Edited version of private ruling

Authorisation Number: 1011792414182

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Ruling

Subject: Group restructure

Question 1

Will any of the replacement-asset roll-overs in Division 124 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to you as a result of the restructure?

Answer

Yes.

Question 2

If any of the replacement-asset roll-overs in Division 124 of the ITAA 1997 will apply to you, will you be required to make any elections or choices in relation to the relevant roll-overs?

Answer

Yes.

Question 3

Will there be any implications for you under Division 40 of the ITAA 1997 in relation to the transfer of depreciable assets as part of the restructure?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You form part of a group which carries on a business. The current structure is as shown in the following diagram:

Trusts A, B, C and D are all discretionary trusts holding the stated percentage of either units or shares as indicated. The percentage equates to both the percentage of units/shares and the percentage of market value, as all shares and units are of a single class of general or ordinary units. None of the units or shares are held as trading stock.

It is proposed that a restructure will occur in four stages, all of which will occur on the same day.

Stage 1 - Unit Trust A to roll into new company

A new company is to be established with ordinary shares issued to Trusts A, B, C and D in the same proportion as their current unit holdings in Unit Trust A. The shares will be issued with a par value equal to the market value of all assets held by Unit Trust A as consideration for those same assets.

Unit Trust A will then wind up, and all existing units will be cancelled.

Stage 2 - Unit Trust B to roll into you.

You are currently a trustee company, and have never performed any activities except in this capacity. Your assets are limited to a small amount of cash which relate to the ordinary shares issued at $X each, currently held 25% each by Trusts A, B, C and D.

It is proposed that you will issue additional ordinary shares at $X to Trusts A, B, C and D in the same proportion as their current unit holdings in Unit Trust B. The additional shares will be issued at a value equal to the market value of all assets (including depreciable plant and equipment) held by Unit Trust B as consideration for those same assets.

Unit Trust B will then wind up, and all existing units will be cancelled.

Stage 3 - You are to acquire shares in Company

You will acquire all shares in Company at market value. As consideration you will issue $X ordinary shares in yourself to the existing owners, Trusts A, B, C and D in the same proportion as their current shareholdings in Company.

Stage 4 - You are to acquire shares in the new company

You will acquire all shares in the new company at market value. As consideration you will issue $X ordinary shares in yourself to the existing owners, Trusts A, B, C and D in the same proportion as their current shareholdings in Company.

The final structure after completion of all stages will look as follows:

You will be acquiring all of the CGT assets from Unit Trust B as part of the restructure, with the exception of some cash required by Unit Trust B to pay debts. The assets transferred will include depreciable assets.

Unit Trust B has fixed income and capital components.

You are not an exempt entity and have no losses of any kind.

The market value of the replacement shares in you just after the restructure will be the same as the market value of the interests of the unit holders in Unit Trust B in that entity just before the restructure.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 40-345

Income Tax Assessment Act 1997 Subsection 100-20(1)

Income Tax Assessment Act 1997 Subsection 103-25(1)

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-70

Income Tax Assessment Act 1997 Section 104-195

Income Tax Assessment Act 1997 Section 124-855

Income Tax Assessment Act 1997 Section 124-860

Income Tax Assessment Act 1997 Section 124-865

Income Tax Assessment Act 1997 Section 124-870

Income Tax Assessment Act 1997 Section 124-875

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 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 of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Question 1

Division 124 of the ITAA 1997 provides replacement-asset roll-overs which allow you, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event happens. It involves your ownership of one CGT asset ending and you acquiring another one.

You make a capital gain or loss only if a CGT event happens (subsection 100-20(1) of the ITAA 1997).

In your case, the results of the group restructure will be as follows:

(a) you will issue additional ordinary shares at $X to Trusts A, B, C and D in the same proportion as their current unit holdings in Unit Trust B

(b) you will acquire all shares in Company and as consideration you will issue $X ordinary shares in yourself to the existing owners, Trusts A, B, C and D

(c) you will acquire all shares in the new company and as consideration you will issue $X ordinary shares in yourself to the existing owners, Trusts A, B, C and D, and

(d) you will acquire CGT assets, including depreciable assets, from Unit Trust B.

No CGT event will happen in your case as a result of the above acquisitions or the share issues.

The replacement-asset roll-over in Subdivision 124-N of the ITAA 1997, relating to the disposal of assets by a trust to a company, will be available in relation to the disposals of CGT assets to you by Unit Trust B if the following conditions in section 124-855 of the ITAA 1997 are satisfied:

(a) a trust, or 2 or more trusts, (the transferor) dispose of all of 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 of the ITAA 1997 are met.

Condition (a)

Unit Trust B is a trust and will be disposing of all of its CGT assets to you, a company limited by shares, and this condition will be satisfied.

Condition (b)

CGT event E4 under section 104-70 of the ITAA 1997 happens if the trustee of a trust makes a distribution to a beneficiary of the trust in respect of the beneficiary's ongoing unit or interest in the trust and some or all of the payment is not assessable.

The Explanatory Memorandum to the Taxation Laws Amendment Bill (No 4) 2002 states in paragraph 2.15 that a trust in which all the beneficiaries' interests have a fixed capital component and a discretionary income component satisfy the requirement. However, a trust where all the beneficiaries' interests have a fixed income component but a discretionary capital component are not eligible for the roll-over. The roll-over does not apply where the trust is a discretionary trust.

Unit Trust B has fixed income and capital components, and this condition will therefore be satisfied.

Condition (c)

The requirements in section 124-860 of the ITAA 1997 are summarised as follows:

(a) all of the CGT assets owned by the transferor (except CGT assets retained to pay existing or expected debts of the transferor) must be disposed of to the transferee during the 'trust restructuring period' specified in subsection 124-860(2) of the ITAA 1997

(b) the transferee must satisfy the following requirements:

a. the transferee must not be an exempt entity

b. the transferee must be a company that has never carried on commercial activities*

c. the transferee must be a company that has no CGT assets other than small amounts of cash or debt* and

d. the transferee must be a company that has no losses of any kind*.

(c) just after the trust restructuring period, 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 that transferor. In addition, the market value of the replacement interests each of those entities owns in the transferee just after the restructure will be substantially the same as the market value of the interests it owned in the transferor just before the start of the trust restructuring period.

* This condition does not apply to a transferee that is the trustee of the transferor.

The facts provided as part of the private ruling application indicate that the above requirements in section 124-860 of the ITAA 1997 are satisfied, and this condition will therefore be satisfied.

Conclusion

You satisfy all of the requirements to choose the replacement-asset roll-over in Subdivision 124-N of the ITAA 1997 in relation to the disposal of the CGT assets of Unit Trust B to you.

The effect of the roll-over on Unit Trust B and you is contained in section 124-875 of the ITAA 1997.

Note

CGT event J4 under section 104-195 of the ITAA 1997 happens if Unit Trust B fails to cease to exist within a specified period (usually six months) after the start of the trust restructuring period.

Question 2

Under section 124-865 of the ITAA 1997, the replacement-asset roll-over in Subdivision 124-N of the ITAA 1997 is only available for Unit Trust B and you if both you and Unit Trust B choose to obtain it.

Subsection 103-25(1) of the ITAA 1997 requires that any choice made by you must be made:

(a) by the day you lodge your income tax return for the income year in which the relevant CGT event happened or

(b) within a further time allowed by the Commissioner.

Question 3

Division 40 of the ITAA 1997 provides a deduction for the decline in value of a depreciating asset.

Item 2A of the table in subsection 40-340(1) of the ITAA 1997 provides roll-over relief in relation to the transfer of a CGT asset of a trust to a company under a trust restructure where the transferor and transferee are able to choose a roll-over under Subdivision 124-N of the ITAA 1997 for the CGT event.

Section 40-345 of the ITAA 1997 sets out what the relief is for both the transferor and the transferee.