Edited version of private advice

Authorisation Number: 1051882335165

Date of advice: 6 August 2021

Ruling

Subject: Scrip for scrip roll-over relief under Subdivision 124-M of the Income Tax Assessment Act 1997

Question

Will Unitholder A be able to choose roll-over relief under Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the exchange of their ordinary units in Trust X for units in Trust Y?

Answer

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

The year ended 30 June 20XX

Relevant facts and circumstances

1.            In this document:

•                    reference to 'unitholder' is a reference to an entity that owns one or more units in Trust X at a particular point in time.

•                    Reference to 'current unitholder' is a reference to an entity that owns one or more units in Trust X as at the date of this document. Unitholder A is a current unitholder.

2.            Trust X was established in 20XZ. It is an Australian tax resident. Since its inception, each current unitholder in Trust X has held the same respective unit holding proportions.

3.            All unitholders are Australian tax residents.

4.            The current unitholders hold their Trust X units on capital account and not on revenue account or as trading stock.

5.            Under the Trust Deed of Trust X, each unitholder has a vested interest in the income and capital of Trust X in proportion to the amounts paid up on their unit holdings.

6.            The Trustee of Trust X will not, at any time during the period of this determination, exercise a power capable of diluting or defeating a unitholder's interest in the income or capital of Trust X.

7.            Further, the Trustee of Trust X has never exercised a power capable of diluting or defeating a unitholder's interest in the income or capital of Trust X.

8.            The Trustee of Trust X has distributed capital of Trust X but always in proportion to the current unitholders' unit holdings, in accordance with clause 5.2 of the Trust Deed.

9.            Trust Y is an Attribution Managed Investment Trust (AMIT) for the purposes of the ITAA 1997 and Tax Administration Act 1953 (TAA 1953) and it is an Australian tax resident.

10.         Under the terms of the Sale Agreement, the Responsible Entity of Trust Y will purchase all the units in Trust X.

11.         To give effect to the purchase, Trust Y units will be exchanged for the Trust X units. That is, the Responsible Entity will issue Trust Y units to the current unitholders in consideration for its acquisition of the Trust X units (the Scrip for Scrip Transaction).

12.         Following a successful execution and completion of the Scrip for Scrip Transaction, the Trust Deed of Trust X will not be amended immediately after.

13.         Trust X has no carried forward tax losses, no tax losses for the financial years 20XX to 20XX and no trust losses forecasted for the financial years 20XX and 20XX.

14.         If further distributions to the current unitholders are made during the period leading up to the Scrip for Scrip Transaction (whether of trust income or capital), such distributions will be in accordance with and proportionate to the unit holdings in Trust X.

15.         No arrangement has been entered into by the current unitholders for the purpose of and resulting in:

•                    section 272-35 having application;

•                    the trafficking of the tax benefit of a tax loss, bad debt deduction or debt/equity swap deduction; or

•                    fraud or evasion.

16.         Trust Y, being an AMIT, is deemed a fixed trust for tax purposes and its members are deemed to have a vested and indefeasible interest in a share of income and capital of Trust Y pursuant to section 276-55.

17.         Each of the current unitholders has been dealing with, and will continue to deal with, the Responsible Entity of Trust Y at arm's length.

18.         Any capital gain which might be made by a unitholder on its Trust Y units will not be disregarded under the terms of paragraph 124-795(2)(a), except because of a roll-over.

19.         The current unitholders and Trust Y are not members of the same wholly owned group and will not be members of the same wholly-owned group just before the current unitholders' units in Trust X are transferred.

20.         No unitholder is, just before or just after the completion of the Scrip for Scrip Transaction, a 'common stakeholder' or 'significant stakeholder' for the arrangement under subsection 124-783.

21.         Trust Y will not make a choice to deny a roll-over to the unitholders under Subdivision 124-M.

22.         The current unitholders will choose to obtain the roll-over under 124-781(3)(c).

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1997 section 124-781

Income Tax Assessment Act 1997 subsection 124-781(1)

Income Tax Assessment Act 1997 paragraph 124-781(1)(a)

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 paragraph 124-781(2)(a)

Income Tax Assessment Act 1997 paragraph 124-781(2)(b)

Income Tax Assessment Act 1997 paragraph 124-781(2)(c)

Income Tax Assessment Act 1997 subsection 124-781(3)

Income Tax Assessment Act 1997 paragraph 124-781(3)(a)

Income Tax Assessment Act 1997 paragraph 124-781(3)(b)

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

Income Tax Assessment Act 1997 paragraph 124-781(3)(d)

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 section 124-795

Income Tax Assessment Act 1997 subsection 124-795(1)

Income Tax Assessment Act 1997 subsection 124-795(2)

Income Tax Assessment Act 1997 paragraph 124-795(2)(a)

Income Tax Assessment Act 1997 paragraph 124-795(2)(b)

Income Tax Assessment Act 1997 subsection 124-795(3)

Income Tax Assessment Act 1997 subsection 124-795(4)

Income Tax Assessment Act 1936 subsection 272-5(3)

Income Tax Assessment Act 1997 section 276-55

Reasons for decision

Subdivision 124-M sets out the requirements for replacement asset roll-over relief. More specifically, section 124-781 sets out the preconditions for replacement of trust interests roll-over relief as follows:

subsection 124-781(1)

There is a 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.

The requirements in subsection 124-781(1) have been met in this case. The conditions prescribed under each of the paragraphs of the subsection and their application to the facts of this case is considered below.

subsection 124-781(1): exchange of interests in trusts

Paragraph 124-781(1)(a)

An 'exchange' occurs when each of the unitholders (the 'original interest holder') exchanges their units in the original trust ('the original interest') for units ('replacement interest') in another trust (the 'acquiring entity' and the 'replacement entity').

In this case, current unitholders will exchange their units in Trust X for units in Trust Y.

Paragraph 124-781(1)(b)

In relation to Trust X, the Commissioner has exercised his discretion to deem that each unitholder has a fixed entitlement to the share of the income or capital of Trust X for the purposes of subsection 272-5(3) of Schedule 2F to the ITAA 1936 for the ruling period.

In relation to Trust Y, being an AMIT, it is deemed a fixed trust for tax purposes and its members are deemed to have a vested and indefeasible interest in a share of income and capital of Trust Y pursuant to section 276-55.

As the entities have fixed entitlements to all of the income and capital of Trust X and Trust Y, paragraph 124-781(b) will be satisfied.

Paragraph 124-781(1)(c)

This paragraph requires that the exchange is in consequence of an arrangement that satisfies subsection (2) or (2A).

'Arrangement' is defined in section 995-1 as 'any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.'

Paragraph 11.23 of the Explanatory Memorandum (EM) to the New Business Tax System (Miscellaneous) Bill (No. 2) 2000 provides that:

"What constitutes a single arrangement is a question of fact. Relevant factors in determining whether what takes place is part of a single arrangement would include, but not be limited to, whether there is more than one offer or transaction, whether aspects of an overall transaction occur contemporaneously, and the intention of the parties in all the circumstances as evidenced by objective facts."

The Scrip for Scrip Transaction satisfies the definition of 'arrangement' in section 995-1 and exhibits all the characters of a single arrangement as outlined in the above extract of the EM.

On the facts in this matter, the arrangement satisfies subsection 124-781(2) for reasons as set out further below.

subsection 124-781(1)(d)

This paragraph requires that the conditions in subsections (3) and (4) are satisfied.

On the facts in this matter, the arrangement satisfies the conditions in subsections (3) and (4) as set out further below.

subsection 124-781(2): Conditions for arrangement

As mentioned above, the requirements of subsection 124-781(2) will be met in this case, for the reasons outlined in the following paragraphs.

Paragraph 124-781(2)(a)

The Responsible Entity of Trust Y will acquire 100% of the voting interests in Trust X, thus satisfying the requirement that the arrangement must 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 interests in the original entity.

Paragraph 124-781(2)(b)

All unitholders will exchange their units in Trust X for units in Trust Y, thus satisfying the requirement that the arrangement must be one in which at least all owners of trust voting interests in the original entity could participate.

Paragraph 124-781(2)(c)

All unitholders of Trust X have the same terms for participating in the Scrip for Scrip Transaction thus satisfying the requirement that the arrangement must 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.

subsection 124-781(3): Conditions for roll-over

As mentioned above, the requirements of subsection 124-781(3) will be met in this case, for the reasons outlined in the following paragraphs.

Paragraph 124-781(3)(a)

The requirement under this provision is that the original interest holder acquired its original interest on or after 20 September 1985.

The condition in this paragraph is satisfied as the Trust Deed was settled post 20 September 1985 at which time the current unitholders acquired their units in Trust X.

Paragraph 124-781(3)(b)

The condition in this provision will be satisfied as, apart from the roll-over, the current unitholders will make a capital gain from CGT event A1 under section 104-10 when they dispose their units in Trust X, being the CGT provision applicable to the disposal of a CGT asset.

Paragraph 124-781(3)(c)

This provision requires that the original interest holder must choose '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'.

The current unitholders will choose to obtain the roll-over.

Section 124-782 applies only if the holder is a 'significant stakeholder' or a 'common stakeholder' for the arrangement. In this case, no unitholder is, just before or just after the completion of the Scrip for Scrip Transaction, 'common stakeholder' or 'significant stakeholder' for the arrangement under subsection 124-783.

Therefore, the requirement in this provision will be satisfied.

Paragraph 124-781(3)(d)

This provides that if section 124-782 applies to the original interest holder, the holder must inform the 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'.

Since section 124-782 does not apply, this paragraph has no application to this case.

subsection 124-781(4): Further roll-over conditions in certain cases

This subsection sets out further conditions if the original interest holder and the trustee of the acquiring entity did not deal with each other at arm's length and neither of the original entity nor the acquiring entity had at least 300 beneficiaries just before the arrangement started.

In this case, this subsection does not apply because:

•                    It is taken as a fact and assumption in this ruling that each of the current unitholders has been dealing with, and will continue to deal with, the Responsible Entity of Trust Y at arm's length.

•                    Trust Y has more than 300 unitholders.

Therefore, the further roll-over condition in subsection 124-781(4) has no application in this case.

Exceptions in section 124-795

Section 124-795 specifies a list of circumstances in which a roll-over under Subdivision 124-M is not available. The circumstances in this case do not fall within the scope of any of the listed exclusions in section 124-795 for the following reasons:

•                    subsection 124-795(1) does not apply in this case as the current unitholders to which this ruling relates are Australian residents.

•                    This ruling is made on the basis that a capital gain which might be made by a relevant unitholder on its Trust Y units will not be disregarded. On the basis of this premise, paragraph 124-795(2)(a) will not apply.

•                    The current unitholders and Trust Y are not members of the same wholly owned group and will not be members of the same wholly-owned group just before the unitholders' units in Trust X are transferred. Further, Trust Y is not a foreign resident. Therefore, paragraph 124-795(2)(b) will not apply.

•                    The exclusion in paragraph 124-795(3) applies if the current unitholders can choose a roll-over under Division 122 or Division 615 for the event. As Division 122 concerns roll-over for the disposal of assets to, or the creation of assets in, a wholly-owned company, it has no application to this case.

Similarly, in this case no roll-over choice can be made by a current unitholder under Division 615 as the Division concerns an exchange resulting in the ownership of new shares in an interposed company. No such business restructure is proposed in this case.

•                    Trust Y will not make a choice to deny a roll-over to the unitholders under Subdivision 124-M. On this basis, subsection 124-795(4) will not apply.

Conclusion

On the basis of the reasons provided above, the conditions for the replacement of trust interests roll-over relief are satisfied, and Unitholder A will be able to choose roll-over relief under Subdivision 124-M.