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Ruling

Subject: Exchange of units in a unit trust for shares in a company

Question

Will the disposal of units in a Unit Trust by a unit holder, to a newly formed company qualify for rollover relief pursuant to Subdivision 124-H of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

There are two unit holders in the Unit Trust and both unit holders wish to sell their units in the Unit Trust to a newly formed company in exchange for shares in that company.

The company is yet to be created/formed so the actual name of the company has not been decided upon.

The two unit holders in the Unit Trust together own 100% of the units. Both of these unit holders are referred to as the exchanging members for the purposes of this application.

Under the proposed scheme to reorganise its affairs, the exchanging members will be disposing of their units to the company in exchange for shares in the company and nothing else.

You have advised that the requirements of sections 124-450 and 124-465 will be compiled with.

The units in the Unit trust were issued by the trust after the 1986 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 124-440

Income Tax Assessment Act 1997 Section 124-450

Income Tax Assessment Act 1997 Section 124-445

Income Tax Assessment Act 1997 Section 124-465

Income Tax Assessment Act 1997 Section 124-470

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'.

Reasons for decision

All legislative references referred to herein are from the ITAA 1997, unless otherwise stated.

Summary

The trust may choose to obtain a roll-over when the affairs of the Unit Trust are being reorganised pursuant to a reorganisation scheme if the requirements found in Subdivision 124-H are complied with.

Detailed reasoning

The roll-over provisions in Subdivision 124-H relating to an exchange of units in a unit trust for shares in a company contain a number of conditions for eligibility to choose roll-over relief. The main conditions in relation to a disposal case that are relevant to the Trust Scheme are set out in sections 124-445, 124-450 and 124-465 and are:

§ there must be more than one entity that owns all the units in the unit trust (the exchanging members);

§ there must be a scheme for reorganising the trust's affairs and the consideration on disposal of the units by the exchanging members must consist of shares in the company and nothing else;

§ all unit holders must dispose of their units in exchange for shares in the company;

§ the company must own all the units in the unit trust just after all the exchanging members have disposed of their units in the unit trust (the completion time);

§ just after the completion time, each unit holder must own a whole number of shares in the company;

§ just after the completion time, each unit holder must own a percentage of the shares in the company that were issued to all unit holders that is equal to the percentage of the units in the unit trust that the unit holder owned;

§ just after the completion time, the unit holders must own all the shares in the company, or entities other than those unit holders must own no more than five shares in the company and the market value of those shares is such that it is reasonable to treat the unit holders as owning all the shares;

§ the shares issued in the company must not be redeemable shares; and

§ the ratio test in subsection 124-450(3) is met.

You have confirmed that you are a unit holder of the unit trust, and together with another entity own all the units in the Unit Trust. Further that under the proposed scheme to reorganise its affairs, the exchanging members will be disposing of their units to the company in exchange for shares in the company and nothing else.

You have advised that the requirements of sections 124-450 and 124-465 will be compiled with.

As stated in Subsection 124-465(5), the company must choose that the rules in section 124-470 apply. It must make its choice within two months after the completion time, or within such further time as the Commissioner allows.

The trust may choose to obtain a roll-over when the affairs of the Unit Trust are being reorganised pursuant to a reorganisation scheme if the requirements found in Subdivision 124-H are complied with.