Edited version of your written advice

Authorisation Number: 1012739453495

Ruling

Subject: Capital gains tax roll-over

Question 1

Will a trustee for Trust 1 (a managed investment trust), be eligible to choose the roll-over available under section 126-225 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the transfer of shares in public companies to the trustee of Trust 2, such that the trustee of Trust 2 will also be eligible to choose to obtain the roll-over?

Answer

Yes

This ruling applies for the following period:

Income Year ended 30 June 2015

The scheme commences on:

Income Year ended 30 June 2015

Relevant facts and circumstances

The trustee of Trust 1 wishes to transfer assets held by Trust 1 to the trustee of Trust 2 as part of a reorganisation of portfolio assets.

Trust 1

The Trust 1 is a resident trust for CGT purposes, within the meaning of subsection 995-1(1) of the ITAA 1997.

The trustee of Trust 1 is Company X, an Australian resident company. In its capacity as trustee, the company holds a significant portfolio of investments. The trust's assets are managed by a management company (the Manager) who does not have custody of the trust's assets.

Trust 1's largest investments are shares held in public listed companies (the Companies). The interests in these companies represented a significant proportion in Trust 1's total investment portfolio.

A reorganisation of the investments held by Trust 1 is proposed whereby approximately 2/3 of the current interests held by the trust in each of the companies ('the relevant shareholding interests) will be transferred to Trust 2. Each of the Unitholders in Trust 1 will receive units in Trust 2 equal to the number of units they hold in Trust 1.

Proposed Reorganisation

The Reorganisation involves the following steps:

1. Step 1:

a. a new trust (Trust 2) was established. Company Y was the original trustee of Trust 2.

b. Company X as trustee of Trust 1 subscribed for, and was issued with, nominal amount of units in Trust 2 in consideration for $.

c. Company Y retired as trustee of Trust 2 and was replaced by Company X.

2. Step 2:

a. The amount of units held by Trust 1 in Trust 2 will be split so that the total number of issued units will equal the same number of units on issue in Trust 1.

b. The trustee of the Trust 1 will make an in-specie distribution of the units in Trust 2 to the Unitholders of Trust 1 equal to the number of their existing unit holdings in Trust 1.

3. Step 3:

a. After the in-specie distribution of Trust 2 units, Trust 1 will transfer the relevant shareholding interests for nil consideration. The transfers will happen on or around the same time (the transfer time).

b. Just after the transfer time, the net asset value of each of Trust 1 and Trust 2 will represent X% and Y%, respectively, of the total net asset value of Trust 1 immediately prior to the transfer time.

Other

Trust 1 and Trust 2 each have only one class of units on issue. The rights attaching to the units in Trust 1 and Trust 2 are identical, having regard to the terms of each trust deed.

Trust 1 is a MIT and has a MIT deemed capital account treatment election in force.

The market value of the total interests in Trust 1 and Trust 2 is substantially the same as the net asset value of the respective trusts.

Trust 2 will have in place an agreement with a Prime Broker immediately prior to the transfer time. The agreement sets out the basis on which the Prime Broker will perform the prime broking/custodial services, in consideration for a fee. The terms of the agreement are such that it has no operative effect until such time as the transfer of relevant shareholding interests to Trust 2 has occurred

A Management Agreement is currently in place between the Manager and the trustee of Trust 2. This agreement is on identical terms to the agreement between the Manager and the trustee of Trust 1. The agreement sets out the services the manager of Trust 1 and Trust 2 and will provide and the fees payable to the manager for those services. The terms of the agreement are such that it has no operative effect until such time as the transfer of relevant shareholding interests to the Trust 2 has occurred.

Relevant legislative provisions

Income Tax Assessment Act 1936

Section 6

Division 6B

Division 6C

Income Tax Assessment Act 1997

Subsection 104-60(1)

Subsection 104-60(2)

Subsection 104-60(3)

Subsection 104-70(1)

Section 115-30

Subsection 115-30(1)

Subdivision 126-G

Section 126-225

Subsection 126-225(1)

Subparagraph 126-225(1)(a)

Subparagraph 126-225(1)(a)(ii)

Paragraph 126-225(1)(b)

Paragraph 126-225(1)(c)

Subparagraph 126-225(1)(c)(i)

Subparagraph 126-225(1)(c)(ii)

Subparagraph 126-225(1)(c)(iii)

Paragraph 126-225(1)(d)

Paragraph 126-225(1)(e)

Subsection 126-225(3)

Section 126-230

Subsection 126-230(1)

Subsection 126-230(2)

Subsection 126-230(3)

Subsection 126-230(4)

Subsection 126-235(1)

Subsection 126-235(2)

Subsection 126-235(3)

Section 126-245

Subsection 126-245(1)

Subsection 126-245(2)

Subsection 126-245(3)

Subsection 126-245(4)

Section 126-250

Subdivision 275-B

Section 275-100

Subparagraph 275-105(1)(a)

Subsection 275-105(2)

Section 275-115

Paragraph 960-130(1)

Subsection 995-1(1)

Taxation Administration Act 1953

Schedule 1 Section 12-400

Reasons for decision

Question 1

Summary

The trustee of Trust 1 will be eligible to choose the roll-over available under section 126-225 of the ITAA 1997 in respect of the proposed transfer of shares held in public companies (the relevant shareholding interests) to the trustee of Trust 2.

Detailed reasoning

CGT Events

CGT event E2 happens if you transfer a CGT asset to an existing trust: subsection 104-60(1) ITAA 1997. The time of the event is when the asset is transferred: subsection 104-60(2) of the ITAA 1997.

You make a capital gain if the capital proceeds from the transfer are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base: subsection 104-60(3) of the ITAA 1997.

The proposed transfer of each of the relevant shareholding interests by the trustee of Trust 1 to Trust 2 will therefore result in CGT event E2 happening.

Subdivision 275-B - Capital Account Treatment for Australian Managed Investment Trusts

Division 275 of the ITAA 1997 relates to Australian managed investment trusts (MITs). Subdivision 275-B of the ITAA 1997 provides for certain Australian MITs to make a choice that certain assets of the trust be dealt with under the CGT rules (the 'MIT deemed capital account treatment election'). If the trustee does not make such a choice, those assets will be treated as revenue assets for income tax purposes.

For the purposes of this ruling, it is assumed that Trust 1 is, and Trust 2 will be, a MIT within the meaning of section 12-400 in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). It is also assumed that the trustee of Trust 1 has made, and that the trustee of Trust 2 will make by the relevant time, the MIT deemed capital account treatment election under section 275-115 of the ITAA 1997.

Each of the relevant shareholding interests will be a 'covered asset' for the purposes of the MIT deemed capital account treatment: paragraph 275-105(1)(a) of the ITAA 1997. The exclusions in subsection 275-105(2) of the ITAA 1997 will not apply on the basis that the relevant shareholding interests will not be either:

• a Division 230 financial arrangement, as defined in subsection 995-1(1) of the ITAA 1997 - this is because, in absence of a relevant TOFA tax timing elections, the default methods for working out a gain or loss do not apply to equity interests, or

• a debt interest under Division 974 of the ITAA 1997.

On the basis that Trust 1 is, and Trust 2 will be, a MIT within the meaning of section 12-400 in Schedule 1 to the TAA 1953 which have validly made the MIT deemed capital account treatment election under section 275-115 of the ITAA 1997, section 275-100 of the ITAA 1997 would have the consequence that provisions, such as section 6-5 in the ITAA 1997, do not apply to treat the gain as a revenue gain.

In the absence of CGT roll-over relief, there would be CGT consequences for Trust 1 from CGT event E2 happening upon the transfer of each of the relevant shareholding interests.

Subdivision 126-G - Transfer of Assets between Certain Trusts

Subdivision 126-G of the ITAA 1997 provides CGT roll-over relief for the transfer of assets between certain trusts. Subsection 126-225(1) of the ITAA 1997 lists the eligibility requirements for obtaining the roll-over:

126-225(1) A rollover may be chosen for a CGT asset (the roll-over asset) if:

'(a) the trustee of a trust (the transferring trust):

(i) creates a trust (the receiving trust), by declaration or settlement, over one or more CGT assets that include the roll-over asset; or

(ii) transfers the roll-over asset to an existing trust (the receiving trust); at a particular time (the transfer time ); and

(b) if subparagraph (a)(ii) applies--the receiving trust has no CGT assets, other than small amounts of cash or debt, just before the transfer time; and

(c) just after the transfer time:

(i) each of the trusts has the same beneficiaries; and

(ii) the receiving trust has the same classes of membership interests that the transferring trust had just before, and has just after, the transfer time; and

(iii) the sum of the market values of each beneficiary's membership interests of a particular class in both trusts is substantially the same as the sum of the market values, just before the transfer time, of the beneficiary's membership interests of that class in both trusts; and

(d) the requirement in section 126- 230 is met; and

(e) the exceptions in section 126- 235 do not apply.'

For Trust 1 to be eligible for roll-over relief under Subdivision 126-G for the transfer of the relevant shares to Trust 2, the conditions in subsection 126-225(1) of the ITAA 1997 must be satisfied.

Paragraph 126-225(1)(a) - Transfer of roll-over asset

Subparagraph 126-225(1)(a)(ii) of the ITAA 1997 requires the trustee of the transferring trust to transfer a CGT asset, known as the "roll-over asset", to the trustee of an existing trust (the receiving trust) at a particular time (the "transfer time").

Each of the relevant shareholding interests which are transferred from Trust 1 to Trust 2 will be a 'roll-over asset' for the purposes of section 126-225 of the ITAA 1997.

Based on the facts, Trust 2 will be established as a new trust prior to the transfer of the relevant shareholding interests. As a result, the rollover assets will be transferred to an existing trust and the requirements of subparagraph 126-225(1)(a)(ii) of the ITAA 1997 will be satisfied.

Paragraph 126-225(1)(b) - Receiving trust has no CGT assets, other than small amounts of cash or debt before Transfer Time

As the relevant shares are being transferred to an existing trust, subsection 126-225(1)(b) of the ITAA 1997 must also be satisfied. This requires the receiving trust (i.e. Trust 2) to hold no CGT assets, other than small amounts of cash or debt just before the transfer time.

Just before the relevant shareholding interests are transferred, Trust 2 will hold $ of cash.

There will be no agreement in place prior to the transfer time in respect of the transfer of the shares in the Companies. Further, the terms of the Manager Agreement and the Prime Broking Agreement are such that they are considered to not give rise to any rights for Trust 2 just before the transfer time.

As Trust 2 will not have any CGT assets other than $ of cash immediately prior to the Transfer Time, the requirements of subsection 126-225(1)(b) of the ITAA 1997 will be met.

The transfers of the relevant shareholding interests will happen on or around the same time. However, as there are multiple CGT assets being transferred on or around the same time under the proposed arrangement, the special rules in subsection 126-225(2) of the ITAA 1997 will ensure, for the avoidance of doubt, that the rollover can apply to multiple CGT assets transferred as part of the arrangement.

The transfers of the shares will happen simultaneously.

Paragraph 126-225(1)(c) - the beneficiaries

Paragraph 126-225(1)(c) of the ITAA 1997 requires that, just after the transfer time, three conditions must be satisfied in relation to the beneficiaries (the unit holders) of Trust 1 and Trust 2.

Subparagraph 126-225(1)(c)(i) - Same beneficiaries

Subaragraph 126-225(1)(c)(i) of the ITAA 1997 requires that each of the trusts has the same beneficiaries just after the transfer time. Further guidance in relation to what is meant by the phrase 'same beneficiaries' is found in paragraph 1.46 of the Explanatory Memorandum (EM) to the Tax Laws Amendment (2009 Measures No. 6) Bill 2009 (enacted as the Tax Laws Amendment (2009 Measures No. 6) Act 2010). It states that:

'Both trusts must have the same 'direct' beneficiaries. In other words, the same entities, acting in the same capacities, must be beneficiaries of both trusts. It is not sufficient that the 'indirect' or ultimate beneficiaries of both trusts are the same.'

Trust 2 has issued 10 units to Trust 1. As part of the reorganisation, these units will be split so that the total number of issued units will equal the same number of units on issue in Trust 1. Subsequently, the trustee of the Trust 1 will make an in-specie distribution of the units in Trust 2 to the unitholders of Trust 1 equal to the number of their existing unitholdings in Trust 1.

As a result of these steps, the identity of the unitholders will be identical for each trust.

Accordingly, just after the transfer time, the transferring trust and the receiving trust will have the same beneficiaries such that subsection 126-225(1)(c)(i) of the ITAA 1997 will be met.

Subparagraph 126-225(1)(c)(ii) - Same classes of ownership

Subparagraph 126-225(1)(c)(ii) of the ITAA 1997 requires that, just after the transfer time, the receiving trust (i.e. Trust 2) has the same classes of membership interests that the transferring trust (i.e. Trust 1) had just before, and has just after, the transfer time.

A membership interest in an entity will arise for each interest by virtue of which you are a member of the entity (section 960-135 of the ITAA 1997).

Relevantly, a unitholder of a trust (other than a public trading trust or a corporate unit trust) will be a member of the trust (Item 3 of the table in subsection 960-130(1) of the ITAA 1997). The units on issue in Trust 1 and Trust 2 are therefore the relevant membership interests for the purposes of section 960-135 of the ITAA 1997.

Trust 1 only has on issue one class of units.

Trust 2 also has on issue only one class of units and the rights and obligations of these units are identical to the rights and obligations of the units on issue in Trust 1. There will no change in the rights attached to the membership interests in either trust as a result of transferring the relevant shareholding interests to Trust 2.

Therefore, it is considered the requirements of s126-225(1)(c)(ii) of the ITAA 1997 will be satisfied.

Subparagraph 126-225(1)(c)(iii) - Market value of the Unitholders units

Subparagraph 126-225(1)(c)(iii) of the ITAA 1997 requires that, just after the transfer time, the receiving trust (i.e. the Trust 2) has the same classes of membership interests that the transferring trust (i.e. the Trust 1) had just before, and has just after, the transfer time.

The EM provides:

'1.48 The market value test determines whether beneficiaries have the same proportionate membership interests before and after the transfer.

1.49 Under this test, the total market value of each beneficiary's interests in the transferring trust of a particular class and their interests of the matching class in the receiving trust must be substantially the same just before and just after the transfer time.'

The only class of membership interests for both trusts (i.e. Trust 1 and Trust 2) will be ordinary units. Units in both trusts will be owned by the same beneficiaries. The units in both Trust 1 and Trust 2 will be held in equal proportion by the same unitholders and will carry the same rights, just before and just after the transfer time. As confirmed by paragraph 1.48 of the EM, these are the primary considerations under subparagraph 126-225(1)(c)(iii) of the ITAA 1997.

The proposed restructure will involve a transfer of the relevant shareholding interests from Trust 1 to Trust 2. On an aggregate basis, the collective net asset values should remain substantially the same just before and just after the transfer time. The decrease in the market value of the units in the Trust 1 as a result of the transfer of the rollover asset to Trust 2 will be mirrored by the increase in the market value of the units in Trust 2.

This should translate into substantially the same market value for the units in the trusts just before and just after the transfer time.

Therefore, it is considered the three conditions of paragraph 126-225(1)(c) of the ITAA 1997 will be satisfied.

Paragraph 126-225(1)(d) - Requirement in section 126- 230 is met

Paragraph 126-225(1)(d) of the ITAA 1997 requires that the tests set out in section 126-230 of the ITAA 1997 must be satisfied.

Under subsection 126-230(1) of the ITAA 1997, two requirements must be satisfied.

'126-230(1)

The conditions in subsections (2) and (3) must be met:

(a) if subsection 126-225(2) applies - at all times during the period:

(i) starting at the start time; and

(ii) ending at the transfer time; and

(b) otherwise - at the transfer time.

125-230(2)

The first condition is met at a particular time if, at that time, *CGT event E4 is capable of happening to all of the *membership interests in each of the trusts.

125-230(3)

The second condition is met at a particular time, if at that time, the manner or extent to which each beneficiary of each trust can benefit from the trust is not capable of being significantly affected by the exercise, or non-exercise, of a power.'

(i) CGT event E4 is capable of happening

Subsection 126-230(2) of the ITAA 1997 is met at a particular time if, at that time, CGT Event E4 is capable of happening to all of the membership interests in each of the transferring trust and the receiving trust.

Under subsection 104-70(1) of the ITAA 1997, CGT Event E4 happens if:

(a) the trustee of a trust makes a payment to you in respect of your unit or your interest in the trust (except for CGT event A1, C2, E1, E2, E6 or E7 happening in relation to it); and

(b) some or all of the payment (the non-assessable part) is not included in your assessable income.

The trust deed for each of Trust 1 and Trust 2 provides for the beneficial interests in each trust to be divided into units. Accordingly, at all times during the period starting at the start time and ending at the transfer time, CGT Event E4 as capable of happening to all of the membership interests (being units) in both of the trusts and the conditions in subsection 126-230(2) of the ITAA 1997 will be satisfied.

(ii) Beneficiaries' entitlements not discretionary

Subsection 126-230(3) of the ITAA 1997 requires that the manner or extent to which each beneficiary of each trust can benefit from the trust cannot be capable of being significantly affected by the exercise (or non-exercise) of a power.

However, the 'saving clause' in subsection 126-230(4) of the ITAA 1997 applies if both the transferring trust and receiving trust are MITs. The provision allows for powers which do not significantly affect the market value of the membership interest in each of the trusts to be disregarded.

Further guidance on whether the market value of interests in a MIT might not be significantly affected by the exercise of a power can be found in the EM which provides:

'1.39 In other words, beneficiaries' interests are effectively 'fixed' if a hypothetical buyer, acting at arm's length in an open market and with reasonable knowledge of the facts, would not discount the value of the interests because of the existence of a discretionary power. In that case, the MIT may be eligible for the roll-over notwithstanding the existence of the power.

1.40 For example, the market value of interests in a MIT might not be significantly affected by the existence of a power that apparently could significantly change the value of the interest, where:

• prudential or market forces effectively prevent the power from being used in a way that would significantly devalue any existing interests;

• the power can only be exercised with the consent of all, or almost all, of the beneficiaries of the trust and there is no particular beneficiary (or group of associated beneficiaries) who control the voting power; and/or

• more generally, there is little or no likelihood that the power will be exercised in a way that significantly reduces the value of each existing interest.

1.41 If the total market value of all of the interests in a MIT is substantially the same as the net value of the trust, this may suggest that the existence of 'discretionary' powers in the trust does not significantly affect the market value of interests in the MIT.'

In this case, both Trust 1 and Trust 2 are, or will be, MITs before any of the relevant shareholding interests are transferred.

The market value of the total interests in Trust 1 and Trust 2 is substantially the same as the net asset value of the respective trusts. The EM suggests that this is indicative that any discretionary powers do not significantly affect the market value of interests in the trusts.

On this basis, the requirements of subsections 126-230(2) and (3) will be met at the relevant times and, therefore subsection 126-225(1)(d) will also be met.

Paragraph 126-225(1)(e) - Exceptions in section 126-235 do not apply

Paragraph 126-225(1)(e) of the ITAA 1997 requires that none of the exceptions in section 126-235 apply. There are three exceptions.

(i) Foreign Trusts

Under subsection 126-235(1) of the ITAA 1997, an exception will apply where the receiving trust is a foreign trust for CGT purposes, and the roll-over asset is not taxable Australian property just after the transfer time.

The term 'foreign trust for CGT purposes' is defined in subsection 995-1(1) of the ITAA 1997 as a trust that is not a resident for CGT purposes. Subsection 995-1(1) of the ITAA 1997 provides that a unit trust is a resident trust for CGT purposes for an income year if:

• either any property of the trust is situated in Australia or the trust carries on business in Australia

and

• either the central management and control of the trust is in Australia or Australian residents hold more than 50% of the beneficial interests in the income or property of the trust.

In this case, the applicant has confirmed that Trust 2 is a resident trust for CGT purposes.

The exception in subsection 126-235(1) of the ITAA 1997 in respect of foreign trusts therefore will not apply.

(ii) Corporate Unit Trusts and Public Trading Trusts

Subsection 126-235(2) of the ITAA 1997 provides an exception where either of the transferring trust or receiving trust is a corporate unit trust (within the meaning of section 102K of the ITAA 1936) or a public trading trust (within the meaning of 102S of the ITAA 1936) for the income year that includes the transfer time.

In this case, neither Trust 1 nor Trust 2 will be a corporate unit trust or public trading trust for the income year that includes the transfer time. The exception in subsection 126-235(2) of the ITAA 1997 will therefore not apply.

(iii) Mirror Choices

Subsection 126-235(3) of the ITAA 1997, as qualified by subsections 126-235(4) and (5) of the ITAA 1997, provides in broad terms that an exception applies if both trusts do not have the same tax choices (or elections) in force, just after the transfer time.

The only choice that Trust 1 has made which could potentially have an impact on the net income of Trust 2 should it not have the same choice in force, is the MIT deemed capital account treatment election. It is assumed that no other relevant choices have been made by Trust 1.

As Trust 2 will be a MIT before the transfer time and will validly make the deemed capital account treatment election, the exception in subsection 126-235(3) of the ITAA 1997 should not apply.

Subsection 126-225(1)(e) of the ITAA 1997 will therefore be met as none of the exceptions in section 126-235 of the ITAA 1997 will apply.

Conclusion regarding CGT roll-over under Subdivision 126-G

On the basis of the above analysis, it is considered that all of the requirements in subsection 126-225(1) of the ITAA 1997 will be met. Therefore Trust 1 will be eligible to choose CGT roll-over relief under Subdivision 126-G of the ITAA 1997 for the transfer by the trust of each of the relevant shareholding interests to Trust 2.

However, under subsection 126-225(3) of the ITAA 1997, the roll-over will only happen if both Trust 1 and Trust 2 choose to obtain it. Trust 1 and Trust 2 will both choose to obtain the roll-over, such that subsection 126-225(3) will cause the roll-over to apply.