Edited version of your written advice

Authorisation Number: 1051474365415

Date of advice: 21 January 2019

Ruling

Subject: Trust units

Question 1

Will the issue of the additional units by entity A trigger a capital gains tax (CGT) event for entity B?

Answer

No.

Question 2

Will entity B be taken to have acquired the additional units on that same date that the original unit was issued for CGT purposes?

Answer

Yes.

Question 3

Can entity B access the CGT discount under Division 115 of the Income Tax Assessment Act 1997 (ITAA 1997) on disposal of some units, where the disposal occurs in the 2018-19 income year?

Answer

Yes.

Question 4

Will the cost base of the original ordinary unit be apportioned equally across all ordinary units under section 130-20 of the ITAA 1997?

Answer

Yes.

Question 5

Will the acquisition date of the additional units be the same date that the original unit was issued for the purposes of Division 152 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2019

The scheme commenced on

1 July 2018

Relevant facts

Entity A is a fixed unit trust.

Entity B is the sole unit holder of one ordinary (paid up) unit issued by entity A.

Entity A operates a business.

Entity B proposes to sell an interest in entity A to an unrelated third party in the 2018-19 income year.

In order to do so, entity A has converted its unitholding from one ordinary unit to several ordinary units by issuing additional ordinary units to entity B for no consideration (pursuant to the relevant clause of entity A’s trust deed).

The additional ordinary units were issued recently. There was no change to the total capital in entity A.

The original unit has not been cancelled or redeemed.

The additional units are not included in assessable income.

The original unit was issued more than 12 months ago.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 section 109-5

Income Tax Assessment Act 1997 section 112-25

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 section 130-20

Income Tax Assessment Act 1997 Division 152

Reasons for decision

Additional units

Section 112-25 of the ITAA 1997 outlines the rules when an asset is split, changed or merged. Where a taxpayer is the beneficial owner of the original asset and each new asset, the splitting or change is not a CGT event (subsection 112-25(2) of the ITAA 1997).

As outlined in Taxation Determination TD 2000/10 Income tax: capital gains: what are the CGT consequences for a shareholder if a company converts its shares into a larger or smaller number of shares?:

If a company converts its shares into a larger or smaller number of shares ('the converted shares') in accordance with section 254H of the Corporations Law in that:

● the original shares are not cancelled or redeemed;

● there is no change in the total amount allocated to the share capital account of the company; and

● the proportion of equity owned by each shareholder in the share capital account is maintained;

no CGT event happens to the shareholder's original shares for capital gains purposes. While there is a change in the form of the original shares, there is no change in their beneficial ownership.

Paragraph 2 of TD 2000/10 states that the converted shares have the same date of acquisition as the original shares to which they relate.

The principles outlined in TD 2000/10 are equally applicable to units of a unit trust.

Application to your circumstances

In this case, there was not a disposal of any trust units when the additional units were allocated to entity B. The original unit was not cancelled or redeemed. Furthermore there was not a change to the proportion of equity held by entity B, and there was no change to the total capital value in entity A.

As there is no disposal of units and no change to the beneficial ownership of the units and merely a change of the form of the units, there is no CGT event occurring for entity B, as unit holder. That is, none of the CGT events as outlined in Division 104 of the ITAA 1997 occurred when the additional trust units were issued.

Acquisition date and cost base

The general rule is that a taxpayer acquires a CGT asset when the taxpayer becomes its owner (subsection 109-5(1) of the ITAA 1997). Usually when units in a unit trust are issued to a unitholder, there is an acquisition.

This general rule may be modified in certain circumstances.

Special acquisition and cost base rules apply for bonus units issued by the trustee of a unit trust.

Subsection 130-20(1) of the ITAA 1997 sets out what happens if:

(a) you own units in a unit trust (referred to as the original equities), and

(b) the trustee issues other units, (referred to as the bonus equities) to you in relation to the original equities.

The term ‘bonus equities’ is not defined in the ITAA 1997, and is taken to mean bonus shares or units (as appropriate) issued in respect of existing shares or units.

Where a bonus issue is not assessable and the original units are post-19 September 1985 assets, the taxpayer is taken to have acquired the bonus units when the original units were acquired. In addition, the first element of the cost base and reduced cost base of the original units is apportioned in a reasonable way between the original and bonus units (subsection 130-20(3) of the ITAA 1997).

Application to your circumstances

As outlined above, it is considered that the additional trust units have the same acquisition date as the original trust unit. As the original trust unit in entity A was issued more than 12 months ago, the additional trust units would also be considered to have been held for more than 12 months.

Apportioning the original first element of the cost base/reduced cost base equally across all units is considered to be reasonable.

Please note, that the acquisition date for the original unit is also the relevant acquisition date for the additional units for the purposes of Division 152 of the ITAA 1997.

CGT discount

A discount capital gain may be applied if certain conditions are met under Division 115 of the ITAA 1997. Section 115-5 of the ITAA 1997 states a discount capital gain is a capital gain that meets the requirements of sections 115-10, 115-15, 115-20 and 115-25.

Entity B will sell some units in the 2018-19 financial year. As entity B is deemed to have acquired these units more than 12 months ago, and meets the other conditions of Division 115 of the 1997, entity B is entitled to a 50% discount capital gain.