Edited version of private advice

Authorisation Number: 1051850726918

Date of advice: 10 June 2021

Ruling

Subject: CGT roll-over relief

Question 1

Will the first element of the cost base and reduced cost base for the Taxpayer of each CGT asset that the Taxpayer acquires under the restructure be the same as the cost base and reduced cost base of that asset for the Trust just before that acquisition under section 124-875 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the depreciable (i.e. base) value of the depreciable assets and effective life under subsection 40-345(2) ITAA 1997 be the same as the Trust was using where a notice is provided by the Trust to the Taxpayer under section 40-360 ITTAA?

Answer

Yes

Question 3

Will the Commissioner accept that 70-95 ITAA 1997 will not apply to the transfer of the trading stock from the Trust to the Taxpayer?

Answer

Yes

Question 4

Will the Commissioner accept that the Taxpayer should claim a tax deduction under section 8-1 ITAA 1997 for the book value of the Trust's stock on the transfer of the trading stock from the Trust to the Taxpayer?

Answer

Yes

Question 5

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 ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer is the corporate trustee for the Trust.

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 Income Tax Assessment Act 1936 (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 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 as trustee of the Trust.

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 (ITAA 1936) has been considered for the proposed restructure and the Commissioner has determined it does not apply

Assumption

Any valuations required under the roll-over will be done in accordance with ATO market valuation guidelines.

Relevant legislative provisions

Income Tax Assessment Act 1997

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 40-285

Income Tax Assessment Act 1997 section 40-340

Income Tax Assessment Act 1997 subsection 40-340(1) Item 2A

Income Tax Assessment Act 1997 section 40-345

Income Tax Assessment Act 1997 section 40-345(2)

Income Tax Assessment Act 1997 section 40-360

Income Tax Assessment Act 1997 section 70-90

Income Tax Assessment Act 1997 section 70-95

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 the roll-over under subdivision 124-N of the ITAA 1997 is available and chosen, the effects of this roll-over on the transferor and transferee are contained under section 124-875 of the ITAA 1997.

In accordance with subsection 124-875(2) of the ITAA 1997, the first element of the cost base and reduced cost base of each CGT asset that the transferee acquires under the trust restructure is the same as the cost base and reduced cost base of that asset just before that acquisition.

Question 2

Detailed reasoning

You are participating in a restructure pursuant to Subdivision 124-N of the ITAA 1997. This restructure qualifies for roll-over relief under Item 2A of the table under section 40-340 of the ITAA 1997.

Where roll-over relief is available under section 40-340 of the ITAA 1997, subsection 40-345(2) of the ITAA 1997 provides that the transferee can deduct the decline in value of the depreciating asset using the same method and effective life that the transferor was using. Where the prime cost method is used, the remaining effective life is to be used.

Where a notice is not given in accordance with section 40-360 of the ITAA 1997 a penalty of 30 units may be applied to the contravening party.

Question 3

Detailed reasoning

Under section 70-90 of the ITAA 1997 the disposal of trading stock outside the ordinary course of business will result in the entity's ordinary income including the market value of the item on the day of the disposal.

The word 'dispose' is not defined in the ITAA 1997. Taxation Determination TD 96/2 Income tax: can section 36A of the Income Tax Assessment Act 1936 apply if a sole trader who owns trading assets declares himself or herself to be a trustee of a discretionary trust over the assets? (TD 96/2) considers the meaning of disposed in the context of the now repealed subsection 36(1) of the Income Tax Assessment Act 1936 following the ruling from the High Court of Australia in Rose v Federal Commissioner of Taxation (1951) 84 CLR 118. TD 96/2 noted that section 36 of the ITAA 1936 only applied where there is a disposal of the entirety of the ownership of the trading asset. The view in TD 96/2 is relevant to the treatment of trading stock in this ruling and will be adopted.

Under the current arrangement the Company holds the legal title of the trading stock on behalf of the trust, with the unit holders of the Trust holding beneficial ownership. The transfer of trading stock as outlined will not change the legal ownership.

Therefore, as there is no disposal of trading stock outside of the ordinary course of business pursuant to section 70-90 to the ITAA 1997, the Taxpayer is not required to record the purchase price of the stock at market value as required under section 70-95 of the ITAA 1997.

Question 4

Detailed reasoning

Where the Trust records the disposal of the trading stock at book value, the Taxpayer would record the purchase price at this value. This outcome would result in a deduction of the same value when the trading stock is acquired by the taxpayer under section 8-1 of the ITAA 1997.

The Commissioner accepts the use of book value when transferring the stock from the Trust to the Company.

Question 5

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?

Detailed reasoning

Under subsection 104-195(1) of the ITAA 1997, CGT event J4 happens if a trust utilises the roll-over under Subdivision 124-N of the ITAA 1997 and fails to cease its existence after 6 months from the start of the trust restructuring period or as soon as practicable after the end of that 6 month period, and the company owns the asset when the failure happens.

Under the proposed steps, the trust will cease to exist within 6 months of the start of the restructure period. Therefore, CGT event J4 will not apply to the Company.