Edited version of private advice

Authorisation Number: 1051850710369

Date of advice: 10 June 2021

Ruling

Subject: Roll-over relief

Question 1

Where the Taxpayer chooses rollover relief under section 124-870 ITAA 1997, can they disregard any capital gain or loss on the disposal of their units under CGT event C2 within section 104-25 of the ITAA 1997 when the Trust is wound up, which will occur within 6 months of the restructure?

Answer

Yes

Question 2

Is the cost base of the Taxpayer's shares in the Company equal the cost base of their units in the Trust under subsection 124-10(3) ITAA 1997?

Answer

Yes

Question 3

If the Trust vests and ceases to exist within 6 months of the restructure, will CGT event J4 under section 104-195(6) of the ITAA 1997 apply to the Taxpayer?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20YY

The scheme commences on:

1 July 20ZZ

Relevant facts and circumstances

The Taxpayer is a unit holder in the Trust.

The Taxpayer is an Australian resident trust for tax purposes.

The Trust is an unlisted unit trust that operates a business with the Company as its corporate trustee.

The Trust has less than XX unitholders and has never offered these units to the public. No unit holders are exempt entities.

The Trust has a major unitholder, holding over 75% of all units on issue. The other unitholders include both residents and non-residents for tax purposes.

The Trust is not a public trading trust for the purposes of section 102P and Division 6C of the ITAA 1936.

The Trust is not taxed as a company.

The Trust does not own land in Australia.

The Trust records stock at cost.

The unitholders would like the business to be conducted via the medium of a company.

The proposed transaction seeks to employ the CGT roll-over contained in Subdivision 124-N of the ITAA 1997. The steps of this proposed transaction are:

1. The Company is currently a dormant company (and is the trustee of the Trust) with nominal share capital (founder shares) and it would agree to become the trading entity.
2. The Trust would create a present entitlement in the unitholders equal to the value of its current year earnings and any retained earnings.
3. The Trust would transfer all of the assets of the Trust to the Company (reduced by assets which are needed to pay out the unitholders' present entitlements) and also the Company would assume all of the Trust's liabilities and the value of the Trust's unit capital (i.e. its paid up capital).
4. In consideration for the Company acquiring the business from the Trust and assuming its liabilities and the value of its paid up capital, the Company would also cancel its founder shares and issue non-redeemable shares in the Company to the unitholders in proportion to their unit holdings (additional shares).
5. The Trust would pay out its current year earnings (and any retained earnings as well).
6. Rollover choices would be made by the Trust, the Company and eligible unit holders.
7. The Trust would be wound up within 6 months.

All leases, customer contracts, employment agreements, supply contracts etc and other transactions are already in the name of the Company.

The replacement shares in the Company will be issued to the unit holders of the Trust on a one to one basis.

The trust deed and company constitution allow for this restructure to occur.

The transaction would be done with legal agreements and appropriate resolutions from unitholders etc. These will be drafted in due course.

No disposals have been planned for the interests in the company after the proposed restructure.

Part IVA of the Income Tax Assessment Act 1936 has been considered for the proposed restructure and the Commissioner has determined it does not apply.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-195

Income Tax Assessment Act 1997 subsection 104-195(1)

Income Tax Assessment Act 1997 Subdivision 124-N

Income Tax Assessment Act 1997 section 124-10

Income Tax Assessment Act 1997 subsection 124-10(3)

Income Tax Assessment Act 1997 section 124-15

Income Tax Assessment Act 1997 section 124-855

Income Tax Assessment Act 1997 section 124-860

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(5)

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

Income Tax Assessment Act 1997 section 124-865

Income Tax Assessment Act 1997 section 124-875

Income Tax Assessment Act 1997 subsection 124-875(2)

Reasons for decision

Question 1

Detailed reasoning

Where roll-over relief is chosen under section 124-870 of the ITAA 1997 and the corresponding requirements are met, any capital gain or loss resulting from the disposal of the original units may be disregarded under sections 124-10 or 124-15 of the ITAA 1997. Sections 124-10 and 124-15 of the ITAA 1997 provide the consequences of choosing the roll-over.

Question 2

Detailed reasoning

Under the restructure, the Taxpayer will receive replacement shares in the Company for all of their cancelled units in the Trust. The cost base of the new interests will equal the cost base of the original asset divided by the number of new shares provided in the Company in accordance with subsection 124-10(3) of the ITAA 1997. They will have the same cost base where the same number of shares are provided for the number of disposed interests.

Question 3

Detailed reasoning

Where the roll-over conditions under Subdivision 124-N of the ITAA 1997 are met and the roll-over is chosen, CGT event J4 will not apply to the Taxpayer provided the Trust ceases to exist within 6 months from the start of the trust restructure period. Where this is not met, CGT event J4 may apply if the conditions under section 104-195 of the ITAA 1997 are met.