Edited version of private advice

Authorisation Number: 1051597360254

Date of advice: 12 December 2019

Ruling

Subject: Trust fixed entitlements and scrip for scrip rollover relief

Question 1

Will the Commissioner exercise his discretion under subsection 272-5(1) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) to treat the unitholders of Unit Trust C as having a fixed entitlement to a share of the income and capital of the trust for the purpose of paragraph 124-781(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the unitholders in Unit Trust C be able to choose roll-over under Subdivision 124-M of the ITAA 1997 in respect of the exchange of their ordinary units in Unit Trust C for stapled units in Unit Trust A and Unit Trust B?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2020

The scheme commences on:

1 July 2019

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.

Unit Trust C

1.               Unit Trust C was established in xx/xx/xx.

2.               Unit Trust C currently has three unitholders each holding the same number of units.

3.               Unit Trust C holds commercial property with a value of $x million.

4.               The three unitholders have been approached to sell their units in Unit Trust C to Unit Trust A and Unit Trust B.

Unit Trust A and Unit Trust B

5.               Unit Trust A is a Public Trading Trust, which is subject to Division 6C of the ITAA 1936, with more than 1,000 unitholders.

6.               Unit Trust A has a net worth in the order of $x million.

7.               In the year ended 30 June 2018 the units in Unit Trust A became stapled with those in Unit Trust B.

8.               The net worth of Unit Trust B is $nil, as the assets are roughly the same as its liabilities.

9.               Due to the units being stapled to Unit Trust A there are now more than 1,000 unitholders in Unit Trust B.

10.            In response to an information request sent, the following information was received:

(a)             Unit Trust A and Unit Trust B are Registered Managed Investment Schemes

(b)             Unit Trust A and Unit Trust B have complied with all the requirements of Chapter 5C of the Corporations Act 2001

(c)             all beneficial interests in both trusts have the same rights to receive the income and capital of the trust:

·                  there is only one class of units in each Trust

·                  there is no intention in the future to issue different classes of units.

Sale of units

11.            A Heads of Agreement has been entered into between the three unitholders (the Vendors) and the Custodian Trustee, Unit Trust A and Unit Trust B (together the Purchasers) for the Purchasers to purchase all the units from the Vendors. The consideration will be equal to $x million and is payable as follows at the election of each of the Vendors:

(a)             100% in cash, or

(b)             50% in cash and 50% through the issue of units in Unit Trust A and Unit Trust B as a stapled security, or

(c)             100% through the issue of units in Unit Trust A and Unit Trust B as a stapled security.

12.            There is no agreement or understanding as to which unitholder will elect which option.

13.            Unit Trust A and Unit Trust B do not intend to amend the Unit Trust C's trust deed after they gain control of Unit Trust C.

14.            The two trusts plan to operate Unit Trust C like a subsidiary entity and to leave the existing commercial property in Unit Trust C.

Other Information

15.            In response to an information request, the following information was received:

·                  there is no relationship between the unitholders

·                  the unitholders are not associates or affiliates of each other

·                  the entities the unitholders own or control are not 'related to' or 'associates of' the other unitholders in Unit Trust C in any way whatsoever, other than as a consequence of their mutual interest in Unit Trust C, and its trustee.

·                  in relation to any capital payments made by the Trustee in accordance with a clause of the Trust Deed:

-                  all repayments and adjustments have at all times been made proportionate to and in accordance with the unit-holdings.

16.            Each party will deal with each other at arm's length.

17.            The disposal of the units in Unit Trust C would result in a capital gain being made by each original unitholder.

18.            The unitholders in Unit Trust C will choose to obtain roll-over under Subdivision 124-M.

19.            Unit Trust A and Unit Trust B will not make a choice to deny a roll-over to the original unitholders under Subdivision 124-M of the ITAA 1997.

Information provided

20.            You have provided the following documents in relation to the ruling request:

(a)             your private ruling application, and

(b)             supplementary information provided on various dates.

Relevant legislative provisions

Income Tax Assessment Act 1936, Subsection 272-5 of Schedule 2F

Income Tax Assessment Act 1936, Subsection 272-5(1) of Schedule 2F

Income Tax Assessment Act 1936, Subsection 272-5(3) of Schedule 2F

Income Tax Assessment Act 1936, Subsection 272-5(3)(b) of Schedule 2F

Income Tax Assessment Act 1936, Section 272-35 of Schedule 2F

Income Tax Assessment Act 1936, Section 272-65 of Schedule 2F

Income Tax Assessment Act 1997, Section 108-5

Income Tax Assessment Act 1997, Subdivision 124-M

Income Tax Assessment Act 1997, Subsection 124-781(1)

Income Tax Assessment Act 1997, Subparagraph 124-781(1)(a)(i)

Income Tax Assessment Act 1997, Paragraph 124-781(1)(b)

Income Tax Assessment Act 1997, Paragraph 124-781(1)(c)

Income Tax Assessment Act 1997, Paragraph 124-781(1)(d)

Income Tax Assessment Act 1997, Subsection 124-781(2)

Income Tax Assessment Act 1997, Subsection 124-781(2A)

Income Tax Assessment Act 1997, Subsection 124-781(3)

Income Tax Assessment Act 1997, Paragraph 124-781(3)(c)

Income Tax Assessment Act 1997, Subsection 124-781(4)

Income Tax Assessment Act 1997, Section 124-782

Income Tax Assessment Act 1997, Section 124-783

Income Tax Assessment Act 1997, Subsection 124-785(2)

Income Tax Assessment Act 1997, Subsection 124-785(4)

Income Tax Assessment Act 1997, Section 124-790

Income Tax Assessment Act 1997, Subsection 124-790(2)

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

Corporations Act 2001, section 601EB

Reasons for Decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Will the Commissioner exercise his discretion under subsection 272-5(1) of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936) to treat the unitholders of Unit Trust C as having a fixed entitlement to a share of the income and capital of the trust for the purpose of paragraph 124-781(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The unitholders of Unit Trust Cdo have fixed entitlements to all of the income and capital of the trust as defined in subsection 272-5(1) of Schedule 2F to the ITAA 1936.

The Commissioner will exercise his discretion in subsection 272-5(3) of Schedule 2F to the ITAA 1936 to treat the unitholders of the Unit Trust C as having fixed entitlements to all of the income and capital of the Trust when the contract is executed.

Detailed reasoning

1.               A trust is a 'fixed trust' if entities or persons have fixed entitlements to all of the income and capital of the trust.

2.               Subsection 995-1(1) states:

an entity has a fixed entitlement to a share of the income or capital of a trust if the entity has a fixed entitlement to that share within the meaning of Division 272 in Schedule 2F to the Income Tax Assessment Act 1936.

3.               The circumstances in which a fixed entitlement will ordinarily arise is found in subsection 272-5(1) of Schedule 2F to the ITAA 1936, which states:

If, under a trust instrument, a beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust, the beneficiary has a fixed entitlement to that share of the income or capital.

Vested and indefeasible interest

4.               A fixed entitlement can only arise where a beneficiary has a 'vested and indefeasible interest' in a share of the income or capital of the trust.

5.               The term 'vested and indefeasible' is not defined in the taxation legislation.

6.               The Explanatory Memorandum to A New Tax System (Closely Held Trusts) Act 1999 states:

What is a vested interest?

1.20 A person has a vested interest in something if the person has a present right relating to the thing. Stated simply, a vested interest is one that is bound to take effect in possession at some point in time. A vested interest is to be contrasted with a contingent interest which may never fall into possession. If an interest of a beneficiary in income or capital is the subject of a condition precedent, so that an event must occur before the interest becomes vested, the beneficiary does not have a vested interest to the income or capital since such an interest is instead contingent upon the event occurring.

1.21 Broadly speaking, a person can be said to be either vested in possession or vested in interest. A present interest, i.e. one that is being enjoyed, is said to be vested in possession; a future interest, i.e. one which gives its holder a present right to future enjoyment, is said to be vested in interest. A person is vested in possession where the person has a right to immediate possession or enjoyment of the thing in question. In the definition of fixed entitlement, vested includes both vested in possession and vested in interest.

1.22 Because vested interests include future interests, a person can have a vested interest in a thing even though the persons actual possession and enjoyment of the thing is delayed until sometime in the future.

When is a vested interest indefeasible?

1.23 A vested interest is indefeasible where, in effect, it is not able to be lost. A vested interest is defeasible where it is subject to a condition subsequent that may lead to the entitlement being divested. A condition subsequent is an event that could occur after the interest is vested that would result in the entitlement being defeated, for example, on the occurrence of an event or the exercise of a power. For example, where a beneficiarys vested interest is able to be taken away by the exercise of a power by the trustee or any other person, the interest will not be a fixed entitlement.

1.24 Where the trustee exercises a power to accumulate income or capital of the trust in accordance with the trust deed, the accumulation does not result in a beneficiarys interest being taken away or defeased as long as the beneficiary nevertheless remains entitled at some future time to enjoy his or her share of the income or capital which has been accumulated.

7.               In Practical Compliance Guideline PCG 2016/16: Fixed entitlements and fixed trusts, the terms 'vested' and 'indefeasible' are referred to as follows:

13. In terms of the concept of 'fixed entitlement', an interest is 'vested' if it is vested in interest or vested in possession. An interest is vested in possession when it gives its holder a right of present enjoyment, whereas an interest is vested in interest if it gives its holder a present right to future enjoyment. ...

15. An interest is defeasible if it can be defeated by the actions of one or more persons or by the occurrence of one or more subsequent events. An interest of a default beneficiary in the income or capital of the trust is an example of a defeasible interest.

16. Powers in modern trust instruments which cause a beneficiary's interests to be defeasible include:

·                  Broad powers to amend the trust instrument.

·                  Powers to issue new units after the trust is settled, or to redeem existing units.

·                  A power to reclassify existing units so that they do not all have equal rights to receive the income and capital of the trust.

·                  A power to classify receipts as being on income or capital account where the units that have been issued do not all have the same rights to receive the income and capital of the trust.

·                  A power to appoint a beneficiary's interest in the income or capital of the trust to another beneficiary.

·                  A power to settle or appoint any part of the corpus of the trust to a new trust with different beneficiaries.

·                  A power to enforce the forfeiture or cancellation of partly paid units due to the non-payment of a call except where such partly paid units would be void ab initio.

8.               For the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936, the trust instrument that Unit Trust C has consists of the Trust Deed and Supplementary Deeds.

9.               Various clauses of the trust deed makes it clear that the unitholders have a vested interest in a share of the income and capital of the Unit Trust C.

10.            A clause of the Trust Deed gives the Trustee the power to issue additional units. The inclusion of such clauses in the Trust Deed will cause the unitholders interests to be defeasible. Therefore, the unitholders, as beneficiaries of the Unit Trust C, do not have a fixed entitlement to a share of the income or capital of Unit Trust C for the purposes of subsection 272-5(1) of Schedule 2F to the ITAA 1936.

Safe harbour - Compliance Approach

11.            PCG 2016/16 at Attachment B describes certain types of trusts. These trusts can manage the trust's tax affairs as if the Commissioner has exercised the discretion to treat the beneficiaries as having fixed entitlements to the income and capital of the trust for the purposes of section 272-5 of Schedule 2F to the ITAA 1936. To qualify for access to a safe harbour, a trust must, at all relevant times, satisfy the conditions of one of the categories below:

(1)             Listed Trusts

(2)             Registered managed investment schemes that are trusts

(3)             Certain widely held trusts that satisfy licensing requirements

(4)             Unregistered managed investment schemes that satisfy licensing requirements

(5)             Specific single interest holder trusts

(6)             Other trusts

12.            Unit Trust C falls into Category 6 - Other trusts. PCG 2016/16 states at paragraph 54 that the trust must comply with all of the following conditions:

·                  the trust must have a trust instrument

·                  all beneficial interests in the income and capital of the trust are vested

·                  all beneficial interests have the same rights to receive the income and capital of the trust (see paragraph 17 of this Guideline)

·                  all beneficial interests in the income and capital of the trust can be expressed as a percentage of the total income and capital of the trust

·                  the trust 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 or other donee

·                  a trustee or manager has never exercised a power capable of defeating a beneficiary's interest to defeat a beneficiary's interest in the income or capital of the trust, and

·                  an arrangement has not been entered into which would result in:

(a)             section 272-35 having application

(b)             the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction, or

(c)             fraud or evasion.

13.            In relation to these conditions:

(a)             Unit Trust C has a trust instrument

(b)             all the beneficiaries have a vested interest in the income and capital of Unit Trust C

(c)             with only one type of unit available to the unitholders of Unit Trust C they will have the same rights to receive the income and capital of the trust in proportion to their unitholdings.

(d)             as the beneficiaries are entitled to the income and capital of the trust in proportion to their unitholdings this can be expressed as a percentage of the total income and capital of the trust.

(e)             the trustee has no discretion in the Trust Deed to appoint income or capital to anyone else.

(f)               Unit Trust C has never exercised a power capable of defeating a beneficiary's interest.

(i)               The circumstances in which defeasance of interests can happen is if the Trustee pays out an amount of capital that is not made in proportion to and in accordance with the unitholdings. In the two circumstances in which Trustee made a payment out of capital, it was made proportionate to and in accordance with the unitholdings.

(ii)              The Trustee has stated that they would only ever pay out capital in respect of the unitholdings.

(g)             none of the listed arrangements listed apply to Unit Trust C.

14.            Based on these findings, the Commissioner will exercise his discretion to treat Unit Trust C as a fixed trust for the purposes of section 272-5 of Schedule 2F to the ITAA 1936.

15.            Unit Trust A and Unit Trust B will also fall into a safe harbour category, Category 2, for Registered Managed Investment schemes that are trusts. To qualify for safe harbour, they will need to satisfy the following conditions in paragraph 54 of PCG 2016/16:

·                  it is a 'registered scheme' as defined in subsection 995-1(1) (that is, a managed investment scheme that is registered under section 601EB of the Corporations Act 2001)

·                  the trustee, Responsible Entity, manager or other controller has complied with all of the requirements of Chapter 5C of the Corporations Act 2001, and any applicable ASIC relief (for example, authorising issuing units at a discount), and

·                  all beneficial interests have the same rights to receive the income and capital of the trust (see paragraph 17).

16.            In relation to these conditions you have stated that:

(a)             both Unit Trust A and Unit Trust B have entered into Registered Managed Investment Scheme

(b)             they have complied with all the requirements of Chapter 5C of the Corporations Act 2001, and

(c)             all beneficial interests have the same rights to receive the income and capital of the trust

(i)               there is only one class of units in each Trust

(ii)              there is no intention in the future to issue different classes of units.

17.            Based on the information provided, the Commissioner will exercise his discretion to treat Unit Trust A and Unit Trust B as fixed trusts for the purposes of section 272-5 of Schedule 2F to the ITAA 1936.

Commissioner's Discretion

18.            The 'safe harbours' in PCG 2016/16 can only be satisfied in relation to known facts. A trustee that requires certainty as to whether or not the beneficiaries of the trust have fixed entitlements in relation to a future time must request the Commissioner to exercise his discretion.

19.            As the contract to sell the units in Unit Trust C to Unit Trust A and Unit Trust B has not yet been executed, you require the Commissioner to exercise his discretion that Unit Trust C, Unit Trust A and Unit Trust B will satisfy the safe harbour conditions when it is executed.

20.            Where beneficiaries do not have a fixed entitlement, the Commissioner may, for the purposes of the Act, treat such beneficiaries as having a fixed entitlement. In deciding whether or not to exercise the discretion, the Commissioner must consider the following factors prescribed in paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936:

(a)             the circumstances in which the entitlement is capable of not vesting or the defeasance can happen

(b)             the likelihood of the entitlement not vesting or the defeasance happening, and

(c)             the nature of the trust.

21.            Having regard to the following factors, the Commissioner will exercise his discretion under subsection 272-5(3) of Schedule 2F to the ITAA 1936 that Unit Trust C will continue to satisfy the safe harbour conditions at a future time:

(a)             the circumstances in which defeasance of interests can happen is if the Trustee pays out an amount of capital that is not made in proportion to and in accordance with the unitholdings. In the two circumstances in which Trustee made a payment out of capital, it was made proportionate to and in accordance with the unitholdings.

(b)             the Trustee has stated that they would only ever pay out capital in respect of the unitholdings

(c)             the likelihood of defeasance happening has been reduced by amendments to the Trust Deed, e.g. to delete various parts to Clause x that took away the power of the Trustee to reclassify units and to delete references to 'class of units'

(d)             any additional units the Trustee issues shall comprise one class and shall at any time be of equal value

(e)             there is no relationship between the unitholders

(f)               the unitholders are not associates or affiliates of each other

(g)             the entities the unitholders own or control are not 'related to' or 'associates of' the other unitholders in Unit Trust C in any way whatsoever, other than as a consequence of their mutual interest in Unit Trust C and its Trustee

(h)             whilst the trustee has the power to alter, modify, vary or add to the provisions of the Trust Deed, any exercise of this power must not prejudice the interests of the any of the unitholders

(i)               the likelihood of defeasance happening is low, as the unitholders are not associated or affiliated with one another, which makes it less likely for the trustee to act in a way to favour or prejudice the interests of any unitholder.

22.            Having regard to the following factors, the Commissioner will exercise his discretion under subsection 272-5(3) of Schedule 2F to the ITAA 1936 that Unit Trust A and Unit Trust B will continue to satisfy the safe harbour conditions at a future time:

(a)             they have entered into a Registered Managed Investment Scheme and have complied with the numerous regulations

(b)             they have a compliance plan lodged with ASIC

(c)             they are independently audited

(d)             they are a public trading trust

(e)             the Product Disclosure Statement states that related parties hold XX% interests - based on voting powers they cannot control either Unit Trust A or Unit Trust B.

23.            Therefore, by the Commissioner exercising his discretion under paragraph 272-5(3)(b) of Schedule 2F to the ITAA 1936 means that the unitholders of the Unit Trust C is to be treated as having fixed entitlements to all of the income and capital of the Unit Trust C for the year ending 30 June 2020.

Question 2

Will the unitholders in Unit Trust C be able to choose roll-over under Subdivision 124-M of the ITAA 1997 in respect of the exchange of their ordinary units in Unit Trust C for stapled units in Unit Trust A and Unit Trust B?

Summary

The unitholders of the Unit Trust C will be able to choose partial roll-over under Subdivision 124-M.

Detailed reasoning

24.            Subdivision 124-M allows you to choose a roll-over where post-CGT shares or trust interests are replaced with other shares or trust interests.

25.            Subsection 124-781(1) states:

There is roll-over if:

(a)an entity (also the original interest holder ) exchanges:

(i)a unit or other interest (also the holder's original interest ) in a trust (also the original entity) for a unit or other interest (also the holder's replacement interest) in another trust (also the acquiring entity and the replacement entity); or

(ii)an option, right or similar interest (also the holder's original interest) issued by the original entity that gives the holder an entitlement to acquire a unit or other interest in the original entity for a similar interest (also the holder's replacement interest) in another trust (also the acquiring entity and the replacement entity); and

(b)entities have *fixed entitlements to all of the income and capital of the original entity and the acquiring entity; and

(c)the exchange is in consequence of an *arrangement that satisfies subsection (2) or (2A); and

(d)the conditions in subsections (3) and (4) are satisfied.

Units are exchanged for units in another trust

26.            Subparagraph 124-781(1)(a)(i) requires an entity to exchange a unit or other interest in a trust for another unit or other interest in another trust.

27.            In this case, the unitholders of the Unit Trust C will exchange their units for their choice of the following:

(a)             100% in cash, or

(b)             50% in cash and 50% through the issue of units in Unit Trust A and Unit Trust B as a stapled security, or

(c)             100% through the issue of units in Unit Trust A and Unit Trust B as a stapled security.

28.            For those unitholders who choose option (b) or option (c) they will satisfy the condition in subparagraph 124-781(1)(a)(i), as they are exchanging their units for units in another trust.

Entities have fixed entitlements to all of the income and capital of the original entity and the acquiring entity.

29.            As set out in Question 1, the Commissioner will exercise his discretion to treat Unit Trust C (the original entity) and Unit Trust A and Unit Trust B (the acquiring entities) as fixed trusts under the safe harbour provisions.

30.            Therefore, the second condition in paragraph 124-781(1)(b) will be satisfied, as the unitholders in Unit Trust C, Unit Trust A and Unit Trust B will have fixed entitlements to all the income and capital of each respective trust.

Conditions for arrangement: 80% or more ownership

31.            The third condition contained in paragraph 124-781(1)(c) requires the exchange is in consequence of an arrangement that satisfies subsection 124-781(2) or (2A). As this arrangement does not involve a takeover, subsection 124-781(2) is relevant and states:

The arrangement must:

(a)             result in the acquiring entity, owning 80% or more of the trust voting interests in the original entity or, if there are none, 80% or more of the units or other units in the original entity; and

(b)             be one in which at least all owners of trust voting interests (or of units or other interests) in the original entity (except the acquiring entity) could participate; and

(c)             be one in which participation was available on substantially the same terms for all of the owners of interests or units of a particular type in the original entity.

32.            Under the Heads of Agreement entered into between the parties:

·                  Unit Trust A and Unit Trust B will acquire 100% of units in the Unit Trust C, and

·                  each of the Vendors (being the three unitholders of the Unit Trust C) are able to elect from the same three options how they would like to receive their one third share of the Purchase Price.

33.            Accordingly, the condition in paragraph 124-781(1)(c) is satisfied.

Conditions for roll-over

34.            The fourth and final condition in paragraph 124-781(1)(d) is that the conditions in subsections 124-781(3) and (4) are satisfied.

35.            Subsection 124-781(3) states:

The conditions are:

(a)             the original interest holder acquired its original interest on or after 20 September 1985

(b)             apart from the roll-over, it would make a capital gain from a CGT event happening in relation to its original interest

(c)             it chooses to obtain the roll-over or, if section 124-782 applies to it for the arrangement, it and the trustee of the acquiring entity jointly choose to obtain the roll-over; and

(d)             if that section applies to it, it informs that 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.

36.            The Register of Members for the Unit Trust C shows all three unitholders acquired their interests after 20 September 1985. Therefore, the first condition is satisfied.

37.            You have advised that the unitholders in Unit Trust C will make a capital gain on the sale of relation to their original units. Therefore, the second condition is satisfied.

38.            In determining if the third condition is satisfied, it has to be determined if section 124-782 applies. Section 124-782 applies if the original unitholder obtains a roll-over and they were a significant stakeholder or a common stakeholder for the arrangement.

39.            Section 124-783 sets out the meaning of significant stakeholder, common stakeholder, significant stake and common stake as follows:

Significant Stakeholder

1.                An original interest holder is a significant stakeholder for an *arrangement if it had:

(a)             a *significant stake in the original entity just before the arrangement started; and

(b)             a significant stake in the replacement entity just after the arrangement was completed.

2.                ...

Common Stakeholder

3.                An original interest holder is a common stakeholder for an *arrangement if it had:

(a)             a *common stake in the original entity just before the arrangement started; and

(b)             a common stake in the replacement entity just after the arrangement was completed.

4.                ...

5.                No original interest holder is a common stakeholder for an *arrangement if either the original entity or the replacement entity had at least 300 *members (for a company) or 300 beneficiaries (for a trust) just before the arrangement started.

Significant stake

6.                ...

7.                An entity has a significant stake in a trust at a time if the entity, or the entity and the entity's *associates between them, had at that time the right to receive 30% or more of any distribution to beneficiaries of the trust of income or capital of the trust.

8.                ...

Common stake

9.                ...

10.             If the original entity and the replacement entity are trusts, an entity, or 2 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 entity or entities, and their *associates, between them:

(a)             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

(b)             had, 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.

40.            Unit Trust A and Unit Trust B have over 1,000 unitholders. Therefore, as no original interest holder (being the Unit Trust C unitholders) is able to be a common stakeholder or a significant stakeholder, section 124-782 does not apply to the original interest holders.

41.            As section 124-782 does not apply to the original interest holders, to satisfy the condition in paragraph 124-781(3)(c) will require the original interest holder choosing to obtain the roll-over. You have advised that the unitholders in Unit Trust C will choose to obtain the roll-over.

42.            Therefore, the third condition in subsection 124-781(3) is satisfied.

43.            Subsection 124-781(4) provides further roll-over conditions that must be satisfied if the original interest holder and the acquiring entity did not deal with each other at arm's length and neither the original entity nor the replacement entity had at least 300 members just before the arrangement started.

44.            As Unit Trust A and Unit Trust B dealt with each other at arm's length and all entities involved have more than 1,000 unitholders, the further roll-over conditions in subsection 124-781(4) do not need to be satisfied.

45.            As all the conditions for roll-over have been satisfied, the unitholders of the Unit Trust C are able to choose roll-over under Subdivision 124-M.

Availability of scrip for scrip roll-over

46.            Scrip for scrip roll-over cannot be chosen if one of the exceptions in section 124-795 applies. As none of the exceptions apply, roll-over can be chosen to disregard any amount of the capital gain made by the Unit Trust C unitholders disposing of their units for Unit Trust A and Unit Trust B units.

47.            Where a unitholder elects to only receive cash for disposing of theirs units to Unit Trust A and Unit Trust B, such unitholder is not able to obtain roll-over under Subdivision 124-M.

48.            Where a unitholder elects to receive 50% cash and 50% in units for disposing of their units to Unit Trust A and Unit Trust B, such unitholder is able to obtain partial roll-over under section 124-790, which states.

The original interest holder can obtain only a partial roll-over if its capital proceeds for its original interest include something (the ineligible proceeds) other than its replacement interest. There is no roll-over for that part (the ineligible part) of its original interest for which it received ineligible proceeds.

49.            Section 124-790(2) states that the cost base of the ineligible part is that part of the cost base of your original interest as is reasonably attributable to it.

50.            Each stapled unit issued by Unit Trust A and Unit Trust B comprises two separate CGT assets: a unit in Unit Trust A and a unit in Unit Trust B.

51.            In this case, the unitholders of the Unit Trust C who choose option (b) or (c) will exchange their units for their choice of the following:

(a) Unit Trust A units valued at 90.5 cents are eligible proceeds

(b) Unit Trust B units valued at $0 are eligible proceeds

(c) cash is ineligible proceeds.

52.            Where scrip for scrip roll-over is chosen, the first element of the cost base and reduced cost base of each stapled unit received is equal to that part of the cost base of the Unit Trust C units that is reasonably attributable to the stapled units received.

53.            In order to calculate the cost base of a stapled unit, the Unit Trust C unitholders must reduce the cost base of their Unit Trust C units by so much of the cost base as is reasonably attributable to an ineligible part, being the cash portion.

54.            Therefore, the unitholders who choose option (b) will disregard the 50% cash portion received from the sale of their units. They will be eligible for roll-over for the 50% of Unit Trust C units that were exchanged for units in Unit Trust A and Unit Trust B.

55.            The unitholders who choose option (c) will be eligible for roll-over for 100% of Unit Trust C units that were exchanged for units in Unit Trust A and Unit Trust B.