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Subject: Unit trust leaves a consolidated group
Relevant facts
Trust 1 holds all of the shares in the head company of a consolidated group (A Co).
Two of A Co's wholly-owned companies (A Co and B Co) are subsidiary members of the consolidated group.
A Co acquired 100% of the shares in B Co and C Co before 20 September 1985.
It is proposed to restructure the corporate group. Under the restructure a new unit trust (New Trust) will be established by A Co. 100% of the units in New Trust will be held by A Co. New Trust will be a member of the A Co consolidated group. New Trust will be interposed between A Co, and B Co and C Co by A Co transferring the shares in B Co and C Co at their market value to New Trust in exchange for units in New Trust of the same value.
A Co will then transfer 100% of its units in New Trust to Trust 1 at the direction of its shareholder (Trust 1).
Reasons for Decision
Summary
The pre-CGT proportion of the membership interests in B Co, and in C Co, when they joined the consolidated group is 100%.
All of the membership interests that New Trust holds in B Co and C Co will, therefore, be pre-CGT membership interests when they leave the consolidated group and are transferred to Trust 1, subject to the integrity rules contained in sections 711-70 and 711-75 of the ITAA 1997.
Detailed reasoning
XYZ, as head company of the consolidated group, has chosen to apply the new rules (pre-CGT proportion rules) to preserve the pre-CGT status of the membership interests in B Co and C Co.
Under those rules, the pre-CGT status of membership interests held in a joining entity is preserved by:
· working out the proportion of pre-CGT membership interests in a joining entity, and
· subject to integrity rules, attaching pre-CGT status to an equivalent proportion of membership interests when the entity leaves the group.
When an entity joins a consolidated group the pre-CGT proportion of the membership interests is the market value of the pre-CGT membership interests held by members of the group divided by the market value of all of the membership interests held by members of the group (subsection 705-125(2) of the ITAA 1997).
When B Co, and C Co, joined the A Co consolidated group all of the membership interests in each company were owned by A Co and were acquired by A Co prior to 20 September 1985, such that they are all pre-CGT membership interests. The pre-CGT proportion for both B Co and C Co is, therefore, 100%.
When the joining entity is a trust, the membership interests taken into account are the units and interests in the trust (subsection 705-125(4) of the ITAA 1997).
When New Trust joined the consolidated group none of the units in the trust were pre-CGT units. The pre-CGT proportion is therefore nil.
When an entity leaves a consolidated group, the number of membership interests held by members of the group which are treated as pre-CGT assets is worked out using the following formula in subsection 711-65(4) of the ITAA 1997:
Number of membership interests in the leaving entity held by members of the old group |
x |
Leaving entity's pre-CGT proportion |
When New Trust leaves the consolidated group the pre-CGT proportion is nil. Therefore, none of the units in New UT will be pre-CGT units.
When B Co and C Co leave the consolidated group (when New Trust is disposed of by A Co) the pre-CGT proportion will be 100%. Therefore, all of the membership interests that New Trust holds in B Co and C Co will be pre-CGT membership interests when they leave the consolidated group and are transferred to Trust 1, subject to the integrity rules contained in sections 711-70 and 711-75 of the ITAA 1997.