Edited version of your private ruling

Authorisation Number: 1012613548824

Ruling

Subject: Consequences of Subdivision 124-H roll-over

Question 1

As a consequence of the proposed Subdivision 124-H roll-over of units in the unit trust for shares in the company, if the total of the cost bases of all of the post-CGT assets of the unit trust are less than the liabilities in respect of those assets, will the first element of the cost base of the company's units in the unit trust not taken to have been acquired before 20 September 1985 pursuant to section 124-470(3), be equal to nil?

Answer

Yes.

Question 2

As a consequence of the proposed Subdivision 124-H roll-over of units in the unit trust for shares in the company, will there be any assessable income for the company?

Answer

No.

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.

A unit trust is currently the main operating entity for a group of entities (the group).

It is proposed to restructure the group so that the holding entity will be a company (the company).

The restructure is intended to facilitate an initial public offering (IPO) of shares in the company and the quotation of its shares on the Australian Securities Exchange (ASX).

As part of the restructure, the unit holders in the unit trust (also known as the exchanging members) will dispose of their units in exchange for shares in the company.

The company will enter into a contract to acquire all the unit trust's units from the exchanging members.

Each exchanging member will receive the same number of ordinary shares in the company as they had units in the unit trust, such that the approximate unit holdings before the roll-over will be reflected in the approximate shareholdings after the exchange.

The application states that the exchanging members will choose to obtain the roll-over.

Also, in the application it is stated that following the roll-over, the company will choose to apply the rules in section 124-470 pursuant to section 124-465.

At the completion time, the sum of the cost bases of all the post-CGT assets of the unit trust will be less than the sum of all liabilities in respect of those assets.

In the application the company contends that as a consequence of the Subdivision 124-H roll-over and the application of subsection 124-470(3), the first element of the cost base is nil because:

In the case of the company's units, it is expected that, as at the completion time, the liabilities of the unit trust will be greater than the cost base of its assets (all of which should be post-CGT assets)…

The application formula in section 124-470(3) will result in a negative number where liabilities are greater than the cost base of assets...

and also:

The structure of section 110-25(2) effectively means that a negative first element is not possible under an application of the general rule. This is because it is not possible to 'pay' a negative amount of money or 'give' a negative amount of property.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 103-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 Division 110

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 Subdivision 122-A

Income Tax Assessment Act 1997 Subdivision 124-H

Income Tax Assessment Act 1997 section 124-445

Income Tax Assessment Act 1997 section 124-450

Income Tax Assessment Act 1997 section 124-465

Income Tax Assessment Act 1997 section 124-470

Reasons for decision

CGT event A1

You dispose of a CGT asset if a change of ownership in the CGT asset occurs from you to another entity. If a change of ownership of a CGT asset occurs, CGT event A1 happens (section 104-10).

The time of the event is when you enter into the contract for the disposal (paragraph 104-10(3)(a)) or, if there isn't a contract, when the change of ownership occurs (paragraph 104-10(3)(b)).

Subdivision 124-H roll-over and consequences for the company

If exchanging members choose to roll-over and the company makes a choice that the rules in section 124-470 will apply within 2 months of the completion time the conditions for roll-over under Subdivision 124-H will be satisfied (see paragraphs 45 and 46 of Class Ruling CR 2013/44 Income Tax: exchange of units in a unit trust for shares in a company: restructure of the Strathearn Group (CR 2013/44)).

Cost base of units

Subsection 124-470(3) is the provision that determines the first element of the cost base of (post-CGT) units acquired as a result of a Subdivision 124-H roll-over:

The first element of the *cost base of the company's units in the unit trust that are not taken to have been *acquired before 20 September 1985 is:

• the total of the cost bases (as at the completion time) of the unit trust's assets that it acquired on or after that day;

less:

• its liabilities (if any) in respect of those assets.

The first element of the *reduced cost base of the company's units is worked out similarly.

A liability of the unit trust that is not a liability in respect of a specific asset or assets of the trust is taken to be a liability in respect of all the assets of the trust.

As set out above, the first element of the cost base of the units in a unit trust that are post-CGT units is the total of the cost bases (at completion time) of the unit trust's post-CGT assets, less any liabilities in respect of those assets (subsection 124-470(3)). The first element of the reduced cost base of a company's post-CGT assets is similarly calculated (subsection 124-470(4)).

Subsection 124-470(5) provides that a liability of a unit trust that is not specific to a particular asset or assets of the trust is taken to be a liability of all assets of the trust.

Division 110 tells you how to work out the cost base and reduced cost base of a CGT asset. The general rules about cost base (section 110-25) are such that the first element is the amount paid and/or the market value of any other property given. The second to fifth elements of the cost base are either costs or expenditures.

Application to the facts

As stated in the application, as part of the restructure, the unit holders in the unit trust will dispose of their units in exchange for shares in the company such that each exchanging member will receive the same number of ordinary shares in the company for units they hold in the unit trust.

Therefore, the disposal of the post-CGT assets will trigger a change of ownership in the post-CGT assets and thereby CGT event A1 happens (section 104-10).

In the circumstances of this case, the time of the event is when the exchanging members enter into the contract (with the company) for the disposal.

Also, according to the application, following the roll-over, the company will choose that the rules in section 124-470 apply, pursuant to section 124-465.

As previously stated, the applicant has contended that the liabilities of the unit trust will be greater than the cost base of its assets and further that the first element of the cost base must be equal to nil because a negative first element is not possible under the application of the general rule as it is not possible to pay or give a negative amount.

Cost base of nil

The first element of the cost base of the company's units in the unit trust is the total of the cost bases (as at the completion time) of the unit trust's post-CGT assets that it acquired on or after that day, less its liabilities in respect of those assets (subsection 124-470(3)).

If as contended by the applicant, the liabilities of the unit trust are greater than the cost base of its assets then the first element of the cost base of the company's units could be construed as being a negative value, however a negative first element is not tenable as in effect it would not be a cost. As stated in paragraph 82 of Taxation Ruling TR 2008/5 Income tax: tax consequences for a company of issuing shares for assets or for services (TR 2008/5):

Shares issued for a CGT asset are property given to the vendor of the asset.

Both paragraphs 82 and 83 provide relevant commentary on the giving of shares for assets and the cost of a CGT asset and its market value. Shares are given to the vendors of the assets and the notion of a negative value "given" is as already stated, not tenable. A value greater than nil is precluded by the liabilities being greater than the value of the assets and therefore, in the circumstances contended by the applicant, the value of the first element of the cost bases of the assets would be reduced by their liabilities, to nil.

Question 2

As a consequence of the proposed Subdivision 124-H roll-over of units in the unit trust for shares in the company, will there be any assessable income for the company?

Summary

As a consequence of the proposed section 124-H roll-over, the company will be merely acquiring units, in exchange for shares, (not disposing of units) and therefore it is not subject to any assessable income as a result of the roll-over transaction.

Detailed reasoning

CGT event A1

You dispose of a CGT asset if a change of ownership in the CGT asset occurs from you to another entity. If a change of ownership of a CGT asset occurs, CGT event A1 happens (section 104-10).

The time of the event is when you enter into the contract for the disposal (paragraph 104-10(3)(a)) or, if there isn't a contract, when the change of ownership occurs (paragraph 104-10(3)(b)).

Capital gain or capital loss

In the context of Subdivision 124-H (where there is an exchange of units in a unit trust for shares in a company) a unitholder will make a capital gain from CGT event A1 happening if the capital proceeds from the disposal of a unit exceed its cost base (subsection 104-10(4)). A unitholder will make a capital loss if the capital proceeds are less than the reduced cost base of the unit (subsection 104-10(4)).

Application to the facts

As stated in the application, as part of the restructure, the unit holders in the unit trust will dispose of their units in exchange for shares in the company, such that each exchanging member will receive the same number of ordinary shares in the company for units they hold in the unit trust.

As a consequence of the proposed section 124-H roll-over, the company will be merely acquiring units, in exchange for shares. The roll-over transaction does not entail a CGT event to which the company is subject, and thereby there is no assessable income payable by the company as a consequence of the roll-over transaction.

Conclusion

The company is not subject to any assessable income as a consequence of the roll-over transaction.