Edited version of private advice

Authorisation Number: 1051557335855

Date of advice: 10 October 2019

Ruling

Subject: Scrip-for-scrip rollover

Question 1

Will CGT event A1 (subdivision 104-A of the Income Tax Assessment Act 1997 (ITAA 1997)) occur for each existing unitholder at the time of the exchange of their Black Units for the White Units?

Answer

Yes

Question 2

Will the existing unitholders be eligible to elect to apply rollover relief under subdivision 124-M of the ITAA 1997?

Answer

Yes

Question 3

Can the existing unitholders who choose subdivision 124-M rollover relief in respect of their Black Units disregard any capital gain made in respect of CGT event A1 happening to their Black Units?

Answer

Yes

Question 4

If an election is made to apply CGT rollover relief under subdivision 124-M of the ITAA 1997, will the cost base of the White Units acquired by the existing unitholders be equal to the cost base of their original Black Units?

Answer

Yes

Question 5

If an election is made to apply CGT rollover relief under subdivision 124-M of the ITAA 1997, will the cost base of the Black units acquired by White be equal to the cost base that the existing unitholders originally held in the Black Units?

Answer

Yes

This ruling applies for the following period:

1 July 2019 to 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

Black Unit Trust

The Black Unit Trust (Black) was established in 201X, Management Pty Ltd as trustee.

In 201X, Black acquired a commercial building commonly referred to as the 'White Building'. Black acquired the White Building using funds sourced from its unitholders and a loan from an Australian bank. If the White Building was sold today it would result in a capital gain to Black.

Black does not hold any other significant assets nor has it lent amounts to any party.

Black does not have any carry forward tax losses and is not forecast to have any in the future.

Black has only issued ordinary units and only ordinary units will be on issue during the ruling period.

Black is not:

(a)   listed for quotation in the official list of an approved stock exchange

(b)   a registered managed investment scheme (MIS) for the purposes of Chapter 5 of the Corporations Act 2001

(c)   an unregistered MIS that is required to be registered (i.e. although the scheme falls within the definition of 'managed investment scheme', a Product Disclosure Statement is not required, the scheme has less than 20 members and it is not promoted by a professional promoter)

(d)   a widely held trust.

The trustee of Black does not hold an Australian Financial Services Licence.

Black is not a discretionary trust or a trust with default income or capital beneficiaries - that is, no beneficial interest in the income or capital of the trust is capable of being defeated, partly or wholly, by the exercise of a power of appointment of income or capital by the trustee.

Black's unitholders

Black has three ordinary unitholders. The Family Trust holds 70% of the units, FR1 holds 20%, and FR2 holds 10%. All units were purchased in 201X and 201Y.

The Family Trust is a discretionary trust which was established in 201X with Family Pty Ltd as trustee. Its trust deed is governed by Australian state law.

Both FR1 and FR2 are non-resident companies that were established in a foreign country.

FR1 and FR2 are genuine third-party investors that are unrelated to the trustee of Black.

Each of the 3 existing unitholders held units in Black prior to the first material equity capitalisation in 201Y. All units issued to date were issued for net asset value in accordance with the Black trust deed.

Unitholders' rights

All beneficial interests in the income and capital of Black are vested. All of the units issued by Black carry equal rights to income and capital. All beneficial interests in the income and capital of Black can be expressed as a percentage of the total income and capital of the trust.

The trustee does have the right to stream income but this has never been exercised and will not be exercised during the period covered by this ruling. The trustee has never exercised its defeasible powers under Black's deed nor does the trustee propose to use its powers to defeat the interest of any of the unitholders.

Black's unitholders can consent by way of special resolution to vary the trust deed. The trustee can otherwise only vary the deed where it is necessary to ensure the trust is a fixed trust for the purposes of state-based taxes. The trust deed has never been varied.

The restructure

Black's unitholders are proposing to restructure by interposing the White Unit Trust (White) between Black and the existing unitholders. The restructure will include the following steps:

1. White has been established under Australian law, with an Australian company, White Pty Ltd, as its trustee. White's deed has substantially the same terms as the Black deed.
2. White will acquire all of the units in Black from the existing unitholders.
3. As consideration for the Black units, White will issue each of Black's existing unitholders with ordinary units in White in the same proportions as they currently hold in Black.

The purpose of the proposed restructure is to facilitate future capital raising and investment opportunities in relation to the White. The proposed restructure has the following benefits:

·        third party financiers can obtain security over both the White property and the units in the Black from an Australian entity

·        if a third party equity investor is introduced, the existing unitholders can retain their current contractual and governance arrangements at the White level and enter into new arrangements between White and any new investor.

An arrangement has not been entered into which would result in section 272-35 of Schedule 2F of the Income Tax Assessment Act 1936 having application, the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or fraud or evasion.

White - additional details

All of the units issued by the White carry equal rights to income and capital. The trustee does have the right to stream income but this has never been exercised and will not be exercised during the period covered by this ruling. The trustee will not exercise a power capable of defeating a unitholder's interest to defeat a unitholder's interest in the income or capital of the trust during the ruling period.

Unitholders can consent by way of special resolution to vary the trust deed. The trustee can otherwise only vary the deed where it is necessary to ensure the trust is a fixed trust for the purposes of state-based taxes. The trust deed has never been varied.

The trustee has never exercised any of its defeasible powers under the White deed.

White does not hold any other assets nor has it lent amounts to any party.

White does not have any carry forward tax losses and is not forecast to have any in the future.

White has only issued ordinary units and only ordinary units will be on issue during the ruling period.

Fixed entitlements

The Commissioner has exercised the discretion under subsection 272-5(1) of Schedule 2F to the Income Tax Assessment Act 1936 to deem the beneficiaries of the Black and White as having fixed entitlements to all of the income and capital of the trust for the 2020 income year.

Relevant legislative provisions

Section 124-781 of the Income Tax Assessment Act 1997 (ITAA 1997)

Section 124-782 of the ITAA 1997

Section 124-783 of the ITAA 1997

Section 124-784 of the ITAA 1997

Section 124-785 of the ITAA 1997

Section 124-795 of the ITAA 1997

Section 272-5 of Schedule 2F to the Income Tax Assessment Act 1936

Reasons for decision

Question 1

Summary

CGT event A1 will occur when Black's unitholders dispose of their units in Black.

Detailed reasoning

Section 104-10 states that CGT event A1 occurs if there is a disposal of a CGT asset.

Black's unitholders will dispose of their units in Black. The units are CGT assets. CGT event A1 will occur when Black's unitholders contract with White in relation to the disposal of units.

Question 2

Summary

The unitholders are eligible to elect to apply rollover relief under Subdivision 124-M.

Detailed reasoning

Subdivision 124-M provides rollover relief for certain post-CGT interests that are exchanged for interests in another entity.

Section 124-781 allows a rollover if all of the following conditions are met:

·        a trust interest is exchanged for an interest in another trust (the replacement asset)

·        entities have fixed entitlements to all of the income and capital of the original trust and the acquiring trust

·        the exchange is in consequence of an arrangement

·        that results in the acquiring trust having at least 80% of the trust interests in the original trust; and

·        in which all entities (apart from the acquiring entity) holding trust interests in the original trust could participate in the arrangement on substantially similar terms

·        the holder of trust interests in the acquiring trust, and the trustee of the acquiring trust, jointly choose for rollover relief to apply (paragraph 124-781(c))

·        the holder of the trust interests in the acquiring trust informs the trustee in writing of the cost base of its original interest as at the time just before a CGT event happened in relation to it.

In addition, subsection 124-781(4) provides that if the original interest holder and the trustee of the acquiring entity did not deal with each other at arm's length and neither the original entity nor the acquiring entity had at least 300 beneficiaries just before the arrangement started, then the following applies:

·        the market value of the original interest holder's capital proceeds for the exchange is at least substantially the same as the market value of its original interest

·        its replacement interest carries the same kind of rights and obligations as those attached to its original interest.

Rollover relief is not available under paragraphs 124-781(3)(a) and 124-781(3)(b) if the trust interests are pre-CGT trust interests or the sale of the trust interests does not, in the absence of applying rollover relief applying, result in a capital gain arising.

Rollover relief is not available:

·        to foreign residents unless the replacement asset is taxable Australian property just after the replacement interest is acquired (subsection 124-795(1))

·        where any capital gain that would be made from the replacement asset is disregarded (paragraph 124-795(2)(a))

·        if Division 122 or Division 615 rollover is available (subsection 124-795(3)).

The arrangement in this case involves:

·        the establishment of White with a deed that has substantially the same terms as the Black deed

·        White's acquisition of all the post-CGT units in Black from the existing unitholders

·        White issuing each of Black's existing unitholders with ordinary units in White in the same proportions as they currently hold in Black.

This arrangement constitutes an exchange of the post-CGT fixed entitlements to all of the income and capital of the original trust (Black) for fixed entitlements to all of the income and capital in the acquiring trust.

All of Black's unitholders are able to, and will, participate in the arrangement, with the result being that White, as the acquiring trust, ends up with 100% of the interests in the original trust Black.

It is assumed both White's unitholders and trustee will collectively choose for the rollover to apply, and that White's unitholders will provide White's trustee with notice of the cost base of their original interests in Black as at the time just before the transaction occurs.

Black's original unitholders and the trustee of White have not dealt with each other at arm's length and neither Black or White will have 300 beneficiaries just before the arrangement. However, as the trust deeds are on substantially the same terms, Black's original unitholders' replacement interests in White will carry the same kind of rights and obligations as are attached to their original interests in Black, and the market value of the replacement interests - being made up of the value of the White - will be the same as the market value of the original interests.

If Black's unitholders did not apply the rollover relief available under Subdivision 124-M, the result would be gross capital gains assessable to the unitholders proportionately.

Finally, none of the exceptions apply in this case because:

·        Black's foreign resident unitholders' replacement units in White are taxable Australian property

·        no capital gain that might arise from the replacement units in White is disregarded

·        neither Division 122 or Division 615 rollover is available.

·        The unitholders are eligible to elect to apply rollover relief under Subdivision 124-M.

Question 3

Summary

The existing unitholders who choose to apply rollover relief can disregard their capital gains.

Detailed reasoning

Subsection 124-785(1) provides that, if you choose for rollover relief to apply, any capital gain that an entity makes from its original interest is disregarded.

If, having satisfied the criteria discussed at question 2, Black's unitholders choose for rollover relief to apply to the disposal of their units in Black, then any capital gain that those unitholders make will be disregarded.

Question 4

Summary

The unitholders' replacement units in White will have the same cost base as their units in Black before the transaction takes place.

Detailed reasoning

Subsections 124-785(2) and 124-785(4) provide that the replacement asset has as its cost base the cost base of the original asset.

The unitholders' replacement units in White will have the same cost base as their units in Black before the transaction takes place.

Question 5

Summary

White will inherit the cost base of the units in Black that White acquires from the Black's existing unitholders.

Detailed reasoning

Subsection 124-782(1) provides that the cost base of an original interest from an original interest holder acquired by an acquiring entity under the arrangement becomes the first element of the cost base and reduced cost base of the acquiring entity if the original interest holder obtains a rollover and the holder is a common stakeholder for the arrangement.

Subsection 124-783(3) defines a common stakeholder as an original interest holder that had a common stake in the original entity just before the arrangement started and a common stake in the replacement entity just after the arrangement was completed.

Subsection 124-783(10) provides that two or more entities have a common stake in the original entity just before the arrangement started and in the replacement entity just after the arrangement was completed if the entities, and their associates, between them had:

·        just before the arrangement started, the right to receive 80% or more of any distribution to beneficiaries of the original entity of income or capital of the original entity; and

·        just after the arrangement was completed, the right to receive 80% or more of any distribution to beneficiaries of the replacement entity of income or capital of that entity.

Here, the three unitholders in Black and White are the same and collectively have the right to receive 80% or more of the distributions of income and capital in both Black (before the transaction) and White (after the transaction), meaning that the original interest holders are common stakeholders. These common stakeholders will benefit from rollover relief in undertaking this transaction. Therefore, White will inherit the cost base of the units in Black that White acquires from the Black's existing unitholders.