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Ruling

Subject: Roll-over relief - depreciating assets

Question 2

Will the Trust be treated to have disposed of the Assets for the purposes Division 40 and/or the CGT provisions?

Answer

Yes.

Question 3

If there is a disposal and a gain is made, will rollover relief be available to the Trust either under subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA1997) and/or section 40-340 of the ITAA1997?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2013

The scheme commences on:

1 July 2012.

Relevant facts and circumstances

The below diagram sets out the proposed arrangement:

Assets

Trustees for Trust → Trustee for New Entity

← 100% of the shares of the beneficiary

of New Trust (equal to the market value of Assets)

Relevant legislative provisions

Division 357 of schedule 1 of the Tax Administration Act 1953

Section 357-55 of schedule 1 of the Tax Administration Act 1953

Section 960-100 of the Income Tax Assessment Act 1997

Division 40 of the Income Tax Assessment Act 1997

Section 40-40 of the Income Tax Assessment Act 1997

Section 40-295 of the Income Tax Assessment Act 1997

Section 40-285 of the Income Tax Assessment Act 1997

Section 40-340 of the Income Tax Assessment Act 1997

Section 104-5 of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Section 118-24 of the Income Tax Assessment Act 1997

Sub-division 126-G of the Income Tax Assessment Act 1997

Division 106 of the Income Tax Assessment Act 1997

Section 106-50 of the Income Tax Assessment Act 1997

Sub-division 122A of the Income Tax Assessment Act 1997

Section 122-15 of the Income Tax Assessment Act 1997

Reasons for decision

Question 2

Detailed reasoning

"Entity" is a defined term in the ITAA 1997. Section 960-100 of the ITAA 1997 provides the meaning of entity, and states, at paragraph (f), that a trust is an entity.

The proposed arrangements relate to dealings between two trusts (the Trust and the trust for New Entity) with the same trustee. Although the two trusts have the same trustee, both trusts are separate entities for the purposes of the ITAA 1997, and can enter arrangements with each other.

The Assets held by the Trustee for the Trust have been treated as depreciating assets. As such, if the Trust stops holding the Assets in an income year, the Trust will have to make a balancing adjustment to its taxable income under sub-division 40-D of the ITAA 1997.

Section 40-40 of the ITAA 1997 provides the meaning of 'holds a depreciating asset'.

Items 5 and 6 of the table in section 40-40 deal with hire purchase arrangements, and states that the entity hiring the assets for use (economic owner) holds the depreciating assets.

Items 5 and 6 of the table in section 40-40 states:

The following example of the operation of section 40-40 in respect of a hire purchase is given in Example 2 of section 40-40.

Example 2: Sandra sells a packing machine to Jenny under a hire purchase agreement. Jenny holds the machine under item 6 because, although she is not the legal owner until she exercises her option to purchase, she possesses the machine now and can exercise an option to become its legal owner.

Jenny is reasonably expected to exercise that option because the final payment will be well below the expected market value of the machine at the end of the agreement. Sandra, as the machine's legal owner, would normally be its holder under item 10 but item 6 makes it clear that the legal owner is not the holder.

Accordingly, the Trustee for the Trust is the current economic owner of the Assets, and is therefore holder of the Assets.

If the Trustee then declares that the Assets are held on trust for New Entity, under a bare trust arrangement, the economic ownership changes from Trustee for the Trust to the Trustee for New Entity

Trustee for New Entity will become the economic owner and holder of the Assets under either Item 5 or 6 of the table in section 40-40.

Therefore, in accordance with section 40-295 of the ITAA 1997 a balancing adjustment event will occur (the Trustee of Trust will stop holding the Assets), and the resulting balancing adjustment must either be added to or deducted from the assessable income of the Trust (section 40-285 of the ITAA 1997), unless roll-over relief is available to the Trust under section 40-340 of the ITAA 1997.

Further, the change in beneficial ownership of the Assets would also be considered a CGT event under section 104-5 of the ITAA 1997; event A1 - disposal of a CGT asset. Section 104-10 of the ITAA 1997 provides that a CGT asset is disposed of under event A1 where ownership changes from one entity to another, unless the entity disposing of the asset retains beneficial ownership of the asset. Under the proposed arrangement the Trustee for the Trust will cease to have beneficial ownership of the Assets, and the Trustee for New Entity will become the beneficial owners of the Assets.

However, section 118-24 of the ITAA 1997 provides that a capital gain or loss of an entity from a CGT event (that is also a balancing adjustment event) that happens to a depreciating asset is disregarded if the asset was an asset held by the entity and the decline in value was worked out under Division 40.

The Assets are depreciating assets, and the change of holder would be a balancing adjustment event. As the Assets were held by the Trustee for the Trust, any capital gain or loss would be disregarded under section 118-24 as the Assets' decline in value is calculated under Division 40.

Question 3

Detailed reasoning

Sub-section 40-340(1) of the ITAA 1997 provides automatic roll-over relief in the following circumstances:

There is a balancing adjustment event because of a disposal of a depreciating asset from one entity to another entity.

The disposal involves a CGT event.

The conditions in an item of the table are satisfied.

The table in sub-section 40-340(1) states the following:

As discussed in question 2, the proposed arrangement between the Trust and the Trust for New Entity will be a balancing adjustment event and a CGT event (A1).

Therefore, to be entitled to the automatic roll-over relief under sub-section 40-340(1) the proposed arrangement must satisfy the requirements of one of the items in the table. The proposed arrangement will be from trust to trust. As such, items 1, 2, 2A, 3, 4 and 6 will not be satisfied. Item 5 is also not satisfied as sub-division 126-G relates to transfers between trusts where the beneficiaries are the same. The beneficiary of the Trust for New Entity will be a newly created entity.

However, the taxpayer contends that section 106-50 of the ITAA 1997 should apply to make the absolutely entitled beneficiary of the Trust for New Entity the recipient of the Assets, and not the Trust for New Entity.

Division 106 of the ITAA 1997 provides rules for determining which entity makes the capital gain or loss. That is, the capital gain or loss may be made by an entity other than the entity to which a CGT event happens.

Section 106-50 of the ITAA 1997 provides that:

If you are absolutely entitled to a CGT asset as against the trustee of a trust (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it.

Section 106-50 provides that where a trustee deals with a CGT asset that has an absolutely entitled beneficiary, the absolutely entitled beneficiary is taken to have made the gain or loss.

It is the Trustee for the Trust and not the Trustee for New Entity that will cause the CGT event, and the associated gain or loss. There is no CGT event identified in the proposed arrangement which will cause a capital gain or loss that is attributable to New Entity as absolutely entitled beneficiary of the Trust for New Entity. As such, section 106-50 will not apply to actions of the Trustee for New Entity, and the proposed arrangement cannot be considered to be a trust to company transaction.

As the proposed arrangement will be from trust to trust, the requirements of sub-section 40-340(1) of the ITAA 1997 are not satisfied, and automatic roll-over relief is not available.

Further, the Trust will not be able to choose roll-over relief under sub-section 40-340(3) of the ITAA 1997 as the Assets are not a partnership asset as required by sub-section 40-295(2) of the ITAA 1997.

In addition, the capital gains tax roll-over relief provided at sub-division 122A of the ITAA 1997 will not be available, as the proposed arrangement is not from trustee (or individual) to company as is required by section 122-15 of the ITAA 1997.