Edited version of private ruling

Authorisation Number: 1011846867293

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Ruling

Subject: Trust Restructure- Same asset roll-over- Scrip-for-scrip roll-over

Issue 1

Question 1

Can the unit holders of Unit Trust A use the concession available in Sub-division 124N of the Income Tax Assessment Act 1997 (ITAA 1997) to obtain rollover relief to restructure the Unit Trust to a company?

Answer

Yes

Issue 2

Question 1

Can scrip for scrip roll-over be obtained by the shareholders of Company A if they receive shares in Company B in exchange for their shares in Company A shares under section 124-780 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 2013

The scheme commences on:

1 July 2012

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.

Unit Trust A and Company B would like to amalgamate. To achieve this amalgamation they will complete the following steps:

Step 1

Company A is incorporated with an initial shareholding identical to the ownership of Unit Trust A. The unit holders will be issued shares in the company in the same proportion as their existing unit holding for no consideration.

Step 2

The Unit Trust A deed will be amended to insert a paragraph empowering the Trustee to transfer all assets to Company A for no consideration.

Step 3

All assets of Unit Trust A will be transferred to Company A.

Step 4

Vest Unit Trust A within X months of the commencement of this process.

Step 5

Company A's shareholders will transfer their shares to Company B and receive shares in Company B for the same value.

Company A will apply for a scrip for scrip roll-over under section 124-780

Company B will own 100% of Company A

The shareholders of Company A will have the same rights in Company B (voting, dividends etc) as they had in Company A as per section 619(2) and (3) of the Corporations Act.

1. CGT Event E4 is capable of applying to all the units in the Unit Trust A.

2. Company A is not an exempt entity.

3. Company A has never traded.

4. The market value of the replacement shares in Company A will be the same as the market value of the units held in Unit Trust A.

5. Both the unit holders of Unit Trust A and the shareholders of Company A choose to obtain roll-over under s124N.

6. There are no foreign residents as unit holders of Unit Trust A.

7. None of the unit holders of Unit Trust A hold the units as trading stock, nor does the shareholders of Company A.

8. The shareholders of Company A and Company B will jointly choose to obtain rollover.

9. The shareholders in Company A would have made a capital gain in relation to their shares except for the application of the roll-over.

10. The shareholders of Company A will advise Company B in writing the cost base of their shares just before the CGT event occurs.

11. The share transfer arrangement is one that will allow the shareholders of Company A to participate in Company B's offer on the same terms.

12. The shareholders of Company A and Company B are not members of the same linked group and there is no significant stakeholder.

13. Company B has agreed to purchase the current business of the Unit Trust A.

14. The Unit Trust A is not a discretionary trust.

15. Unit Trust A has no significant or common stakeholders

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 124–780,

Income Tax Assessment Act 1997 Section 124–785,

Income Tax Assessment Act 1997 Section 124–795,

Income Tax Assessment Act 1997 Section 124–800 and

Income Tax Assessment Act 1997 Subdivision 124N.

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 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 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.

Issue 1 Question 1

Can the unit holders of Unit Trust A use the concession available in Sub-division 124N of the Income Tax Assessment Act 1997 (ITAA 1997) to obtain rollover relief to restructure the Unit Trust to a company?

Summary

Yes, the unit holders of Unit Trust A (the Unit Trust) can use the concession available in Sub-division 124N of the ITAA 1997 to obtain rollover relief to restructure the Unit Trust to a company, as the conditions in the subdivision are satisfied.

Detailed reasoning

Rollover relief: Subdivision 124-N

Under subsection 124-855(1) a rollover may be available for a restructure if:

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

· CGT event E4 in section 104-70 is capable of applying to all of the units and interests in the trust; and

· the requirements in section 124-860 are met.

Under the Scheme that is the subject of this ruling, the Unit Trust A (the Unit Trust) will dispose of all of its CGT assets to Company A, which is a company limited by shares. CGT event E4 is capable of applying to all of the units in the Unit Trust (see paragraph 104-70(1)(a)).

Therefore, subject to the requirements in section 124-860 being met, rollover under subsection 124-855(1) is available.

Requirements for roll-over for the transferor and the transferee

The transferor (the Unit Trust) and the transferee (Company A) are eligible to choose rollover if the requirements in section 124-860 are also met.

Subsection 124-860(1) requires that all of the CGT assets owned by the transferor (the Unit Trust) must be disposed of to the transferee (Company A) during the trust restructuring period, ignoring any CGT assets retained by the Unit Trust to pay existing or expected debts of the Unit Trust.

Subsection 124-860(2) states that the trust restructuring period:

· starts just before the first CGT asset is disposed of to the transferee (Company A) under the trust restructure; and

· ends when the last CGT asset of the transferor (the Unit Trust) is disposed of to the transferee (Company A).

Subsection 124-860(1) will be satisfied by Step 3 of the proposed restructure.

Subsection 124-860(3) requires that the transferee (Company A) must not be an exempt entity, as defined in section 995-1. Company A satisfies this requirement. It is not an entity whose ordinary income and statutory income is exempt from income tax because of a Commonwealth law; nor is it an untaxable Commonwealth entity.

Subsection 124-860(4) requires that the transferee (Company A) must be a company that:

· has never carried on commercial activities;

· has no CGT assets other than small amounts of cash or debt; and

· has no losses of any kind.

Company A will be a newly incorporated company. It will therefore satisfy all of the requirements of subsection 124-860(4).

Subsection 124-860(6) requires that, just after the end of the trust restructuring period:

· each entity (unit holder) that owned interests (units) in the transferor (the Unit Trust) just before the start of the trust restructuring period must own replacement interests in the transferee (shares in Company A) in the same proportion as it owned those units in the Unit Trust; and

· the market value of the replacement interests (shares) each of those entities owns in the transferee (Company A) must be at least substantially the same as the market value of the interests (units) it owned in the transferor (the Unit Trust) just before the start of the trust restructuring period. The trust restructuring period starts just before the first CGT asset is disposed of to Company A (the transferee) under the trust restructure (happening after 11 November 1999) and ends when the last CGT asset of the Unit Trust (the transferor) is disposed of to the transferee.

Just after the end of the trust restructuring period, the unit holders of the Unit Trust will own shares in Company A in the same proportion as they owned units just before the start of the trust restructuring period. Additionally, the market value of the shares owned by each shareholder in Company A will be at least substantially the same as the market value of the units which it owned in the Unit Trust just before the start of the trust restructuring period. Thus, subsection 124-860(6) will be satisfied.

Therefore, all the requirements in section 124-860 are met and both the Unit Trust and Company A can choose rollover relief.

Under section 124-865 roll-over is only available for the transferor (the Unit Trust) and transferee (Company A) if both the transferor and transferee choose to obtain it. Since both the Unit Trust and Company A will be choosing to obtain roll over, the roll over is available.

Consequences of roll-over for the transferor and the transferee

Any capital gain or capital loss from CGT event A1 happening to the Unit Trust under the trust restructure is disregarded (subsection 124-875(1)) and the first element of the cost base and reduced cost base for Company A of each CGT asset that Company A acquires under the trust restructure is the same as the cost base and reduced cost base of that asset for the Unit Trust just before the acquisition (subsection 124-875(2)).

However, subsection 124-875(5) provides that section 124-875 does not apply to a CGT asset if:

· the asset was an item of trading stock (as defined in section 995-1) of the Unit Trust and becomes an item of trading stock of Company A; or

· the asset was not an item of trading stock of the Unit Trust but becomes an item of the trading stock of Company A when it acquired it.

Also, if Company A is a foreign resident, section 124-875 only applies to a CGT asset that is taxable Australian property (as defined in section 995-1) just after Company A acquires it under the trust restructure (subsection 124-875(6)).

Requirements for roll-over for unit holders

Under subsection 124-870(1) a unit holder can choose to obtain a roll-over (whether or not the Unit Trust and Company A choose to obtain a roll-over) if:

(a) they own units or interests in the Unit Trust; and

(b) the ownership of all their units or interests ends under a trust restructure in exchange for shares in Company A.

The word 'exchange', which is used in paragraph 124-870(1)(b), is not specifically defined for income tax purposes in either the ITAA 1997 or the Income Tax Assessment Act 1936. The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 2002, which introduced Subdivision 124-N, does not discuss the meaning of the word 'exchange' in paragraph 124-870(1)(b). Therefore the ordinary meaning of 'exchange' applies.

The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne defines 'exchange' as:

a. the act of or an instance of giving one thing and receiving another in its place.

b. give or receive (one thing) in place of another.

The Macquarie Dictionary, 2001, revised 3^rd edition, The Macquarie Library Pty Ltd, North Ryde defines 'exchange' as:

to part with for some equivalent, giving up (something) for something else

Therefore, 'exchange' in paragraph 124-870(1)(b) means giving up units or interests in the trust and receiving shares in the company in its place.

The proposed restructure involves:

· Company A issuing shares to the unit holders in identical proportions to their existing unit holdings in the Unit Trust;

· the Trustee of the Unit Trust transferring all of the assets of the Unit Trust to Company A for no consideration; and

· the Unit Trust terminating within X months from the date of the transfer of the assets (at which time the unit holders' ownership of units will also end).

Therefore, the unit holders' ownership of units in the Unit Trust will end in exchange for shares in Company A. Subsection 124-870(1) will be satisfied.

The unit holders must make the choice for each unit they own in the Unit Trust (subsection 124-870(2)).

Also, as per subsection 124-870(5) roll-over does not apply to a unit holder's ownership of a unit ending under the trust restructure if:

· the unit was an item of their trading stock (as defined in section 995-1) and the corresponding shares in Company A become items of their trading stock when they acquire them; or

· the unit was not an item of their trading stock but the corresponding shares in Company A became items of their trading stock when they acquired them.

As the unit holders of the Unit Trust do not hold their units as trading stock and they will not hold the shares in Company A as trading stock subsection 124-870(5) is not applicable.

Therefore, the unit holders who are not disqualified by subsection 124-870(3) are eligible to choose rollover.

Unit holders who choose rollover cannot make a capital loss from a CGT event that happens to their units during the trust restructuring period (subsection 124-870(4)).

Consequences of roll-over for the unit holders

If a unit holder chooses to obtain the roll-over, a capital gain or a capital loss they make from the ending of their ownership of a unit in the Unit Trust is disregarded (subsection 124-15(2)).

Under subsection 124-15(3), the first element of the cost base for a unit holder of the shares in Company A that they acquire under the trust restructure is the total of the cost bases of all the units in the Unit Trust in respect of which they choose to obtain a roll-over (worked out when their ownership of the units ended) divided by the number of the shares in Company A. The first element of the reduced cost base of the shares in Company A is worked out similarly.

Issue 2 Question 1

Can scrip for scrip roll-over be obtained by the shareholders of Company A if they receive shares in Company B in exchange for their shares in Company A shares under section 124-780 of the ITAA 1997?

Summary

Yes, the scrip for scrip roll-over would be obtained by the shareholders of Company A if they receives shares in Company B in exchange for their shares in Company A shares under section 124-780 of the ITAA 1997, as the conditions in subdivision 124M are satisfied.

Detailed reasoning

Disposal of Company A shares to Company B

CGT event A1 happens if there is a change in the ownership of a CGT asset from one entity to another. The event happens when a contract to dispose of the asset is entered into, or if there is no contract, when the change of ownership occurs.

A Company A shareholder will make a capital gain from CGT event A1 happening if the capital proceeds from the disposal of a Company A share exceeds its cost base. A Company A shareholder will make a capital loss if those capital proceeds are less than the Company A share's reduced cost base.

The time when CGT event A1 happens determines the income year in which any capital gain or capital loss is made and whether the CGT discount applies to any capital gain.

Company A shareholder disposes of a Company A share to Company B under the Scheme, CGT event A1 will happen when the change of ownership occurs when the contract to dispose of the Company A shares is signed.

Capital proceeds

Section 116-20 provides that capital proceeds from a CGT event are the money and the market value of any property received or are entitled to be received (worked out at the time of the event happening).

The capital proceeds for Company A shareholders will be the share consideration received in respect of the transfer of the shares.

The capital proceeds Company A shareholders receive for the disposal of a Company A share is the equivalent market value of Company B shares.

Discount capital gains

An Company A shareholder who makes a capital gain from the disposal of the Company A shares, may be entitled to treat the gain as a discount capital gain in respect of those Company A shares that are held for at least 12 months provided the other requirements of Subdivision 115-A are satisfied (section 115-25).

Availability of scrip for scrip roll-over

Scrip for scrip roll-over enables a shareholder to disregard a capital gain they make from a share that is disposed of as part of a corporate restructure, including a merger, if the shareholder receives a replacement share in exchange.

The capital gain is disregarded completely if the only capital proceeds the shareholder receives are replacement shares. A capital gain will be only partially disregarded if, in addition to shares, there is cash consideration as part of the capital proceeds.

Requirements for scrip for scrip roll-over - Subdivision 124-M

Subdivision 124-M contains a number of conditions for, and exceptions to, the eligibility of a shareholder to choose scrip for scrip roll-over. The main conditions and exceptions that are relevant to the Scheme that is the subject of this Ruling are:

(a) shares are exchanged for shares in another company;

(b) the exchange occurs as part of a single arrangement;

(c) conditions for roll-over are satisfied;

(d) further conditions are not applicable; and

(e) exceptions to obtaining scrip for scrip roll-over are not applicable.

Shares are exchanged for shares in another company

Paragraph 124-780(1)(a) requires an entity (the original interest holder) to exchange a share for a share in another company.

This requirement is satisfied by an Company A shareholder who will receive Company B shares as the capital proceeds for the disposal of their Company A shares under the Scheme.

The exchange occurs as part of a single arrangement

Paragraph 124-780(1)(b) requires that shares in an entity be exchanged in consequence of a single arrangement.

In the context of the scrip for scrip roll-over, the merger of Company B and Company A under the Scheme is considered to be a single arrangement. The single arrangement must also satisfy the following conditions.

(a) 80% ownership

Paragraph 124-780(2)(a) requires that shares in an entity be exchanged in a single arrangement that results in another entity becoming the owner of 80% or more of the voting shares in the original entity.

This requirement will be satisfied as Company B (the acquiring entity) will become the owner of all the ordinary shares in Company A (the original entity) following the Scheme. Each of the ordinary shares satisfies the definition of a 'voting share' in subsection 995-1(1).

(b) All voting share owners participate

Paragraph 124-780(2)(b) requires that the exchange of shares is in consequence of a single arrangement in which at least all owners of voting shares in the original entity (apart from the acquiring entity or members of the acquiring entity's wholly-owned group) could participate.

This requirement will be satisfied because all Company A shareholders will be entitled to participate in the Scheme.

(c) Participation is on substantially the same terms

Paragraph 124-780(2)(c) requires that the exchange is in consequence of a single arrangement in which participation was available on substantially the same terms for all of the owners of interests of a particular type in the original entity.

This requirement will be satisfied because the Scheme provides that all the Company A shareholders will be entitled to participate in the Scheme on the same terms.

Conditions for roll-over are satisfied

Paragraph 124-780(1)(c) requires that the conditions for roll-over outlined in subsection 124-780(3) are met. These conditions must be met in relation to each Company A share for which scrip for scrip roll-over will be chosen.

The conditions in subsection 124-780(3) are as follows.

(a) The Company A shares are post-CGT shares

Paragraph 124-780(3)(a) requires that the original interest holder acquired their original interests on or after 20 September 1985.

This requirement will be satisfied as all of the Company A shares have been acquired after 20 September 1985 due to the fact that Company A was incorporated in 20XX.

(b) A Company A shareholder would otherwise make a capital gain

Paragraph 124-780(3)(b) requires that, apart from the rollover, the original interest holder would make a capital gain from a CGT event happening in relation to its original interest.

A capital gain will be made by an Company A shareholder from the disposal of an Company A share if the capital proceeds for the share are more than its cost base. Therefore, this condition is met.

(c) Company A shareholders receive replacement interests in the acquiring entity or the ultimate holding company

Paragraph 124-780(3)(c) requires that the replacement interest is in the acquiring entity or the ultimate holding company of the wholly owned group which includes the acquiring entity.

This requirement will be satisfied as the Company A shareholders will receive shares in Company B.

(d) An Company A shareholder must choose to obtain scrip for scrip roll-over

Paragraph 124-780(3)(d) requires that the original interest holder chooses the roll-over, or if section 124-782 applies, the original interest holder and the replacement entity jointly choose to obtain the roll-over.

Section 124-782 has no application in the Scheme since there are no significant stakeholders or common stakeholders under the arrangement.

Due to their eligibility, an Company A shareholder may choose to obtain roll-over in relation to the disposal of an Company A share.

Further conditions are not applicable

Subsection 124-780(4) provides that the additional requirements in subsection 124-780(5) must be satisfied if the original interest holder and the acquiring entity did not deal with each other at arm's length and:

· neither the original entity nor the replacement entity had at least 300 members just before the arrangement started (paragraph 124-780(4)(a)); or

· the original interest holder, the original entity and the acquiring entity were all members of the same linked group just before the arrangement started (paragraph 124-780(4)(b)).

Paragraph 124-780(4)(a) will not apply because even though both Company A and Company B will have less than 300 members just before the arrangement started, they were dealing with each other at arm's length. Paragraph 124-780(4)(b) will not apply as Company A shareholders, Company A and Company B will not be members of the same linked group just before the arrangement commences.

Exceptions to obtaining scrip for scrip roll-over are not applicable

Section 124-795 contains a number of exceptions where scrip for scrip rollover cannot be chosen. The exceptions in section 124-795 are as follows.

(a) Company A shareholders are residents of Australia

Subsection 124-795(1) provides that roll-over is not available if, just before the disposal, the original interest holder is a foreign resident unless, just after the acquisition of the replacement interest, the replacement interest is not taxable Australian property.

All of the Company A shareholders who are residents of Australia at the time of the scheme. As a consequence, the exception in subsection 124-795(1) will not apply to limit this Ruling.

(b) A capital gain cannot (apart from the roll-over) be otherwise disregarded

Paragraph 124-795(2)(a) provides that the roll-over is not available if any capital gain the original interest holder might make from their replacement interest would be disregarded (except because of a roll-over).

Whether a capital gain arising from the disposal of a Company A share will be disregarded under another provision of the ITAA 1997 (for example, the Company A shares are trading stock held by the Company A shareholder) is a question of fact for each shareholder. None of the shareholders hold Company A shares as trading stock i.e. this provision does not apply to the scheme.

(c) Acquiring entity is not a foreign resident

Paragraph 124-795(2)(b) provides that the roll-over is not available if the original interest holder and the acquiring entity are members of the same wholly owned group just before the original interest holder stops owning their original interest and the acquiring entity is a foreign resident.

This exception will not apply as the Company A shareholders and Company B will not be members of the same wholly-owned group just before the proposed Scheme is implemented. In addition, Company B is not a foreign resident company.

(d) No roll-over is available under Division 122 or Subdivision 124-G

Subsection 124-795(3) provides that the roll-over is not available if a roll-over can be chosen under Division 122 or Subdivision 124-G.

This exception will not apply as the circumstances of the Scheme are such that a roll-over pursuant to Division 122 or Subdivision 124-G is not available.

Consequences of roll-over

Scrip for scrip roll-over enables a shareholder to disregard all or part of a capital gain from a share that is disposed of as part of a corporate take over or merger if the shareholder receives a replacement share in exchange.

If the only capital proceeds an Company A shareholder receives are replacement shares in Company B, and they are eligible for and chose the roll-over, the capital gain is disregarded completely (subsection 124-785(1)). All of the cost base of the Company A shares can be allocated to the replacement Company B shares (subsection 124-785(2)).

Acquisition date of Company B shares

The acquisition date of Company B shares is the date that they were issued to each Company A shareholder.

For Company A shareholders who choose scrip for scrip roll-over, the acquisition date of their Company B shares for CGT discount purposes is the date they acquired the corresponding Company A shares that were disposed of for the relevant Company B shares.