Edited version of private advice

Authorisation Number: 1051583513721

Date of advice: 10 October 2019

Ruling

Subject: 124-N rollover relief

Question 1

Is the Trust and its unitholders able to claim rollover relief under Subdivision 124-N in respect of the restructure?

Answer

Yes

Question 2

Will the Trust be able to disregard the capital gain it would have otherwise made on disposal of its CGT assets to NewCo?

Answer

Yes

Question 3

Will the unitholders be able to disregard the capital gain they would have otherwise made on the disposal of their units in the Trust in consideration for the issue of new shares in NewCo?

Answer

Yes

This ruling applies for the following period:

Year end 30 June 20XX

The scheme commences on:

XX/XX/20XX

Relevant facts and circumstances

All legislative references are made to the Income Tax Assessment Act 1997 unless otherwise stated.

1.            Coy A is an Australian resident company incorporated on XX/XX20XX.

2.            The shares of Coy A are wholly owned by a Trust.

3.            Coy A and the Trust are collectively referred to as 'the Group'.

The Trust

4.            The Trust was established in XX/XX/20XX and is governed by the terms of the trust deed.

5.            Under the Trust Deed, each unitholder has an equal interest in the Trust and all entitlements to distributions of the Trust are equal under the Trust Deed.

6.            For accounting purposes, the amounts distributed each year by the Trust to its unitholders are equal to the accounting income of the trust i.e. net of expenses.

7.            As the accounting distributions have been equal to the taxable income of the Trust for each year there have been no distributions of non-assessable amounts that would be subject to CGT event E4.

8.            All unitholders are Australian tax residents and do not hold their units as trading stock.

9.            The shares of Coy A are post CGT assets and are the only assets owned by the Trust, excluding minor bank account cash balances and borrowings.

10.          Pursuant to a trust restructure, the Trust transferred all Coy A shares to NewCo.

Coy A

11.          Coy A is the head company of an Australian income tax consolidated group (TCG) with one member and the TCG will de-consolidate as part of this restructure.

Overview of the proposed restructure

12.          The Group (the Trust & Coy A) has been approached by a third party investor (Investor) interested in acquiring xx% of Coy A.

13.          The investor has determined the market value of Coy A to be $Xm.

14.          To facilitate this acquisition, a restructure will be undertaken by converting the trust structure into a corporate structure (by replacing the Trust with NewCo).

Step 1

15.          NewCo was incorporated on XX/XX/20XX as a new standalone shelf company with each unitholder issued with one share.

Step 2

16.          On XX/XX/20XX , the Trust transferred all Coy A shares to NewCo for no consideration.

Step 3

17.          NewCo issued additional ordinary shares to its shareholders in the same proportion as their existing shareholdings in exchange for the future cancellation of the shareholders units in the Trust.

Step 4

18.          Any remaining assets and liabilities of the Trust were transferred to NewCo by on XX/XX/20XX.

1.            At this point the Trust will still exist but will have no assets or liabilities.

Step 5

2.            The Trust will be terminated within six months from the date of the transfer of Coy A shares to NewCo.

Step 6

3.            The Trust and NewCo will both choose to obtain rollover relief under Subdivision 124-N.

4.            The unitholders of the Trust will choose to obtain rollover relief in relation to the ending of their units in the Trust under Subdivision 124-N.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 50-A

Income Tax Assessment Act 1997 Section 104-70

Income Tax Assessment Act 1997 Subdivision 124-A

Income Tax Assessment Act 1997 Section 124-15

Income Tax Assessment Act 1997 Subsection 124-15(2)

Income Tax Assessment Act 1997 Subparagraph 124-780(1)(a)(i)

Income Tax Assessment Act 1997 Subdivision 124-N

Income Tax Assessment Act 1997 Subsection 124-855(1)

Income Tax Assessment Act 1997 Paragraph 124-855(1)(a)

Income Tax Assessment Act 1997 Paragraph 124-855(1)(b)

Income Tax Assessment Act 1997 Paragraph 124-855(1)(c)

Income Tax Assessment Act 1997 Section 124-860

Income Tax Assessment Act 1997 Subsection 124-860(1)

Income Tax Assessment Act 1997 Subsection 124-860(2)

Income Tax Assessment Act 1997 Subsection 124-860(3)

Income Tax Assessment Act 1997 Subsection 124-860(4)

Income Tax Assessment Act 1997 Subsection 124-860(6)

Income Tax Assessment Act 1997 Paragraph 124-860(6)(a)

Income Tax Assessment Act 1997 Paragraph 124-860(6)(b)

Income Tax Assessment Act 1997 Subsection 124-860(7)

Income Tax Assessment Act 1997 Paragraph 124-860(7)(a)

Income Tax Assessment Act 1997 Paragraph 124-860(7)(b)

Income Tax Assessment Act 1997 Section 124-865

Income Tax Assessment Act 1997 Section 124-870

Income Tax Assessment Act 1997 Subsection 124-870(1)

Income Tax Assessment Act 1997 Subsection 124-870(2)

Income Tax Assessment Act 1997 Subsection 124-870(3)

Income Tax Assessment Act 1997 Subsection 124-870(4)

Income Tax Assessment Act 1997 Subsection 124-870(5)

Income Tax Assessment Act 1997 Section 124-875

Income Tax Assessment Act 1997 Subsection 124-875(1)

Income Tax Assessment Act 1997 Subsection 124-875(3)

Income Tax Assessment Act 1997 Subsection 124-875(4)

Income Tax Assessment Act 1997 Subsection 124-875(5)

Income Tax Assessment Act 1997 Subsection 124-875(6)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the Trust and all of the unitholders of the Trust

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Is the Trust and all of its unitholders able to claim rollover relief under Subdivision 124-N in respect of the restructure?

Summary

Entities can choose to obtain rollover under Subdivision 124-N if a trust disposes of all of its assets to a company and the units in the trust are replaced by shares in the company.

Based on the information provided, all of the requirements in Subdivision 124-N will be satisfied. Therefore, VET and all of its unitholders are eligible to claim rollover relief in relation to the trust restructure.

Detailed reasoning

1.            Subdivision 124-N provides that entities can choose to obtain a roll-over if a trust disposes of all of its assets to a company and units and interest in the trust are replaced by shares in the company.

2.            Subsection 124-855(1) states that:

A roll-over may be available for a restructuring (a trust restructure) if:

(a)          a trust, or 2 or more trusts, (the transferor) dispose of all of their CGT assets to a company limited by shares (the transferee); and

(b)          CGT event E4 is capable of applying to all of the units and interests in the transferor; and

(c)          the requirements in section 124-860 are met.

Condition under paragraph 124-855(1)(a)

3.            The Trustee proposes to dispose all CGT assets in the Trust to NewCo, a company limited by shares. Therefore, the requirement in paragraph 124-855(1)(a) will be satisfied.

Condition under paragraph 124-855(1)(b)

4.            CGT event E4 under section 104-70 happens if the trustee of a trust makes a distribution to a beneficiary of the trust in respect of the beneficiary's ongoing unit or interest in the trust and some or all of the payment is not assessable. The amount that is not included in the taxpayer's assessable income is referred as the 'non-assessable part'.

5.            The Note in subsection 124-855(1) states that rollover over is not available for a restructure undertaken by a discretionary trust. For CGT event E4 to be capable of applying all the beneficiaries' interest must have a fixed capital component; having a discretionary income component will not fail this requirement.

6.            The terms of the Trust Deed indicate that the unitholders have a fixed entitlement to the capital of the trust. Whilst the Trustee has absolute discretion to pay sums out of the capital of the trust fund, to the extent the Trustee exercises this discretion, all such capital payments must be made to unitholders of participating units in proportion to their holdings.

7.            In effect, the Trustee cannot make non-assessable distributions to different VET unitholders, such that any capital distribution made will be considered to be a fixed capital component. Therefore, CGT event E4 is capable of applying to all of the units and the requirement in paragraph 124-855(1)(b) will be satisfied.

Condition under paragraph 124-855(1)(c)

8.            Paragraph 124-855(1)(c) requires that the requirements in section 124-860 are met, which are summarised as follows:

(a)          all of the CGT assets owned by the transferor (except CGT assets retained to pay existing or expected debts of the transferor) must be disposed of to the transferee during the 'trust restructuring period' specified in subsection 124-860(2)

(b)          the transferee must satisfy the following requirements:

(i)            the transferee must not be an exempt entity

(ii)           the transferee must be a company that has never carried on commercial activities

(iii)          the transferee must be a company that has no CGT assets other than small amounts of cash or debt* and or rights under an *arrangement, if (collectively) those rights only facilitate the transfer of assets to the transferee from the transferor

(iv)         the transferee must be a company that has no losses of any kind.

(c)          just after the trust restructuring period, each entity that owned interests in a transferor just before the start of the trust restructuring period must own replacement interests in the transferee in the same proportion as it owned those interests in that transferor. In addition, the market value of the replacement interests each of those entities owns in the transferee just after the trust restructuring period will be substantially the same as the market value of the interests it owned in the transferor just before the start of the trust restructuring period.

Disposal of all CGT assets during restructuring period - subsections 124-860(1) and (2)

9.            Under the restructure, the Trust will dispose of all of its CGT assets to NewCo during the 'trust restructuring period'. The trust restructuring period commences just before the first CGT asset of the transferor is disposed of to the transferee and ends when the last CGT asset of the transferor is disposed of to the transferee.

10.          The trust restructuring period commenced on XX/XX/20XX when the Trust transferred all of its Coy A shares to NewCo and ended on XX/XX/20XX when the Trust transferred all of its remaining CGT assets to NewCo. Therefore, these two requirements will be satisfied.

The transferee must not be an exempt entity - subsection 124-860(3)

11.          An 'exempt entity' is defined in subsection 995-1(1) as:

(a)          An entity all of whose ordinary income and statutory income is exempt from income tax because of this Act or because of another Commonwealth law, no matter what kind of ordinary or statutory income the entity might have or

(b)          An untaxable Commonwealth entity.

12.          Subdivision 50-A provides a list of the type of entities that may be considered exempt entities for income tax purposes.

13.          As NewCo is a newly incorporated shelf company and not characterised as any type of exempt entity listed in Subdivision 50-A, the requirement in subsection 124-860(3) will be satisfied

The transferee must have certain characteristics - subsection 124-860(4)

14.          To satisfy subsection 124-860(4) requires the transferee to meet the following conditions:

(a)          never carried on commercial activities

(b)          have no CGT assets, other than any or all of the following:

(i)            small amounts of cash or debt

(ii)           rights under an arrangement, if (collectively) those rights only facilitate the transfer of assets to the transferee from the transferor, and

(c)          have no losses of any kind.

15.          NewCo was incorporated on XX/XX/20XX with Coy A shares being transferred by the Trust to NewCo on XX/XX/20XX. Immediately just before the start of the trust restructuring period, NewCo did not have any commercial activities, losses or CGT assets, other than

·                     cash or receivables in respect of initial share issue to incorporate the company, and

·                     rights under an arrangement that facilitated the transfer of assets from the Trust to NewCo as part of the restructure.

16.          Therefore, the requirement in subsection 124-860(4) will be satisfied.

Just after the end of the trust restructuring period - subsections 124-860(6) and (7)

17.          Subsection 124-860(6) states:

Just after the end of the trust restructuring period:

(a)          each entity that owned interests in a transferor just before the start of the trust restructuring period must own replacement interests in the transferee in the same proportion as it owned those interests in that transferor; and

(b)          the market value of the replacement interests each of those entities owns in the transferee must be at least substantially the same as the market value of the interests it owned in the transferor or transferors just before the start of the trust restructuring period.

18.          The 'proportionate interest' test compares the proportionate ownership of interests in the trust (the transferor) just before the trust disposes of its first CGT asset to the company (the transferee) under the trust restructure, with the proportionate ownership of shares in the company just after the trust restructuring period.

19.          The 'market value test' requires the market value of the replacement shares just after the trust restructuring period must be at least substantially the same as the market value of the interests in the trust just before the start of the trust restructuring period.

20.          To satisfy the conditions in subsection 124-860(6) requires determining what is meant by the term 'replacement interests'. Whilst this term is not defined, subparagraph

21.          124-780(1)(a)(i) states 'there is roll-over if an entity (the original interest holder) exchanges a share (the entity's original interest) in a company (the original entity) for a share (the holder's replacement interest) in another company.' Subparagraph 124-780(1)(a)(i) indicates that for there to a replacement interest requires there to be an exchange of a share for another share. This interpretation accords with the definition of 'exchange' in the Cambridge English Dictionary:

the act of giving something to someone and them giving you something else

22.          Therefore, the shares issued on incorporation are not considered to be 'replacement interests', as they were not issued to replace or exchange the units held by the unitholders. The issue of the additional shares to the shareholders was said to be in exchange for the future cancellation of the shareholders units in the Trust.

23.          In addition, we also do not agree with your view that subsection 124-860(7) would have no application if the 'incorporation' shares are excluded

24.          Subsection 124-860(7) states:

For the purposes of subsection (6), ignore any *shares in the transferee that:

(a)          just before the start of the trust restructuring period, were owned by entities who together owned no more than 5 shares; and

(b)          just after the end of that period, represented such a low percentage of the total *market value of all the shares that it is reasonable to treat other entities as if they owned all the shares in the transferee.

25.          The Explanatory Memorandum to Taxation Laws Amendment Bill (No 4) 2002 states:

2.28 As the company may be a shelf company, a nominal number of shares may be owned by entities other than the beneficiaries in the trust before the first asset is disposed of to the company. It is also a requirement that the entities that own shares in the company just before the start of the trust restructuring period only own up to 5 shares collectively at that time [Schedule 2, item 1, paragraph 124-860(7)(a)] . Those shares initially issued in the shelf company may be ignored for the purposes of the proportionate interest tests if it would be reasonable to treat the beneficiaries of the trust as if they owned all the shares in the company. Those shares can be ignored where the market value of the shares owned in the company before the trust restructuring period is so insignificant that the beneficiaries of the trust, just before the trust restructuring period, can be considered to own all the shares in the company just after the end of that period [Schedule 2, item 1, paragraph 124-860(7)(b)] .

Example 2.5

Felicity owns 2 shares in ESS Pty Ltd (a shelf company) before the trust restructure. Immediately after the trust restructure period, 10,000 shares are issued to the members of the trust that restructured into ESS Pty Ltd. All the shares have equal market value. The shares owned by Felicity can be ignored in applying the proportionate interest test.

26.          Subsection 124-860(7) seeks to ignore shareholdings of no more than five shares owned by entities other than the beneficiaries of the trust and to cater for the disposal of assets by a trust to a shelf company.

27.          Under the restructure, NewCo was incorporated with XX ordinary shares owned by each of the unitholders of the Trust. We do agree with your view that the concession in subsection

28.          124-860(7) does not allow for these shares to be ignored in determining whether the tests in subsection 124-860(6) have been satisfied.

29.          Before the end of the restructuring period, NewCo will issue additional shares to each unitholder. The issue of additional shares will be in exchange for the future cancellation of the shareholders units in the Trust. These additional shares are considered to be 'replacement interests' for the purposes of subsection 124-860(6). Even after including the incorporation shares, at the end of the restructuring period each shareholder will own the 'same proportion' in NewCo as they originally held in the Trust. This means that the requirement in paragraph 124-806(6)(a) will be satisfied. 'Same' is defined as 'identical, not different', 'exactly like another or each other' and 'identical, unchanged'.

30.          The second requirement in paragraph 124-860(6)(b) is that the market value of the replacement interests is substantially the same just after the end of the restructuring period as it was just before the start of the restructuring period. As the incorporation shares are not considered to be part of the replacement interests, the value of these shares is to be taken out in working out this test. It is reasonable to conclude that the market value of the replacement interests is at least substantially the same, representing 99.9% of the market value of NewCo. Therefore, the requirement in subsection 124-860(6)(b) will be satisfied.

Choosing the rollover - section 124-865

31.          A rollover is only available for the transferor and transferee if both the transferor and transferee choose to obtain it.

32.          As the Trust and NewCo will be contractually bound to choose to claim this rollover, the Trust will be able to claim rollover for the transfer of its Coy A shares to NewCo.

Roll-over for owner of units or interests in a trust - section 124-870

33.          Section 124-870 set outs the following:

1.            You can choose to obtain a roll-over (whether or not the transferor and transferee choose to obtain a roll-over, and even if *CGT event J4 applies) if:

(a)          you own units or interests in the transferor (your original interests ); and

(b)          the ownership of all your units or interests ends under a trust restructure in exchange for *shares in the transferee (your replacement interests ).

2.            You must make the choice for each of your original interests.

3.            An entity that is a foreign resident cannot choose a roll-over under this section unless the replacement interests the entity *acquires in the transferee are *taxable Australian property just after their acquisition.

4.            If you choose a roll-over, you cannot make a *capital loss from a *CGT event that happens to your original interests during the *trust restructuring period.

5.            This section does not apply to your ownership of an original interest ending if:

(a)          the interest was an item of your *trading stock and the corresponding replacement interest becomes an item of your trading stock when you *acquire it; or

(b)          the interest was not an item of your trading stock but the corresponding replacement interest becomes an item of your trading stock when you acquire it.

34.          Under the restructure the units held by the unitholders of the Trust will end in exchange for ordinary shares issued in NewCo (proportionate to their respective holdings) and the Trust will be terminated within 6 months from the date of the first transfer of CGT assets to NewCo. Therefore, all the unitholders are able to choose to obtain a rollover, as the requirement in subsection 124-870(1) will be satisfied.

35.          All the unitholders are Australian tax residents', therefore the requirement in subsection 124-870(3) is not applicable.

36.          If any unitholder chooses rollover, they cannot make a capital loss from a CGT event that happens to their original unit holding during the trust restructuring period.

37.          As the unitholders did not hold their units as trading stock and will not hold their shares in NewCo as trading stock, the exception in subsection 124-870(5) is not applicable.

38.          Provided each unitholder makes the choice to obtain rollover for each of their original interests, as prescribed in subsection 124-870(2), each unitholder will be eligible to choose to obtain a rollover under subsection 124-870(1).

Question 2

Will the Trust be able to disregard the capital gain it would have otherwise made on disposal of its CGT assets to NewCo?

Summary

As the Trust (the transferor) has satisfied all the requirements for rollover, the Trust is able to disregard any capital gain or loss made from the disposal of its Coy A shares to NewCo.

Detailed reasoning

Effect on the Trust (the transferor) - section 124-875

39.          Where the requirements for the rollover have been satisfied any capital gain or loss made from CGT event A1 happening to the transferor under the trust restructure is disregarded.

40.          CGT event A1 happened when the Trust transferred its Coy A shares to NewCo on XX/XX/20XX. Therefore, any capital gain or loss made by the Trust is able to be disregarded.

41.          The remaining provisions in section 124-875 do not apply as:

·                     the Trust did not acquired its shares in Coy A before 20 September 1985

·                     the Coy A shares were not held by the Trust as trading stock and will not become an item of trading stock of NewCo, and

·                     NewCo is an Australian resident.

Question 3

Will the unitholders be able to disregard the capital gain they would have otherwise made on the disposal of their units in the Trust in consideration for the issue of new shares in NewCo?

Summary

The unitholders will be able to disregard the capital gain they would have otherwise made on the disposal of their units in the Trust in consideration for the issue of new shares in NewCo.

Detailed Reasoning

Roll-over for owner of units or interests in a trust - section 124-870

42.          As determined in Question 1, the unitholders are able to choose to obtain rollover, as they satisfy the requirements of section 124-870. Subdivision 124-A sets out the rollover consequences where a rollover has been chosen by the unitholders of the Trust.

43.          Section 124-15 describes the consequences (in most cases) if you can obtain a roll-over when your ownership of more than one CGT asset (the original assets) ends and you acquire one or more CGT assets (the new assets).

44.          Subsection 124-15(2) states that a capital gain or a capital loss you make from each original asset is disregarded. Therefore, the capital gain made by each unitholder for disposing of all of their units in the Trust for the issue of new shares in NewCo will be able to be disregarded.