currently Body A holds the assets on trust for charitable purposes and undertake activities. Body B does not have a beneficial interest in the assets as Body A holds them on trust for charitable purposes. That is, the trust is a charitable purpose trust rather than a beneficiary trust. As such, Body B has no discrete CGT asset ('CGT asset' include any kind of property, and a legal or equitable right that is not property (section 108-5 of the ITAA 1997)) that might attract the operation of the CGT regime as a consequence of the proposed change in basis of incorporation of Body A.

Further, and as already noted under the detailed reasoning for Question 1, the trust (of which Body A is trustee) is income tax exempt, and it follows that the trust can have no 'net income' as defined in section 95 of the ITAA 1936. This means that even were Body B a beneficiary, the provisions of the tax law which turn upon section 95 net income to cause an amount to be included in the assessable income of a beneficiary, cannot have any operation here.

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