Edited version of private ruling

Authorisation Number: 1011683630978

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Ruling

Subject: Capital Gains Tax Rollover

Question 1

Will there be a capital gain made by the rulee on the admission of capital partners to the partnership?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The business has equity partners and non-equity partners. The equity partners own all the assets of the partnership and have a right to the residual amount of partnership income after entitlements are paid to the non-equity partners. The rulee is an equity partner in a business.

The non-equity partners are entitled to a share of partnership profit but have no interest in the assets of the partnership. The non-equity owners are entitled to a fixed share of the partnership profit each year.

It is proposed that the equity partners will become shareholders in a company and that the assets of the partnership will be transferred to the company. The Partnership Agreement will be amended to facilitate the proposed arrangement.

The company will be a proprietary company limited by shares. It will have only ordinary shares on issue at all relevant times even though the constitution allows for the issue of shares with special terms and conditions or rights and privileges including the issue of redeemable shares.

Following the issue of new shares to the equity partners and subsequent subscription for shares by the equity partners, the shares will be held by the equity partners in proportion to their interests in the assets of the partnership.

A number of non-equity partners will be admitted as capital partners into the partnership and they will be bare trustees of their capital units in the partnership for the company. The legal interest in the capital units will be held by non-equity partners who, by virtue of being salaried partners, are not participating in the rollover. They hold no interests in the company.

Relevant legislative provisions

Income Tax Assessment Act 1997 104-10,

Income Tax Assessment Act 1997 106-5,

Income Tax Assessment Act 1997 106-50,

Income Tax Assessment Act 1997 122-125,

Income Tax Assessment Act 1997 122-130 and

Income Tax Assessment Act 1997 122-135.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement the rulee asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

Reasons for decision

Summary of decision

We consider that the conditions for rollover are not satisfied as the requirements of section 122-125 of the ITAA 1997 are not met.

Detailed reasoning

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

Can rollover under subdivision 122-B apply to the proposed arrangement?

For roll-over to be available a number of requirements must be met

1. All of the partners must dispose of the CGT assets of the partnership to the company as a result of a trigger event (section 122-125)

2. The consideration the partners receive must be only shares (section 122-130) and

3. All other requirements must be satisfied (section 122-135)

1. The equity partners must dispose of their interests in the CGT assets of the partnership to a company as a result of a trigger event.

The relevant trigger events are listed in the table contained in section 122-125 and are CGT events A1, D1, D2, D3 and F1.

It is submitted by the applicant that the equity partners dispose of their interests in the CGT assets of the partnership by giving up their interests in the assets of the partnership as a result of the capital partners being admitted to the partnership and being issued the capital units to hold on trust for company.

In this case the capital units are issued to the three non-equity partners who declare that they will hold the capital units on trust for the company. This means that while the partners dispose of their interests in the assets to the capital partners (CGT event A1), the assets are not disposed of to the company as it is only following the declaration of trust that the company can become absolutely entitled to any assets of the trust. CGT event E1 would occur upon the capital partners declaring a trust over the assets. Section 106-50 provides that if a beneficiary is absolutely entitled to a CGT asset as against the trustee the CGT provisions apply to an act of the trustee as if the beneficiary had done it. However section 106-50 does not have any application to an entity that disposes of an asset to a trust where a beneficiary is absolutely entitled.

If the trust is in existence at the time of the issue of the capital units to the capital partners then CGT event E2 would happen as a result of the equity partners' transfer of their interests to the trust. As CGT event E2 is not one of the relevant CGT events in the table contained in section 122-125 there will not be a trigger event which would allow the equity partners to obtain roll-over under subdivision 122-B.

As the equity partners have not disposed of their interests in the CGT assets of the partnership to the company it is unnecessary to consider the other requirements.