Edited version of private advice

Authorisation Number: 1051748944068

Date of advice: 9 September 2020

Ruling

Subject: Subdivision 122-A roll-over

Question 1

Can the trustee for the Unit Trust (UT) choose to obtain a roll-over under Subdivision 122-A of the Income Tax Assessment Act 1997[1] if it sells the units it owns in X Unit Trust to Company A in return for the issue of ordinary shares in Company A?

Answer

Yes

Question 2

If the trustee for the UT chooses to obtain a roll-over in respect of its disposal of units in the X Unit Trust to Company A:

(a)  is a capital gain or capital loss that the trustee makes from the disposal disregarded?

(b)  is the trustee taken to have acquired the shares in Company A before 20 September 1985?

Answer

Yes

Question 3

If the trustee for the UT chooses to obtain a roll-over in respect of its disposal of units in the X Unit Trust to Company A, is Company A taken to have acquired the units in the X Unit Trust before 20 September 1985?

Answer

Yes

Question 4

Can Company A elect under section 703-50 to form a consolidated group with effect from

1 January 20XX with the X Unit Trust and its wholly-owned subsidiaries as subsidiary members?

Answer

Yes

Question 5

Will Subdivision 705-B apply to modify the rules in Subdivision 705-A for working out the tax cost setting amounts for the assets of the X Unit Trust and its wholly-owned subsidiaries?

Answer

Yes

Question 6

Pursuant to paragraph 110-25(2)(b), is the first element of the cost base of the units that Company A owns in the X Unit Trust the market value of the Company A shares issued as consideration to acquire those units on the date of issue?

Answer

Yes

Question 7

Is the cost base of the units in the X Unit Trust determined under paragraph 110-25(2)(b) the cost base amount under item 1 in the table in subsection 705-65(1) for the purposes of step 1 in the table in section 705-60?

Answer

Yes

Question 8

Can the trustee for the UT choose to obtain a roll-over under Subdivision 122-A if it sells the Assets to Company A in return for the issue of ordinary shares in Company A?

Answer

Yes, to the extent the Assets exclude any asset that is a precluded asset and any asset that will become trading stock of Company A.

Question 9

If, to the extent entitled in accordance with question 8 of this ruling, the trustee for the UT chooses to obtain a roll-over in respect of the disposal of the Assets to Company A:

(a)  is a capital gain or capital loss that the trustee makes from the disposal disregarded?

(b)  is the trustee's cost base (or reduced cost base) in the Company A shares it receives the cost base (or reduced cost base) of the applicable Assets divided by the number of shares Company A issues?

Answer

Yes

Question 10

If, to the extent entitled in accordance with question 8 of this ruling, the trustee for the UT chooses to obtain a roll-over in respect of the disposal of the Assets to Company A, is the cost base (or reduced cost base) of the applicable Assets in the hands of Company A the trustee's cost base (or reduced cost base) in the those assets at the time of their disposal by the trustee?

Answer

Yes

Question 11

Can the trustee for the UT obtain roll-over relief under section 40-340 in respect of the trustee's disposal of Assets that constitute depreciating assets?

Answer

Yes

Question 12

Under section 701-1, for 'head company core purposes' and 'entity core purposes' can Company A disregard any liability for income tax or loss from the transfer by Company A of Assets to the X Unit Trust?

Answer

Yes

Relevant facts and circumstances

Background and ownership structure

The UT was established by deed of settlement before 20 September 1985, is an Australian resident unit trust, and is owned by 4 discretionary trusts equally. No units in the UT have been issued or redeemed since 20 September 1985.

The UT owns 100% of the units in the Y Unit Trust, an Australian unit trust established by deed of settlement after 20 September 1985.

The X Unit Trust is an Australian unit trust established deed of settlement before 20 September 1985.

The UT has, since settlement, owned 100% of the units on issue in the X Unit Trust. No units in the X Unit Trust have been issued or redeemed since 20 September 1985.

The X Unit Trust owns 100% of the shares in two companies (collectively referred to as the "Subsidiary Entities").

The discretionary trusts, UT, X Unit Trust and the Subsidiary Entities are members of the same private group.

Company A was incorporated in 20XX and issued 1 ordinary share ($1) to UT.

Proposed Restructure

The aim is to restructure certain activities of the group into a consolidated corporate group by:

a.    the trustee for theUT selling the units it owns in the X Unit Trust to a company - "Company A" - in return for shares in Company A;

b.    Company A forming a consolidated group comprising itself, the X Unit Trust and the Subsidiary Entities;

c.     the trustee for theUT selling the Assets it owns (including its units in Y Unit Trust) to Company A in return for additional shares in Company A; and

d.    Company A selling the Assets acquired from the trustee for the UT to the X Unit Trust.

The proposed restructure steps

Step 1: On 31 December 20XX, the trustee for theUT will sell its units in the X Unit Trust to Company A in return for shares in Company A:

e.    the UT incorporated Company A with 1 ordinary share on issue, owned by the trustee for theUT;

f.      the trustee for theUT will transfer the units it owns (100%) in the X Unit Trust to Company A and the only consideration for that transfer will be the issue by Company A of ordinary shares in itself;

                                  i.    Company A will not undertake to discharge a liability (or liabilities) in respect of the units in the X Unit Trust.

g.    the number of ordinary shares that Company A issues to the trustee for theUT in consideration for the units in the X Unit Trust will "swamp" the 1 ordinary share issued upon incorporation and the market value of those shares will be substantially the same as the market value of the units;

h.    the ordinary shares that Company A issues will not be redeemable shares and the trustee for theUT will own all the shares in Company A; and

i.      the trustee for theUT will choose to obtain a roll-over under Subdivision 122-A in respect of the disposal of its units in the X Unit Trust.

Step 2: Company A will form a consolidated group:

j.      Company A will wholly-own the X Unit Trust and the X Unit Trust wholly-owns the Subsidiary Entities; and

k.     Company A will choose in writing (and in an approved form pursuant to section 703-58) with effect from 1 January 20XX to form a consolidated group with Company A as head company, and the X Unit Trust, and the Subsidiary Entities as subsidiary members of that group.

Step 3: The trustee for theUT will sell Assets it owns to Company A in return for shares in Company A:

l.      the trustee for the UT will transfer the Assets to Company A and the only consideration for that transfer will be the issue by Company A of ordinary shares in itself;

                                  i.    Company A will not undertake to discharge a liability (or liabilities) in respect of the Assets.

m.   Company A will issue ordinary shares with a market value substantially the same as the market value of the Assets;

n.    the ordinary shares that Company A issues will not be redeemable shares and the trustee for the UT will own all the shares in Company A after the completion of this Step 3; and

o.    the trustee for the UT will choose to obtain a roll-over under Subdivision 122-A in respect of the disposal of the Assets.

Step 4: Company A will then sell the Assets to the X Unit Trust for market value consideration within 30 days after Step 3.

Assumption

The trustee for the UT will comply with all the requirements under section 40-360 in respect of the disposal of its Assets that constitute depreciating assets.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 section 40-40

Income Tax Assessment Act 1997 Subdivision 40-D

Income Tax Assessment Act 1997 section 40-285

Income Tax Assessment Act 1997 section 40-295

Income Tax Assessment Act 1997 paragraph 40-295(1)(a)

Income Tax Assessment Act 1997 section 40-340

Income Tax Assessment Act 1997 subsection 40-340(1)

Income Tax Assessment Act 1997 paragraph 40-340(1)(a)

Income Tax Assessment Act 1997 paragraph 40-340(1)(b)

Income Tax Assessment Act 1997 paragraph 40-340(1)(c)

Income Tax Assessment Act 1997 paragraph 40-340(2)(b)

Income Tax Assessment Act 1997 subsection 40-345(1)

Income Tax Assessment Act 1997 section 40-360

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 Subdivision 109-B

Income Tax Assessment Act 1997 subsection 110-25(2)

Income Tax Assessment Act 1997 paragraph 110-25(2)(b)

Income Tax Assessment Act 1997 Division 122

Income Tax Assessment Act 1997 Subdivision 122-A

Income Tax Assessment Act 1997 section 122-15

Income Tax Assessment Act 1997 section 122-20

Income Tax Assessment Act 1997 paragraph 122-20(1)(b)

Income Tax Assessment Act 1997 subsection 122-20(2)

Income Tax Assessment Act 1997 paragraph 122-20(3)(a)

Income Tax Assessment Act 1997 section 122-25

Income Tax Assessment Act 1997 subsection 122-25(1)

Income Tax Assessment Act 1997 subsection 122-25(2)

Income Tax Assessment Act 1997 subsection 122-25(3)

Income Tax Assessment Act 1997 subsection 122-25(4)

Income Tax Assessment Act 1997 subsection 122-25(5)

Income Tax Assessment Act 1997 subsection 122-25(7)

Income Tax Assessment Act 1997 section 122-35

Income Tax Assessment Act 1997 section 122-40

Income Tax Assessment Act 1997 subsection 122-40(1)

Income Tax Assessment Act 1997 subsection 122-40(2)

Income Tax Assessment Act 1997 subsection 122-40(3)

Income Tax Assessment Act 1997 section 122-70

Income Tax Assessment Act 1997 subsection 122-70(2)

Income Tax Assessment Act 1997 subsection 122-70(3)

Income Tax Assessment Act 1997 Subdivision 126-B

Income Tax Assessment Act 1997 Part 3-90

Income Tax Assessment Act 1997 section 701-1

Income Tax Assessment Act 1997 subsection 701-1(2)

Income Tax Assessment Act 1997 section 701-10

Income Tax Assessment Act 1997 subsection 701-10(4)

Income Tax Assessment Act 1997 section 701-55

Income Tax Assessment Act 1997 section 701-60

Income Tax Assessment Act 1997 section 703-5

Income Tax Assessment Act 1997 section 703-10

Income Tax Assessment Act 1997 subsection 703-10(1)

Income Tax Assessment Act 1997 subsection 703-15(2)

Income Tax Assessment Act 1997 section 703-20

Income Tax Assessment Act 1997 section 703-25

Income Tax Assessment Act 1997 section 703-30

Income Tax Assessment Act 1997 section 703-40

Income Tax Assessment Act 1997 section 703-45

Income Tax Assessment Act 1997 section 703-50

Income Tax Assessment Act 1997 subsection 703-50(1)

Income Tax Assessment Act 1997 section 703-58

Income Tax Assessment Act 1997 Division 705

Income Tax Assessment Act 1997 Subdivision 705-A

Income Tax Assessment Act 1997 section 705-60

Income Tax Assessment Act 1997 section 705-65

Income Tax Assessment Act 1997 subsection 705-65(1)

Income Tax Assessment Act 1997 Subdivision 705-B

Income Tax Assessment Act 1997 Subdivision 713-A

Income Tax Assessment Act 1997 section 716-855

Income Tax Assessment Act 1997 section 960-135

Income Tax Assessment Act 1997 Subdivision 974-B

Income Tax Assessment Act 1997 section 995-1

We have not fully considered the application of Part IVA to the arrangement ruled on, or to an associated or wider arrangement of which that arrangement is part of.

Reasons for Decision

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

Summary

The trustee for the UT is able to choose to obtain the roll-over relief under Subdivision 122-A in relation to the disposal of the units in the X Unit Trust.

Detailed reasoning

Subdivision 122-A allows a taxpayer that is a trustee of a trust to obtain roll-over relief from a capital gain or loss where they dispose of a CGT asset, or all of the assets of their business, to a company, so long as the requirements listed in sections 122-20 to 122-35 are met.

Under section 122-15, a trustee can choose to obtain a roll-over if one of the CGT events specified in the table occurs.

Pursuant to paragraph 122-20(1)(b), where the trigger event is a disposal case, any consideration you receive must be only shares in the company and the company undertaking to discharge one or more liabilities in respect of the asset or assets of the business.

Subsection 122-20(2) states that shares cannot be redeemable shares.

Furthermore, paragraph 122-20(3)(a) requires that the market value of the shares you receive must be substantially the same as the market value of the assets you disposed of, less any liabilities the company undertakes to discharge in respect of the asset(s).

Section 122-25 requirements are that:

·         you must own all the shares in the company just after the time of the trigger event;

·         the roll-over cannot apply to the disposal of assets listed in the table in subsection 122-25(2), including precluded assets as defined in subsection 122-25(3);

·         the ordinary income and statutory income of the company must not be exempt income because the company is an exempt entity; and

·         the trust is a resident trust for CGT purposes and the company is an Australian resident.

The trustee for the UT will satisfy all the requirements listed above on the following basis:

·         the trustee will be disposing of its units in the X Unit Trust to Company A, triggering a CGT event A1 (section 122-15);

·         the consideration received in return for the units in the X Unit Trust will be ordinary shares in Company A (paragraph 122-20(1)(b)). Those shares will not be redeemable shares (subsection 122-20(2));

·         Company A will issue shares to the value ascertained by market valuations;

·         The only assets of Company A apart from the $1 of initial capital will be the units it owns in the X Unit Trust. Company A will not have any liabilities. Therefore, the market value of Company A will be "substantially the same" as the market value of the X Unit Trust that Company A owns 100% of (paragraph 122-20(3)(a)).

·         the trustee for the UT will own all the shares in Company A after the trigger event, being the disposal of the units in X Unit Trust (subsection 122-25(1));

·         for the purposes of subsections 122-25(2) and (4), the units in the X Unit Trust that the trustee for the UT disposes are not:

-        collectibles or personal use assets;

-        a decoration awarded for valour or brave conduct;

-        precluded assets;

-        assets that become trading stock of Company A after the disposal;

-        assets that become registered emission units held by Company A; or

-        rights, options, convertible interests, or exchangeable interests;

·         the ordinary income and statutory income of Company A will not be exempt from income tax because Company A is an exempt entity in the year of the trigger event (subsection 122-25(5));

·         at the time of the trigger event the UT is a resident trust for CGT purposes and Company A is an Australian resident company (subsection 122-25(7)); and

·         as Company A will not undertake to discharge a liability (or liabilities) in respect of the units in the X Unit Trust, section 122-35 does not apply.

The trustee for the UT can therefore choose to obtain a roll-over under Subdivision 122-A if the trustee sells the units in the X Unit Trust to Company A in return for the issue of ordinary shares in Company A.

Question 2

Summary

If the trustee for the UT chooses to obtain a roll-over in respect of its disposal of units in the X Unit Trust to Company A, any capital gain or capital loss made by the trustee from the disposal will be disregarded and the shares received by the trustee from Company A in relation to the disposal will be taken to have been acquired before 20 September 1985.

Detailed Reasoning

Section 122-40 sets out the consequences for the transferor where a single CGT asset is transferred to a wholly-owned company and the transferor chooses roll-over relief. Those consequences include the following:

·         any capital gain or capital loss the transferor makes from the transfer is disregarded (subsection 122-40(1));

·         if the transferred asset is a post-CGT asset (i.e. acquired by the taxpayer on or after 20 September 1985), the first element of the cost base/reduced cost base (as appropriate) of each share received by the transferor as consideration for the asset transfer is the cost base/reduced cost base (as appropriate) of the asset when transferred (less any liabilities the company undertakes to discharge in respect of the asset), divided by the number of shares (subsection 122-40(2)); and

·         if the transferred asset is a pre-CGT asset (i.e. acquired by the taxpayer before 20 September 1985), the shares received as consideration for the asset transfer are taken to be pre-CGT shares, i.e. to have been acquired by the transferor before 20 September 1985 (subsection 122-40(3)).

As the requirements in Subdivision 122-A will be met the trustee for the UT will be entitled to choose to obtain the roll-over under Subdivision 122-A. If roll-over is chosen, any capital gain or capital loss made as a result of the disposal of units in X Unit Trust will be disregarded in accordance with subsection 122-40(1).

As the units in X Unit Trust were acquired by the trustee for the UT before 20 September 1985, the shares that the trustee receives from Company A for the transfer of the units in the X Unit Trust will be taken to be acquired before 20 September 1985 under subsection 122-40(3).

Question 3

Summary

If the trustee for the UT chooses to obtain a roll-over in respect of its disposal of the units in the X Unit Trust to Company A, those units will be taken to have been acquired by Company A before 20 September 1985 pursuant to subsection 122-70(3).

Detailed reasoning

Section 122-70 sets out the consequences for the company when an asset is disposed of and the transferor chooses to obtain a roll-over under Subdivision 122-A. In particular, if the asset that is acquired by the company (in this case Company A) is a pre-CGT asset, the company is taken to have acquired it before 20 September 1985 under subsection 122-70(3).

If the trustee for the UT chooses to obtain a roll-over under Subdivision 122-A in respect of its disposal of units in the X Unit Trust which were acquired prior to 20 September 1985, pursuant to subsection 122-70(3) the units will be taken to have been acquired by Company A before 20 September 1985.

Question 4

Summary

Company A can elect under section 703-50 to form a consolidated group with effect from 1 January 20XX with the X Unit Trust and its wholly-owned subsidiaries as subsidiary members.

Detailed Reasoning

Subsection 703-50(1) states that a company may make a choice in writing that a consolidatable group (as defined in subsection 703-10(1)) is taken to be consolidated on and after a day that is specified in the choice and is after 30 June 2002, if the company was the head company of the group on the day specified.

A consolidatable group consists of a single head company and all the subsidiary members of the group (as defined in subsection 703-15(2)).

Under subsection 703-15(2), an entity is a head company if it meets all the requirements in item 1 of the table in that subsection, comprising income tax treatment, Australian residence and ownership requirements. The table in subsection 703-15(2) provides that to be a head company, the entity must:

·         be a company that has all or some of its taxable income (if any) taxed at a rate equal to the general company tax rate;

·         be an Australian resident, but not a prescribed dual resident; and

·         not be a wholly-owned subsidiary of another entity that satisfies the two dot points above, or if it is, it must not be a subsidiary member of a consolidatable group or a consolidated group.

Similarly, an entity is a subsidiary member of a consolidated group if it meets all the requirements in item 2 of the table in subsection 703-15(2). The table in subsection 703-15(2) provides that to be a subsidiary member, the entity must:

·         be a company, trust or partnership and, where it is a company, have all or some of its taxable income (if any) taxed at a rate equal to the general company tax rate;

·         satisfy the applicable residency requirements; and

·         be a wholly-owned subsidiary of the head company of the group or, if there is an interposed entity between them, meet the requirements in section 703-45.

The definition of a wholly-owned subsidiary is contained in section 703-30. A subsidiary entity is wholly-owned by the head company if all the membership interests (as defined in 960-135) in that subsidiary are beneficially owned by the head company or its wholly-owned subsidiaries, or a combination of the head company and its wholly-owned subsidiaries.

On 1 January 20XX, Company A, the X Unit Trust, and the Subsidiary Entities will be a 'consolidatable group' under section 703-10 as:

·         the shares in Company A, the units in the X Unit Trust, and the shares in the Subsidiary Entities are not debt interests under Subdivision 974-B and so are membership interests under section 960-135;

·         Company A, a company that will have its income (if any) taxed at the corporate tax rate and is an Australian resident company not wholly-owned (as defined in section 703-30) by another company, is eligible to be 'head company' under item 1 of the table in subsection 703-15(2) as Company A meets the ownership requirements in column 4 of item 1;

·         the X Unit Trust, being a trust that satisfies the requirements of item 2 of the table in section 703-25, is wholly-owned as defined in section 703-30 by Company A and is a 'subsidiary member' under item 2 of the table in subsection 703-15(2);

·         the Subsidiary Entities, being companies that will have their income (if any) taxed at the corporate tax rate and are Australian resident companies wholly-owned under section 703-30 by the X Unit Trust (relying if necessary on section 703-40) are 'subsidiary members' under item 2 of the table in subsection 703-15(2); and

·         section 703-20 does not preclude Company A, the X Unit Trust, or the Subsidiary Entities from being a member of a consolidatable group.

Under section 703-5, if Company A makes a choice under section 703-50 in writing (and in the approved form in accordance with section 703-58) to form a consolidated group comprising Company A (as head company), the X Unit Trust and the Subsidiary Entities (as subsidiary members) with effect from 1 January 20XX, the Company A consolidated group will be taken to be consolidated from that date.

Question 5

Summary

Subdivision 705-B will apply to modify the rules in Subdivision 705-A for working out the tax cost setting amounts for the assets of the X Unit Trust and its wholly-owned subsidiaries.

Detailed Reasoning

Subdivision 705-B has effect for head company core purposes under subsection 701-1(2) if one or more entities become subsidiary members of a consolidated group at the time that it comes into existence as a consolidated group.

The X Unit Trust and the Subsidiary Entities become subsidiary members of the Company A consolidated group at the time that the Company A consolidated group comes into existence as a consolidated group on 1 January 20XX.

Question 6

Summary

Pursuant to paragraph 110-25(2)(b), the first element of the cost base of the units that Company A owns in the X Unit Trust is the market value of the Company A shares issued as consideration to acquire those units on the date of issue.

Detailed reasoning

Subsection 110-25(2) states that the first element of the cost base of a CGT asset is the money paid, or required to be paid, plus the market value of any other property given, or required to be given, for acquiring the CGT asset.

The units in the X Unit Trust are CGT assets as defined in section 108-5. Company A will not pay any money for the units in the X Unit Trust but will issue shares to acquire the units. The shares in Company A are property.

The Commissioner states in Taxation Ruling TR 2008/5 at paragraph 11 that:

[w]hen a company issues shares as consideration for assets, the provision of shares is not money paid, or required to be paid, for the assets and does not involve a liability to pay money. However, the provision of shares is the provision of property given, or required to be given, in respect of acquiring the assets. Therefore, the market value of the shares, that is the property given, is a component of the cost base of the assets so acquired for the purposes of the capital gains tax provisions.

Company A will become the owner of the units in the X Unit Trust on 1 January 20XX.

Under subsection 122-70(3), as the trustee for the UT acquired the units in the X Unit Trust before 20 September 1985, Company A "is taken to have acquired [the units] before that day".

The Full Federal Court in Financial Synergy Holdings Pty Ltd v FCT [2016] FCAFC 31 (Financial Synergy) considered the interaction of roll-over under Subdivision 122-A and the consolidation provisions in Part 3-90. The main issue before the Full Federal Court was whether the cost base of the CGT assets acquired under the Subdivision 122-A roll-over was the market value of the shares issued in consideration for the CGT assets on the date of acquisition or at a date before 20 September 1985 by virtue of subsection 122-70(3).

Middleton and Davies JJ (with Logan J agreeing) concluded that the time of acquisition of the CGT assets was the date of acquisition because:

·         The reference to an acquisition time of an asset being "before 20 September 1985" in subsection 122-70(3) is used in contradistinction to an asset being acquired on or after 20 September 1985 which is provided with a cost base under subsection 122-70(2). The legislative scheme is to exempt pre-CGT assets from the operation of the CGT provisions. The purpose served by subsection 122-70(3) is to preserve the pre-CGT status of an asset which has been rolled over. The function of the deeming provision in subsection 122-70(3) does not need to extend beyond that purpose in the context of Division 122.

·         The definition of 'acquire' in section 995-1 does not extend the ambit of the deeming provision. The time deemed by subsection 122-70(3) does not govern the time of acquisition for the purposes of applying the meaning of 'acquire' under section 995-1 and subsection 110-25(2). Subdivision 109-B is not an operative part of the Income Tax Assessment Act 1997 and does not of its own force govern the time of acquisition for the purposes of subsection 110-25(2).

·         The legislature specifically introduced section 716-855 to contain a special rule for consolidated groups in relation to Subdivision 126-B roll-overs and there is no such cognate provision in respect of a Division 122 roll-over.

The Commissioner in the Decision Impact Statement for Financial Synergy states that:

The Full Federal Court has clarified the scope of the deeming rule in subsection 122-70(3) of the ITAA 1997. This deeming rule only applies for the purpose of exempting pre-CGT assets from the operation of the CGT provisions. The deeming rule does not determine the acquisition time for the purpose of calculating the cost base of a pre-CGT asset under paragraph 110-25(2)(b) of the ITAA 1997.

Based on the decision of the Full Federal Court in Financial Synergy, the acquisition time for the purpose of calculating the cost base of the units Company A owns in the X Unit Trust will be the date on which Company A acquires those units.

Under paragraph 110-25(2)(b), the first element of the cost base of the X Unit Trust units acquired by Company A will be the market value of the shares that Company A issues for the acquisition of those units, as determined on the date of acquisition.

Question 7

Summary

The cost base of the units in the X Unit Trust determined under paragraph 110-25(2)(b) is the cost base amount under item 1 in the table in subsection 705-65(1) for the purposes of step 1 in the table in section 705-60.

Detailed Reasoning

Under subsection 701-10(4) for each asset of the X Unit Trust, being a subsidiary member of the Company A consolidated group at the time of that group's formation, the tax cost of each of those assets is set at the time the X Unit Trust becomes a subsidiary member of that group at the "asset's tax cost setting amount". The X Unit Trust will become a member of the Company A consolidated group as of 1 January 20XX.

Section 701-55 states the meaning of the expression an asset's 'tax cost is set' at a particular time at the asset's tax cost setting amount. Under Item 1 of the table in section 701-60, the asset's tax cost setting amount under section 701-10 is determined under Division 705.

Under step 1 of the table in section 705-60, the step 1 amount is determined under section 705-65 for the cost of membership interests in the X Unit Trust held by Company A.

Subsection 705-65(1) provides as follows:

For the purposes of step 1 in the table in section 705-60, the step 1 amount is the sum of the following amounts for Company A membership interest that members of the joined group hold in the joining entity at the joining time:

Note: If the joining entity is a trust, the step 1 amount may be increased by section 713-20 for settled capital that could be distributed tax free in respect of discretionary interests in the trust.

Under section 705-65, at the joining time (1 January 20XX), the step 1 amount under item 1 of the table in subsection 705-65(1) is the cost base of the units in the X Unit Trust on 1 January 20XX if the market value of the units on that date is equal to or greater than the cost base.

Subsection 110-25(2) provides:

The first element is the total of:

(a) the money you paid, or are required to pay, in respect of *acquiring it; and

(b) the *market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition).

The cost base under paragraph 110-25(2)(b) will be determined on 1 January 20XX based upon the market value of the X Unit Trust on that date. The market value at the joining time, 1 January 20XX, should be the same as the market value on 31 December 20XX.

The Full Federal Court in Financial Synergy Holdings Pty Ltd v FC of T 2016 ATC 20-557 has clarified the scope of the deeming rule in subsection 122-70(3). This deeming rule only applies for the purpose of exempting pre-CGT assets from the operation of the CGT provisions. The deeming rule does not determine the acquisition time for the purpose of calculating the cost base of a pre-CGT asset under paragraph 110-25(2)(b).

Based on the decision of the Full Federal Court in Financial Synergy:

·         the cost base determined under paragraph 110-25(2)(b) became the amount in item 1 in the table in subsection 705-65(1) for step 1 in working out the allocable cost amount; and

·         the first element of cost base under paragraph 110-25(2)(b) will be determined on 1 January 20XX based upon the market value of the X Unit Trust on that date.

Subdivision 713-A applies to discretionary interests and therefore will not apply to the units in the X Unit Trust.

Question 8

Summary

The trustee for the UT can choose to obtain a roll-over under Subdivision 122-A in relation to the disposal of the Assets to Company A to the extent the Assets exclude any asset that is a precluded asset and any asset that will become trading stock of Company A.

Detailed reasons

As outlined in relation to question 1 of this ruling, Subdivision 122-A allows a taxpayer that is a trustee of a trust to obtain roll-over relief from a capital gain or loss where they dispose of a CGT asset, or all of the assets of their business, to a company, so long as the requirements listed in sections 122-20 to 122-35 are met.

The trustee for the UT will satisfy all the requirements in sections 122-15 to 122-35 on the following basis:

·         the trustee will be disposing of its Assets to Company A, triggering a CGT event A1 (section 122-15);

·         the consideration received in return for the Assets will be ordinary shares in Company A (paragraph 122-20(1)(b)). Those shares will not be redeemable shares (subsection 122-20(2));

·         Company A will issue shares to the value ascertained by market valuations and the market valuation of the Company A shares will be "substantially the same" as the market value of the Assets (paragraph 122-20(3)(a));

·         the trustee for the UT will own all the shares in Company A after the trigger event, being the disposal of the Assets (subsection 122-25(1));

·         for the purposes of subsection 122-25(2) and (4), units in the Y Unit Trust and certain other assets that the trustee for the UT disposes are not:

§  collectibles or personal use assets;

§  a decoration awarded for valour or brave conduct;

§  assets that become registered emission units held by Company A; or

§  rights, options, convertible interests, or exchangeable interests;

(some assets making up the Assets may include precluded assets (in the form of depreciating assets) or assets that become trading stock of Company A after the disposal)

·         the ordinary income and statutory income of Company A will not be exempt from income tax because Company A is an exempt entity in the year of the trigger events (subsection 122-25(5));

·         at the time of the trigger events, the UT is a resident trust for CGT purposes and Company A is an Australian resident company (subsection 122-25(7)); and

·         as Company A will not undertake to discharge a liability (or liabilities) in respect of the Assets, section 122-35 does not apply.

To the extent that the Assets exclude any asset that is a depreciating asset or an asset that will become trading stock of Company A after the disposal, the trustee for the UT can choose to obtain a roll-over under Subdivision 122-A if the trustee sells the Assets to Company A in return for the issue of ordinary shares in Company A. Roll-over relief under Subdivision 122-A will not be available for assets that are depreciating assets or assets that become trading stock of Company A after the disposal.

Question 9

Summary

If, to the extent entitled in accordance with question 8 of this ruling, the trustee for the UT chooses to obtain a roll-over in respect of its disposal of the Assets to Company A, any capital gain or capital loss made by the trustee from the disposal will be disregarded and the trustee's cost base (or reduced cost base) in the Company A shares will be the cost base (or reduced cost base) of the applicable Assets divided by the number of shares Company A issues.

Detailed Reasoning

Section 122-40 sets out the consequences for the transferor where a CGT asset is transferred to a wholly-owned company and the transferor chooses roll-over relief. Those consequences include the following:

·         any capital gain or capital loss the transferor makes from the transfer is disregarded (subsection 122-40(1));

·         if the transferred asset is a post-CGT asset (i.e. acquired by the taxpayer on or after 20 September 1985), the first element of the cost base/reduced cost base (as appropriate) of each share received by the transferor as consideration for the asset transfer is the cost base/reduced cost base (as appropriate) of the asset when transferred (less any liabilities the company undertakes to discharge in respect of the asset), divided by the number of shares (subsection 122-40(2)); and

·         if the transferred asset is a pre-CGT asset (i.e. acquired by the taxpayer before 20 September 1985), the shares received as consideration for the asset transfer are taken to be pre-CGT shares, i.e. to have been acquired by the transferor before 20 September 1985 (subsection 122-40(3)).

To the extent that the requirements in Subdivision 122-A will be met the trustee for the UT will be entitled to choose to obtain the roll-over under Subdivision 122-A. If roll-over is chosen, any capital gain or capital loss made by the trustee as a result of the disposal of the applicable Assets will be disregarded in accordance with subsection 122-40(1).

As the Assets were acquired by the trustee for the UT after 20 September 1985, the cost base (or reduced cost base) of the shares that the trustee receives from Company A for the transfer of those applicable Assets will be the cost base (or reduced cost base) of those Assets divided by the number of shares Company A issues to acquire them (subsection 122-40(2)).

Question 10

Summary

If, to the extent entitled in accordance with question 8 of this ruling, the trustee for the UT chooses to obtain a roll-over in respect of its disposal of the Assets to Company A, the cost base (or reduced cost base) of the applicable Assets in the hands of Company A will be the trustee's cost base (or reduced cost base) in those assets at the time of their disposal by the trustee.

Detailed Reasoning

Section 122-70 sets out the consequences for the company when an asset is disposed of and the transferor chooses to obtain a roll-over under Subdivision 122-A. In particular, subsection 122-70(2) states:

If you *acquired the asset on or after 20 September 1985:

(a) the first element of the asset's *cost base (in the hands of the company) is the asset's cost base when you disposed of it; and

(b) the first element of the asset s *reduced cost base (in the hands of the company) is the asset's reduced cost base when you disposed of it.

Where the trustee for the UT chooses to obtain a roll-over under Subdivision 122-A in respect of the applicable Assets, the cost base (or reduced cost base) of those Assets, which were acquired by the trustee after 20 September 1985, for Company A will be the trustee's cost base (or reduced cost base) in those Assets at the time of their disposal to Company A.

Question 11

Summary

The trustee for the UT can obtain roll-over relief under section 40-340 in respect of its disposal of Assets that constitute depreciating assets.

Detailed Reasoning

Subdivision 40-D contains rules regarding the taxation consequences that arise when you stop holding a depreciating asset. In summary, you may have to make a balancing adjustment that adjusts your taxable income based on the difference between the actual value of the asset when you stop holding it and its adjustable value.

There is a roll-over provision in Division 40, which operates in parallel with the CGT roll-over provisions. Subsection 40-345(1) prevents section 40-285 from applying so that no balancing adjustment arises if the taxpayer meets the conditions for automatic roll-over relief set out in subsection 40-340(1).

The requirements in subsection 40-340(1) include:

·         there is a balancing adjustment event under section 40-295 because an entity, the transferor, disposes of a depreciating asset in an income year to another entity, the transferee;

·         the disposal involves a CGT event; and

·         any relevant conditions in the table in paragraph 40-340(1)(c) are satisfied.

In relation to the first requirement, per paragraph 40-295(1)(a), a balancing adjustment occurs for a depreciating asset where you stop 'holding' the asset. Other than in specific circumstances contemplated by section 40-40, a depreciating asset is 'held' by the owner, or legal owner (if there is both a legal and equitable owner) of the asset.

In this case, the trustee for the UT will dispose all of its depreciating assets to Company A and stop being the legal owner. The trustee will therefore stop holding the depreciating assets, resulting in a balancing adjustment event for those depreciating assets. The trustee therefore satisfies the requirement in paragraph 40-340(1)(a). Moreover, the transfer of the depreciating assets of the business to Company A involves CGT event A1, therefore satisfying paragraph 40-340(1)(b).

With reference to the table in paragraph 40-340(1)(c), the applicable type of CGT roll-over that qualifies for transferor relief is described at item 1, which is the disposal of an asset to a wholly-owned company. The condition is that the transferor is able to choose a roll-over under Subdivision 122-A for the CGT event (pursuant to the application of paragraph 40-340(2)(b)).

The trustee for the UT meets the three requirements in subsection 40-340(1), and therefore qualify for automatic roll-over relief in respect of the relevant depreciating assets disposed of to Company A pursuant to the proposed restructure.

Question 12

Summary

Under section 701-1, for 'head company core purposes' and 'entity core purposes' Company A can disregard any liability for income tax or loss from the transfer by Company A of Assets to the X Unit Trust.

Detailed Reasoning

Section 701-1 contains the single entity rule that states that subsidiary members of a consolidated group are taken to be parts of the head company during the period that the subsidiary is a member of the head company consolidated group.

After Step 2 of the proposed restructure, Company A and the X Unit Trust will be members of the Company A consolidated group. Company A will own the Assets after Step 3.

Step 4 of the proposed restructure involves Company A, as head company, transferring for market value consideration the Assets (acquired under Step 3) to the X Unit Trust (a subsidiary member) within 30 days of Step 3.

The Commissioner in Taxation Ruling TR 2004/11 at paragraph 9 states:

An example of an intra-group dealing is the transfer of a capital gains tax (CGT) asset from one group member to another. This transfer is not treated for income tax purposes as a disposal or acquisition in the hands of the head company. Although the legal transfer of the CGT asset between the subsidiary members occurs at general law, it has no income tax consequences as the group's head company is taken to be the owner of the asset both before and after the transfer.

Under section 701-1, and consistent with TR 2004/11, for 'head company core purposes' and 'entity core purposes' Company A can disregard any liability for income tax or loss from the transfer by Company A of the Assets to the X Unit Trust.

[1] All references in this private ruling are to the Income Tax Assessment Act 1997 unless otherwise specified.