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Edited version of private advice

Authorisation Number: 1052294180695

Date of advice: 5 September 2024

Ruling

Subject: CGT - rollovers - trust to company

Question 1

Is A Pty Ltd as trustee for the A Trust and B Pty Ltd as trustee for the B Trust eligible for roll-over relief under section 124-870 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of their units in the X Trust (the Trust) under the Proposed Restructure?

Answer

Yes.

Question 2

Will D Pty Limited (the Company) as trustee for the Trust disregard capital gains or capital losses from the transfer of the assets of the Trust (except trading stock) to itself in its personal capacity under subsection 124-875(1) of the ITAA 1997?

Answer

Yes.

Question 3

Will depreciation roll-over relief under section 40-345 of the ITAA 1997 be available under table item 2A of subsection 40-340(1) of the ITAA 1997 in relation to the depreciating assets transferred by the Trust under the Proposed Restructure such that no balancing adjustment arises for the Trust?

Answer

Yes.

Question 4

Will section 70-90 of the ITAA 1997 apply to the transfer of the trading stock from the Trust to the Company?

Answer

No.

Question 5

Will the Trust include the book value of its trading stock in its assessable income under section 6-5 of the ITAA 1997 on the transfer of the trading stock to the Company?

Answer

Yes.

Question 6

Will the Company include as the cost of its trading stock for the purposes of Division 70 of the ITAA 1997 the book value of its stock acquired from the Trust?

Answer

Yes.

This ruling applies for the following periods

Year ending 30 June 2025

Year ending 30 June 2026

Relevant facts and circumstances

The business

1.    The Trust is a unit trust and conducts the business in Australia.

2.    The business operates pursuant to licences from each of the unitholders of the Trust (Unitholders). The Unitholders each had related businesses that were brought together by the Trust in 20XX. The Company is the trustee of the Trust (Trustee).

3.    The senior executives of the business include 3 members of the same family. The business was originally founded and conducted by this family who have ultimately licenced the business to the Trust as part of the licencing arrangement mentioned above.

4.    Individual C and Individual B are also key members of the executive team and who previously operated similar businesses before becoming Unitholders through their family trusts.

The Trust

5.    The Unitholders are 3 discretionary trusts who each have an Australian incorporated company as trustee. Each discretionary trust is an Australian tax resident. Each Unitholder holds units in the Trust of both classes (ordinary and A class). All units were acquired on or after 20 September 1985 and are post-CGT assets. The units are not held as trading stock and are held on capital account.

6.    The proportionate ownership of the A class units and ordinary units on issue in the Trust is as follows:

•         60% - A Trust. The principal beneficiaries of A Trust are the 3 family members and family entities;

•         28% - C Pty Limited as trustee for the C Trust; and

•         12% - B Trust.

7.    The trust deed of the Trust (Trust Deed) contains a number of clauses relevant to the rights of Unitholders to income and capital of the Trust, including the following:

Clause 4 Units

(a) The whole of the beneficial interest in the Trust Fund shall be divided into Units.

(b) A Unit Shall entitle the Holder thereof:

(i)    equally with the Holders of all other Units to an undivided beneficial interest in the whole of the Trust Fund provided that subject to such preferred deferred or other special rights or restrictions (if any) attaching to a Unit or a class of Units a Unit shall not confer on the Holder an interest in any particular part of the Trust Fund or in any particular money right property asset or thing included in the Trust Fund;

(ii)   ...

provided always that no Unit Holder shall be entitled to require the transfer to him of any property comprised in the Trust Fund nor be entitled to interfere with or question the exercise or non-exercise by the Trustee of any of the powers authorities or discretions conferred upon the Trustee by this deed or in respect of such property.

(emphasis added)

Clause 12 Variation of Units

The Trustee may with the consent of the Unit Holders:

(a)  divide Units into a greater number of Units or consolidate Units into a lesser number of Units and in each case issue new Certificates therefore;

(b)  divide Units into classes with such preferred deferred or other special rights or such restrictions whether in regard to capital income profits or gains or otherwise as the Trustee may deem fit;

(c)   vary the class of a Unit to a new class; and

(d)  vary the rights or restrictions attached to a Unit or class of Units,

provided always that the Trustee shall have obtained the prior consent of a Unit Holder whose Unit is to be so divided consolidated classified re-classified or varied as the case may be.

(emphasis added)

Clause 17.4 Distribution

Subject to such preferred or other special rights or restrictions (if any) attaching to a Unit or class of Units a Unit shall confer on a Unit Holder an absolute and present entitlement to and the right to receive and be paid on the last day of each Financial Year a share of the Net Income of that Financial Year arising from the Trust Fund in accordance with the formula:

A × B ÷ C = D

where

"A" is the Net Income of the Trust Fund of that Financial Year;

"B" is the total number of Units held by a Unit Holder on the last day of that Financial Year;

"C" is the total of the number of Units on issue on the last day of that Financial Year; and

"D" is the share of the Net Income of that Unit Holder.

(emphasis added)

8.    The Trust currently records its trading stock at cost in its books.

The Company

9.    The shares currently on issue in the Company consists of:

Table 1: The shares currently on issue in the Company consists of:

Shareholder

Number of ordinary shares

A Trust

60

C Trust

28

B Trust

12

Total

100

 

10.  On XX XX 20XX, the Company cancelled all the A class shares on issue. The A class shares were held in the same proportion as the ordinary shares in the Company, hence there has been no change to the proportion of ownership by each shareholder. The A class shares have served no function for the shareholders at any time. The Company, as Trustee, has no beneficial interests in the assets of the Trust and holds no other assets. The A class shares therefore have no value. The A class shares have been cancelled also to simplify the shareholding in the Company in preparation of the Proposed Restructure and potential sale (discussed below).

Potential sale

11.  A foreign investment bank has been appointed by the executives of the business to seek expressions of interest from potential investors. The sale transaction will enable additional cash investment into the business so that it may pursue its growth initiatives. To date, the business has been restricted in achieving its growth ambitions given its limited cash reserves and its requirement to distribute profits to the Unitholders given its structure.

12.  While no potential buyer has yet been identified, the investment bank has advised that the concept of a unit trust as the principal trading vehicle is not well understood. Accordingly, the investment bank strongly recommend that the unit trust structure should be converted to a normal corporate structure in advance of any offer from such an investor.

Proposed Restructure

13.  Accordingly, the Unitholders intend to approve amendments to the Trust Deed to enable the business to be 'corporatised'.

14.  The business of the Trust includes an extensive range of valuable contracts with suppliers, customers and staff. Accordingly, it is essential that the transition of the business entity from unit trust to company involve the trustee retaining its present legal ownership, rather than forming a newly incorporated Australian company to acquire all the assets and be party to novation of contracts and assumption of liabilities.

15.  The Company, as Trustee, holds no assets other than those under the terms of the Trust Deed. That is, it holds no assets for its own benefit. The Company is not an exempt entity as defined under section 995-1 of the ITAA 1997.

16.  The Proposed Restructure involves the following steps:

(i)    Step 1: The Trust Deed will be amended to enable the assets of the Trust to be transferred to the Company in its personal capacity.

(ii)   Step 2: The Company, in its capacity as Trustee, will distribute to the Unitholders the net income derived up to the date of transfer of the assets to the Company, which is to be satisfied by the issue of short term loan notes to the Unitholders.

(iii)  Step 2.1 All unpaid present entitlements of the Unitholders will be converted to short term loan notes.

(iv)  Step 3: All the assets of the Trust are transferred to the Company in its personal capacity so that the Company will obtain full legal and beneficial ownership of the assets (commencement of the trust restructuring period or TRP). The paid up capital of the Trust of approximately $X million will also be transferred to the Company.

(v)   Step 4: All the liabilities of the Trust (including the short term loan notes created at Steps 2 and 2.1) will be transferred to the Company in its personal capacity - the Company in its personal capacity will assume all the liabilities of the Trust and perform, pay and discharge these liabilities when due. The Trust will not retain any assets for the purposes of discharging existing or expected debts.

(vi)  Step 5: Unitholders will be issued with ordinary shares in the Company as consideration for the transfer of the beneficial right, title and interest in the assets of the Trust to the Company. A total of 18,672,181 ordinary shares with a value of $1 per share is expected to be issued to the shareholders in the same proportion to their existing shareholding (which is also the same proportion as their unitholding).

(vii)Step 6: The Trust will vest within 6 months of the commencement of the start of the TRP (i.e. when the first asset is transferred).

Assumptions

For the purposes of question 2 in this ruling, both the Trust (as transferor) and the Company (as transferee) will choose to obtain the roll-over in accordance with section 124-865 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 former section 36

Income Tax Assessment Act 1936 former subsection 36(1)

Income Tax Assessment Act 1936 Schedule 2F

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Subdivision 40-B

Income Tax Assessment Act 1997 section 40-40

Income Tax Assessment Act 1997 section 40-285

Income Tax Assessment Act 1997 subsection 40-295(1)(a)

Income Tax Assessment Act 1997 section 40-340

Income Tax Assessment Act 1997 subsection 40-340(1)

Income Tax Assessment Act 1997 section 40-345

Income Tax Assessment Act 1997 Division 70

Income Tax Assessment Act 1997 subsection 70-35(3)

Income Tax Assessment Act 1997 section 70-90

Income Tax Assessment Act 1997 subsection 70-90(1)

Income Tax Assessment Act 1997 section 70-95

Income Tax Assessment Act 1997 section 103-25

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 104-70

Income Tax Assessment Act 1997 section 104-195

Income Tax Assessment Act 1997 subsection 104-195(2)

Income Tax Assessment Act 1997 Subdivision 124-A

Income Tax Assessment Act 1997 section 124-15

Income Tax Assessment Act 1997 subsection 124-15(2)

Income Tax Assessment Act 1997 subsection 124-15(3)

Income Tax Assessment Act 1997 Subdivision 124-N

Income Tax Assessment Act 1997 subsection 124-855(1)

Income Tax Assessment Act 1997 paragraph 124-855(1)(a)

Income Tax Assessment Act 1997 paragraph 124-855(1)(b)

Income Tax Assessment Act 1997 section 124-860

Income Tax Assessment Act 1997 subsection 124-860(1)

Income Tax Assessment Act 1997 subsection 124-860(2)

Income Tax Assessment Act 1997 subsection 124-860(3)

Income Tax Assessment Act 1997 subsection 124-860(4)

Income Tax Assessment Act 1997 subsection 124-860(5)

Income Tax Assessment Act 1997 subsection 124-860(6)

Income Tax Assessment Act 1997 paragraph 124-860(6)(a)

Income Tax Assessment Act 1997 paragraph 124-860(6)(b)

Income Tax Assessment Act 1997 section 124-865

Income Tax Assessment Act 1997 section 124-870

Income Tax Assessment Act 1997 subsection 124-870(1)

Income Tax Assessment Act 1997 paragraph 124-870(1)(b)

Income Tax Assessment Act 1997 subsection 124-870(2)

Income Tax Assessment Act 1997 subsection 124-870(3)

Income Tax Assessment Act 1997 subsection 124-870(5)

Income Tax Assessment Act 1997 section 124-875

Income Tax Assessment Act 1997 subsection 124-875(1)

Income Tax Assessment Act 1997 subsection 124-875(5)

Income Tax Assessment Act 1997 subsection 124-875(6)

Income Tax Assessment Act 1997 section 960-100

Income Tax Assessment Act 1997 paragraph 960-100(1)(b)

Income Tax Assessment Act 1997 subsection 960-100(3)

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

All subsequent legislative references are to the ITAA 1997, unless otherwise indicated.

Question 1

Summary

Yes. Since the requirements in section 124-870 are satisfied A Trust and B Trust can choose to obtain a roll-over in respect of their units in the Trust and new shares in the Company under the Proposed Restructure. The consequences of the roll-over for these Unitholders under section 124-15 are as follows:

•         any capital gain or loss from the ending of the units in the Trust under CGT event C2 can be disregarded (subsection 124-15(2)); and

•         the first element of each new share's cost base is the total of the cost bases of the units (worked out when their ownership of them ended) divided by the number of new shares (subsection 124-15(3)).

Detailed reasoning

Under section 124-870, unitholders can choose to obtain a roll-over if they own units in the transferor (their original interests) and the ownership of all their units ends under a trust restructure in exchange for shares in the transferee (their replacement interests).

Unitholders can choose the roll-over regardless of whether or not the transferor and transferee choose to obtain a roll-over, and even if CGT event J4 under section 104-195 applies. However, the effect of the roll-over may be reversed under CGT event J4 if the transferor does not cease to exist within 6 months (subsection 104-195(2)).

Under subsection 124-870(2), where a unitholder chooses to apply the replacement asset roll-over, it must make the choice to apply the roll-over for all their original interests.

Under subsection 124-870(3), a unitholder that is a foreign resident cannot choose roll-over under section 124-870 unless the replacement shares in the transferee are taxable Australian property just after their acquisition.

Under subsection 124-870(5), the roll-over under section 124-870 does not apply to units that are trading stock or where the replacement shares become an item of trading stock when it is acquired.

Making the choice

Under section 103-25:

•         the choice to apply the roll-over must be made in the income year in which the units (i.e. original interests) comes to an end or within a further time allowed by the Commissioner; and

•         the way the unitholders prepare their tax return is sufficient evidence of the making of the choice.

A Trust and B Trust can choose to obtain a roll-over since all the conditions in subsection 124-870(1) are satisfied. Subsection 124-870(1) is satisfied since each of these Unitholders own units in the Trust and the ownership of all their units ends under a trust restructure in exchange for shares in the Company. ATO ID 2010/72 Income Tax: Capital gains tax: trustee ceasing to hold an asset on trust and commencing to hold it in its own capacity - CGT event A1 (ATO ID 2010/72)makes it clear that the roll-over under Subdivision 124-N is available where the transferee is the corporate trustee of the trust, provided all the other conditions of Subdivision 124-N are satisfied.

A Trust and B Trust must choose the roll-over for all their units in the Trust.

Since A Trust and B Trust are Australian tax residents, subsection124-870(3) does not apply.

Since neither the units in the Trust nor the replacement shares are items of trading stock for the Unitholders, subsection 124-870(5) does not apply.

Consequence of choosing the roll-over

The roll-over consequences for A Trust and B Trust are set out in Subdivision 124-A. For the purposes of section 124-15, the original assets are the units in the Trust (the transferor) and the new assets are the shares in the Company (the transferee).

Where roll-over is chosen for all the units, section 124-15 applies since the ownership of more than one CGT asset (original assets) ends and they acquire one or more CGT assets (the new assets).

The consequences under subsection 124-15 are as follows:

The consequences of the roll-over for A Trust and B Trust under section 124-15 are as follows:

Question 2

Summary

Yes. Since the requirements to choose a roll-over under Subdivision 124-N are satisfied and on the basis both the Trust (as transferor) and the Company (as transferee) will choose the roll-over, capital gains or capital losses from CGT event A1 happening to the Trust under the trust restructure in relation to assets other than trading stock is disregarded under subsection 124-875(1).

Detailed Summary

Broadly, Subdivision 124-N allows for capital gains and losses to be disregarded where a unit trust disposes of CGT assets to a company as part of a business restructure where certain requirements are met.

Eligibility for the roll-over

Specifically, under subsection 124-855(1), a roll-over may be available for a trust restructure if:

(a)  a trust, or 2 or more trusts, (the transferor) dispose of all their CGT assets to a company limited by shares (the transferee); and

(b)  CGT event E4 is capable of applying to all of the units and interests in the transferor; and

(c)   the requirements in section 124-860 are met.

A trust disposes of all its CGT assets to a company limited by shares

The Trust Deed will be amended to enable the Company to obtain beneficial ownership of all the assets.

Section 995-1 states that you 'dispose of' a CGT asset in the circumstances specified in section 104-10.

Section 104-10 is about the disposal of a CGT asset that gives rise to CGT event A1. Subsection 104-10(2) states that:

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.

ATO ID 2010/72 makes it clear that CGT event A1 happens if a company ceases to hold a CGT asset in its capacity as trustee of a trust and starts to hold the asset in its own capacity. CGT event A1 happens because a change in ownership of the asset occurs from the company (acting in its capacity as trustee) to another entity (the company acting in its own capacity). This is the case notwithstanding that there has been no change in the legal ownership of the asset.

Under the Proposed Restructure, all CGT assets of the Trust will be transferred to the Company. There will be a change in the beneficial ownership of all of the transferred CGT assets of the Trust because the Company holds the assets on trust before the Proposed Restructure and will hold the assets in its own right as beneficial owner after the Proposed Restructure. Therefore, the Trust will 'dispose' of all of the transferred CGT assets to the Company.

Since the Company is limited by shares, paragraph 124-855(1)(a) is satisfied.

CGT even E4 must be capable of applying to all units in the transferor

Paragraph 124-855(1)(b) does not require that the transferor unit trust is a 'fixed trust' within the meaning of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936). It only requires that CGT event E4 under section 104-70 is capable of applying to all of the units in the trust.

Paragraph 2.79 of the Explanatory Memorandum to Taxation Laws Amendment Bill (No 4) 2002 which introduced the Subdivision 124-N roll-over mentions that "[t]he roll-over is only available to trusts whose members interests have a fixed capital component" (emphasis added).

Therefore:

It is therefore necessary to establish that all the beneficiaries' interests have a fixed capital component.

The Trust is the transferor. There are 2 types of units on issue for the Trust consisting of 'A class' units and 'Ordinary' units.

The following clauses in the Trust Deed have been considered to determine if all Unitholders have a fixed capital component:

Clause 4 Units

(a) The whole of the beneficial interest in the Trust Fund shall be divided into Units.

(b) A Unit Shall entitle the Holder thereof:

(i)    equally with the Holders of all other Units to an undivided beneficial interest in the whole of the Trust Fund provided that subject to such preferred deferred or other special rights or restrictions (if any) attaching to a Unit or a class of Units a Unit shall not confer on the Holder an interest in any particular part of the Trust Fund or in any particular money right property asset or thing included in the Trust Fund;

(ii)   ...

provided always that no Unit Holder shall be entitled to require the transfer to him of any property comprised in the Trust Fund nor be entitled to interfere with or question the exercise or non-exercise by the Trustee of any of the powers authorities or discretions conferred upon the Trustee by this deed or in respect of such property.

(emphasis added)

Clause 12 Variation of Units

The Trustee may with the consent of the Unit Holders:

(a)  divide Units into a greater number of Units or consolidate Units into a lesser number of Units and in each case issue new Certificates therefore;

(b)  divide Units into classes with such preferred deferred or other special rights or such restrictions whether in regard to capital income profits or gains or otherwise as the Trustee may deem fit;

(c)   vary the class of a Unit to a new class; and

(d)  vary the rights or restrictions attached to a Unit or class of Units,

provided always that the Trustee shall have obtained the prior consent of a Unit Holder whose Unit is to be so divided consolidated classified re-classified or varied as the case may be.

(emphasis added)

Clause 17.4 Distribution

Subject to such preferred or other special rights or restrictions (if any) attaching to a Unit or class of Units a Unit shall confer on a Unit Holder an absolute and present entitlement to and the right to receive and be paid on the last day of each Financial Year a share of the Net Income of that Financial Year arising from the Trust Fund in accordance with the formula:

A × B ÷ C = D

where

"A" is the Net Income of the Trust Fund of that Financial Year;

"B" is the total number of Units held by a Unit Holder on the last day of that Financial Year;

"C" is the total of the number of Units on issue on the last day of that Financial Year; and

"D" is the share of the Net Income of that Unit Holder.

(emphasis added)

The power of the Trustee under clause 12 to divide units into classes with preferential rights has never been exercised by the Trustee. Accordingly, references in clauses 4 and 17.4 to preferential rights have no relevance with the consequence that all Unitholders have a beneficial interest in the Trust Fund in proportion to the number of Units they hold. All units in the Trust therefore have a fixed capital component and CGT event E4 under section 104-70 is capable of applying to all the units in the Trust. The requirement in paragraph 124-855(1)(b) is therefore satisfied.

Section 124-860 requirements

Subsection 124-860(1) requires all of the CGT assets owned by the transferor to be disposed of to the transferee during the trust restructuring period as defined in subsection 124-860(2). However, any CGT assets retained by the transferor to pay existing or expected debts of the transferor can be disregarded.

Subsection 124-860(2) defines the TRP as the period that starts just before the first CGT asset is disposed of to the transferee under the trust restructure (which must happen on or after 11 November 1999) and ends when the last CGT asset of the transferor is disposed of to the transferee.

As part of the Proposed Restructure, all of the assets of the Trust are disposed of to the Company during the TRP and the requirement in subsection 124-860(1) is satisfied.

Under subsections 124-860(3) the transferee must not be an exempt entity. An exempt entity is defined in section 995-1 to mean an entity all of whose ordinary income and statutory income is exempt from income tax. The Company is not an exempt entity and the requirement in subsection 124-860(3) is satisfied.

Under subsection 124-860(4), the transferee:

An example of such transferee provided by subsection 124-860(4) is a shelf company.

However, subsection 124-860(5) states that subsection 124-860(4) does not apply to a transferee that is the trustee of the transferor. ATO ID 2010/72 makes it clear that the roll-over under Subdivision 124-N is available to the unit trust and its unitholders where all the unit trust's CGT assets are transferred to its corporate trustee, provided all the other conditions of Subdivision 124-N are satisfied.

Subsection 124-860(6) requires that:

Just after the end of the trust restructuring period:

(a)  each entity that owned interests in a transferor just before the start of the trust restructuring period must own replacement interests in the transferee in the same proportion as it owned those interests in the transferor; and

(b)  the market value of the replacement interests each of those entities owns in the transferee must be at least substantially the same as the market value of the interests it owned in the transferor or transferors just before the start of the trust restructuring period.

'Replacement interests' is defined in paragraph 124-870(1)(b) as the shares in the transferee given to the owners of the original interests in exchange for the ownership of all their units under the trust restructure.

Under paragraph 124-860(6)(a), the proportion of interests each entity owned in the transferor must be the same as their ownership proportion in the transferee just after the end of the TRP. Under paragraph 124-860(6)(b), the market value of interests each entity owned in the transferor just before the start of the TRP must also be the same as their interests in the transferee just after the end of the TRP.

The requirements of subsection 124-860(6) are satisfied on the basis that the Unitholders will be issued ordinary shares in the Company in the same proportion as their ownership of units in the Trust with the result that they will own shares in the Company in the same proportion as they owned units in the Trust. Further, the market value of each Unitholder's shares in the Company just after the TRP will also be substantially the same as the market value of their units in the Trust just before the TRP. This is on the basis that all the assets and liabilities of the Trust will be transferred to the Company.

In summary, all the conditions in subsection 124-855(1) are satisfied and a roll-over is available for the restructure.

Both transferor and transferee must choose roll-over

Section 124-865 provides that a roll-over is only available for the transferor and transferee if both the transferor and transferee choose to obtain it. If they do, the consequences for the transferor and transferee are set out in section 124-875.

An assumption is made for the purposes of this ruling that both the Trustee and the Company will choose to obtain the roll-over under Subdivision 124-N. The consequences under section 124-875 (including subsection 124-875(1)) will therefore apply.

Consequences for transferor

Under subsection 124-875(1), any capital gain or capital loss from CGT event A1 happening to the transferor under the trust restructure is disregarded even if CGT event J4 applies. However, the effect of the roll-over may be reversed under CGT event J4 if the transferor does not cease to exist within 6 months (section 104-195).

There are 2 exceptions to the roll-over:

As mentioned, the transfer of the assets from the Trust to the Company is a disposal of a CGT asset and generally gives rise to CGT event A1 under section 104-10. Since the Trust and the Company will both elect to choose the roll-over, the Trust can disregard capital gains or capital losses arising from transfer of the assets under the restructure, except assets that are trading stock. Subsection 124-875(6) does not apply since the Company is an Australian resident.

Question 3

Summary

Yes. The conditions for automatic depreciation roll-over relief under table item 2A in subsection 40-340(1) are satisfied. Roll-over relief under section 40-345 is available for the Trust, including that there is no balancing adjustment for the Trust under section 40-285.

Detailed Reasoning

Under paragraph 40-295(1)(a), a 'balancing adjustment event' occurs for a depreciating asset if you stop 'holding' the asset. Section 40-40 contains a table that is used to work out which entity 'holds' a depreciating asset. Under table item 10 in section 40-40 for any depreciating asset the holder of the asset is the entity that is the 'owner' or the legal owner if there is both a legal and equitable owner.

The word 'owner' is not defined in the ITAA 1997 and, accordingly, has its ordinary meaning. The term 'entity' is defined in section 960-100 and includes a body corporate - paragraph 960-100(1)(b). Where a legal person, such as a body corporate, has a number of different capacities in which the person does things, subsection 960-100(3) provides that the person is taken to be a different entity in each of those capacities. Accordingly, a company acting in its capacity as trustee of a trust is a different and distinct entity from the same company acting in its own capacity.

In the present case, when the Trust disposes of a depreciating asset to the Company, this will give rise to CGT event A1 under section 104-10 (as explained above) and also a balancing adjustment event under paragraph 40-295(1)(a) on the basis the Company (in its capacity as Trustee) stops being the owner (and holder under table item 10 in section 40-40) of the asset. The Company (in its personal capacity and as a distinct entity from the Trustee) will become the new owner and holder of the depreciating asset.

Balancing adjustments in respect of depreciating assets held and whose decline in value is worked out under Subdivision 40-B are worked out under section 40-285 and involve either an amount included in your assessable income or a deduction depending on the asset's termination value compared to its adjustable value before the balancing adjustment event.

Automatic roll-over relief is provided under subsection 40-340(1) if:

(a)  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

(b)  the disposal involves a CGT event; and

(c)   the conditions in an item in this table are satisfied.

...

Table item 2A in subsection 40-340(1) covers the transfer of a CGT asset of a trust to a company under a trust restructure where both entities are able to choose a roll-over under Subdivision 124-N for the CGT event.

As concluded, both the transferor and transferee can choose the roll-over since the conditions for Subdivision 124-N have been satisfied. The Trust therefore satisfies table item 2A in subsection 40-340(1) and will therefore be entitled to automatic roll-over relief under section 40-340.

The roll-over relief is outlined under section 40-345, which provides that section 40-285 does not apply to the balancing adjustment event for the transferor, and the transferee can deduct the decline in value of the depreciating asset using the same method and effective life that was being used by the transferor.

Question 4

Summary

Section 70-90 will not apply since the proposed transfer of trading stock by the Trust to the

Company will not constitute a disposal of trading stock.

Detailed Reasoning

Subsection 70-90(1) provides:

If you dispose of an item of your trading stock outside the ordinary course of a business:

(a)  that you are carrying on; and

(b)  of which the item is an asset;

your assessable income includes the market value of the item on the day of the disposal.

The consequences of subsection 70-90(1) applying to the transfer of trading stock under the Proposed Restructure are as follows:

Subsection 70-90(1) applies where the taxpayer 'disposes' of an item of trading stock. The words 'dispose of' for the purposes of subsection 70-90(1) is not defined in the ITAA 1997. The word 'dispose' in the context of the now repealed subsection 36(1) of the ITAA 1936 (the predecessor to section 70-90) was considered by the High Court of Australia in Rose v Federal Commissioner of Taxation (1951) 84 CLR 118 (Rose). In Rose, it was stated in reference to the former provision that:

... In employing the words "dispose of" s.36 doubtless meant to include every alienation of trading stock. "Disposition" and "dispose of" are expressions of the widest import. But the subject of the disposition must be considered as well as the ambit of the expression "dispose of".

Section 36 is concerned with the disposal of the whole or part of the assets of a business when trading stock is included in the disposition....When s.36 speaks of disposing of the assets of a business it is speaking of a transfer of the proprietor's ownership of the assets, including the immediate right to their possession, subject of course to any encumbrance, whether existing or newly created...Plainly it is directed at the disposal of the entirety of ownership in the assets and not the conversion of single ownership into collective ownership.

(Emphasis added)

Taxation Determination TD 96/2 Income tax: can section 36A of the Income Tax Assessment Act 1936 apply if a sole trader who owns trading assets declares himself or herself to be a trustee of a discretionary trust over the assets? (TD 96/2) follows the decision in Rose and notes that former section 36 of the ITAA 1936 only applied where there is a disposal of the entirety of the ownership of the asset.

The view in TD 96/2 is relevant to the treatment of the trading stock in this ruling and will be adopted.

Under the Proposed Restructure, the Trust will transfer all its trading stock to the Company. In accordance with the views in Rose and TD 96/2, since a disposal of trading stock requires the disposal of the entirety of the ownership interest in an asset, not just a single aspect of that ownership, there will be no disposal of trading stock under the Proposed Restructure where the Company as Trustee holds legal title to the trading stock and will continue to hold this title after the proposed transfer.

Therefore there is no disposal of trading stock for the purposes of subsection 70-90(1) and that provision does not apply. Questions 5 and 6 deal with how the transfer of the trading stock under the Proposed Restructure should be accounted for.

Question 5

Summary

The Trust will include the book value of its trading stock in its assessable income when it transfers the trading stock to the Company.

Detailed Reasoning

The Trust currently holds its trading stock at cost in its books. Under the Proposed Restructure, the Trust will transfer all its assets (including trading stock) to the Company which will acquire all of the Trust's assets and liabilities and issue shares to Unitholders as consideration.

Since section 70-90 does not apply, there is no requirement for the Trust to include in its assessable income the market value of the trading stock transferred to the Company. The Commissioner accepts that the Trust can use the book value of its trading stock when transferring the stock to the Company.

The transfer of stock at cost will result in an assessable amount (under section 6-5) for the Trust equal to the total cost of the stock (which is the same amount as the deductions it incurred under section 8-1 when the stock was acquired). Since the Trust will also obtain a deduction (in the year of the restructure) for the total cost of the trading stock under subsection 70-35(3), this will result in a net tax outcome of nil to the Trust.

Question 6

Summary

The Company will use the book value of the trading stock acquired from the Trust as the cost of its trading stock for the purposes of Division 70.

Detailed Reasoning

The Commissioner accepts that the Trust can use the book value of its trading stock when transferring the stock to the Company. Therefore, the Company will acquire the trading stock at book value and use this as the cost of its trading stock for the purposes of Division 70.

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