Edited version of private advice

Authorisation Number: 1051913245601

Date of advice: 25 October 2021

Ruling

Subject: CGT roll-over relief

Question 1

Is the Taxpayer eligible to choose roll-over relief under section 126-225 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the proposed transfer of the Property by the Taxpayer to the Cloned Trust under the proposed trust cloning arrangements?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trustee of the Trust wishes to transfer its property to the New Trust as part of its restructure.

The Unit Trust (the Trust) was established by trust deed on XX/XX/XXXX and amended by a supplemental trust deed on XX/XX/XXXX.

The Trust is an Australian resident trust.

XX is the trustee for the Trust.

The Trust holds the operating business.

The Trustee acquired land in on XX/XX/XXXX.

The Trust only has ordinary units on issue.

The Trustee proposed to create a new trust that has has identical terms, trustee rights and powers and beneficiary rights, powers and entitlements as that of the Trust.

The Trust Deeds for the Trust and the New Trust are identical.

The new Trust will have the same Trustee, units and beneficiary as the Trust.

The New Trust will not be a foreign trust for CGT purposes.

The Trustee will transfer the property to the New Trust for no consideration.

The Trustee has no intention to dispose of this property in the foreseeable future.

Prior to the transfer of the property, the New Trust will have no CGT assets or cash other than $XX settled sum.

Both the Trust and the New Trust have chosen to obtain roll-over of the property currently held by the Trust.

Information provided

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

(a)          your private ruling application and trust deeds

(b)          supplementary information provided via email.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 102K

Income Tax Assessment Act 1936 Section 102S

Income Tax Assessment Act 1997 Subsection 104-70(1)

Income Tax Assessment Act 1997 Subdivision 126-G

Income Tax Assessment Act 1997 Section 126-255

Income Tax Assessment Act 1997 Subsection 126-225(1)

Income Tax Assessment Act 1997 Subparagraph 126-225(1)(a)

Income Tax Assessment Act 1997 Subparagraph 126-225(1)(a)(ii)

Income Tax Assessment Act 1997 Paragraph 126-225(1)(b)

Income Tax Assessment Act 1997 Paragraph 126-225(1)(c)

Income Tax Assessment Act 1997 Subparagraph 126-225(1)(c)(i)

Income Tax Assessment Act 1997 Subparagraph 126-225(1)(c)(ii)

Income Tax Assessment Act 1997 Subparagraph 126-225(1)(c)(iii)

Income Tax Assessment Act 1997 Paragraph 126-225(1)(d)

Income Tax Assessment Act 1997 Paragraph 126-225(1)(e)

Income Tax Assessment Act 1997 Subsection 126-225(3)

Income Tax Assessment Act 1997 Section 126-230

Income Tax Assessment Act 1997 Subsection 126-230(1)

Income Tax Assessment Act 1997 Subsection 126-230(2)

Income Tax Assessment Act 1997 Subsection 126-230(3)

Income Tax Assessment Act 1997 Subsection 126-230(4)

Income Tax Assessment Act 1997 Subsection 126-235

Income Tax Assessment Act 1997 Subsection 126-235(1)

Income Tax Assessment Act 1997 Subsection 126-235(2)

Income Tax Assessment Act 1997 Subsection 126-235(3)

Income Tax Assessment Act 1997 Subsection 126-235(4)(a)

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise stated.

Question 1

Is the Taxpayer eligible to choose roll-over relief under section 126-225 in relation to the proposed transfer of the Property by the Taxpayer to the Cloned Trust under the proposed trust cloning arrangements?

Summary

The Trustee, as trustee for the Trust will be eligible to choose the roll-over available under section 126-225 in relation to the transfer of the property by the Trust to the New Trust.

Detailed reasoning

Subdivision 126-G - Transfer of Assets between Certain Trusts

Subdivision 126-G provides CGT roll-over relief for the transfer of assets between certain trusts. Subsection 126-225(1) lists the eligibility requirements for obtaining the roll-over:

A rollover may be chosen for a CGT asset (the roll-over asset) if:

(a) the trustee of a trust (the transferring trust):

(i) creates a trust (the receiving trust), by declaration or settlement, over one or more CGT assets that include the roll-over asset; or

(ii) transfers the roll-over asset to an existing trust (the receiving trust); at a particular time (the transfer time); and

(b) if subparagraph (a)(ii) applies-the receiving trust has no CGT assets immediately before the transfer time,

(i) other than small amounts of cash or debt,

(ii) its rights under an arrangement, if (collectively) those rights only facilitate the transfer of assets to it from the transferring trust; and

(c) just after the transfer time:

(i) each of the trusts has the same beneficiaries; and

(ii) the receiving trust has the same classes of membership interests that the transferring trust had just before, and has just after, the transfer time; and

(iii) the sum of the market values of each beneficiary's membership interests of a particular class in both trusts is substantially the same as the sum of the market values, just before the transfer time, of the beneficiary's membership interests of that class in both trusts; and

(d) the requirement in section 126- 230 is met; and

(e) the exceptions in section 126- 235 do not apply.

For the trustee of the Trust to be eligible for roll-over relief under Subdivision 126-G, the conditions in subsection 126-225(1) must be satisfied.

Paragraph 126-225(1)(a) - Transfer of roll-over asset

Subparagraph 126-225(1)(a)(ii) requires the trustee of the transferring trust to transfer a CGT asset, known as the 'roll-over asset', to the trustee of an existing trust (the receiving trust) at a particular time (the 'transfer time').

The property to be transferred is a CGT asset (being real property) and will be transferred by the Trustee of the Trust (the transferring trust) to the trustee of the New Trust (the receiving trust), which will be an existing trust.

Based on the facts, the New Trust will be established as a new trust prior to the transfer of the CGT assets. As a result, the roll-over assets will be transferred to an existing trust and the requirements of subparagraph 126-225(1)(a)(ii) will be satisfied.

Paragraph 126-225(1)(b) - Receiving trust has no CGT assets, other than small amounts of cash or debt before Transfer Time

As the property are being transferred to an existing trust, paragraph 126-225(1)(b) must also be satisfied. This requires the receiving trust (the New Trust) to hold no CGT assets, other than small amounts of cash or debt just before the transfer time.

Just before property is transferred, the New Trust will hold the settlement amount $XX of cash.

Accordingly, the condition in paragraph 126-225(1)(b) will be satisfied.

Paragraph 126-225(1)(c) - the beneficiaries

Paragraph 126-225(1)(c) requires that, just after the transfer time, three conditions must be satisfied in relation to the beneficiaries (the unit holders) of the Trust and the New Trust.

Subparagraph 126-225(1)(c)(i) - Same beneficiaries

Subparagraph 126-225(1)(c)(i) requires that each of the trusts has the same beneficiaries just after the transfer time.

There is one beneficiary of the Trust, who will also be the only beneficiary of the New Trust.

Accordingly, just after the transfer time, the transferring trust and the receiving trust will have the same beneficiaries such that subparagraph 126-225(1)(c)(i) will be met.

Subparagraph 126-225(1)(c)(ii) - Same classes of ownership

Subparagraph 126-225(1)(c)(ii) requires that, just after the transfer time, the receiving trust (i.e. the New Trust) has the same classes of membership interests that the transferring trust (i.e. the Trust) had just before, and has just after, the transfer time.

A membership interest in an entity will arise for each interest by virtue of which you are a member of the entity (section 960-135).

The Trust only has ordinary units on issues.

The New Trust will only have ordinary units on issue. The terms of each ordinary units will be identical on the basis that the Trust and New Trust will have identical trust deeds.

There will no change in the rights attached to the membership interests in either trust as a result of transferring the relevant interests to the New Trust. Therefore, it is considered that the requirements of subparagraph 126-225(1)(c)(ii) will be satisfied.

Subparagraph 126-225(1)(c)(iii) - Market value of the Unitholders units

Subparagraph 126-225(1)(c)(iii) requires that the total market value of each beneficiary's interests in the transferring trust of a particular class, and their interests of the matching class in the receiving trust, must be substantially the same just before, and just after, the transfer time.

Explanatory Memorandum (EM) to the Tax Laws Amendment(2009 Measures No. 6) Bill 2009 (enacted as the Tax Laws Amendment (2009 Measures No. 6) Act 2010) provides:

'1.48 The market value test determines whether beneficiaries have the same proportionate membership interests before and after the transfer.

1.49 Under this test, the total market value of each beneficiary's interests in the transferring trust of a particular class and their interests of the matching class in the receiving trust must be substantially the same just before and just after the transfer time.'

The proposed restructure will involve a transfer of the Property by the Trust to the New Trust for no consideration. The combined net asset value should therefore remain substantially the same just before and just after the transfer time. Hence, the market value of the beneficiaries interests should therefore remain the same just before and after the transfer time.

Therefore, it is considered that the three conditions of paragraph 126-225(1)(c) will be satisfied.

Paragraph 126-225(1)(d) - Requirement in section 126-230 is met

Paragraph 126-225(1)(d) requires the following conditions in section 126-230 to be satisfied:

126-230(1)

The conditions in subsections (2) and (3) must be met:

(a) if subsection 126-225(2) applies - at all times during the period:

(i) starting at the start time; and

(ii) ending at the transfer time; and

(b) otherwise - at the transfer time.

125-230(2)

The first condition is met at a particular time if, at that time, *CGT event E4 is capable of happening to all of the *membership interests in each of the trusts.

125-230(3)

The second condition is met at a particular time, if at that time, the manner or extent to which each beneficiary of each trust can benefit from the trust is not capable of being significantly affected by the exercise, or non-exercise, of a power.'

(i) CGT event E4 is capable of happening

Subsection 126-230(2) is met at a particular time if, at that time, CGT event E4 is capable of happening to all of the membership interests in each of the transferring trust and the receiving trust. The note to subsection 126-230(2) states that 'A roll-over cannot be chosen if either trust is a discretionary trust.'

Under subsection 104-70(1), CGT event E4 happens if:

(a) the trustee of a trust makes a payment to you in respect of your unit or your interest in the trust (except for CGT event A1, C2, E1, E2, E6 or E7 happening in relation to it); and

(b) some or all of the payment (the non-assessable part) is not included in your assessable income.

Subsection 126-230(2) does not require CGT event E4 to actually happen to the transferring trust and the receiving trust. It is a notional test, establishing whether CGT event E4 is capable of happening to an interest in a trust.

Further guidance in relation to CGT event E4 can be obtained from paragraph 1.29 of the Explanatory Memorandum to the Tax Laws Amendment (2009 Measure No. 6) Bill 2009 (enacted as the Tax Laws Amendment (2009 Measure No. 6) Act 2010) where it is stated:

This requirement ensures that so-called discretionary trusts cannot access the roll-over. This is because it is difficult to establish with any degree of certainty, the real underlying ownership of the assets of a discretionary trust. Therefore, it is equally difficult to test whether that ownership has been maintained.

In the present case, since the Trust and the New Trust are Unit Trusts all membership interests are held via units in the trusts. Therefore, CGT event E4 is capable of happening to all membership interests in the transferring and the receiving trusts at the transfer time. Accordingly, subsection 126-230(2) will be met at the transfer time.

(ii) Beneficiaries' entitlements not discretionary

Subsection 126-230(3) requires that the manner or extent to which each beneficiary of each trust can benefit from the trust cannot be capable of being significantly affected by the exercise (or non-exercise) of a power.

The beneficiaries' interest in the Trust and New Trust are not capable of being significantly affected by the exercise (or non-exercise) of a power. This is because Clause XXof the Supplemental Deed does not allow the Trustee to exercise their power to alter the fixed entitlement.

Clause XX Fixed Entitlement in the Supplemental Deed states:

Despite anything to the contrary in this deed, the Trustee may not exercise any of its powers in a way that would:

(a)          Result in the Unitholders ceasing to have a Fixed Entitlement in all the Net Income and the Trust Fund; or

(b)          Vary the Fixed Entitlement of any Unitholder in the Net Income or the Trust Fund.

Clause X in the Supplemental Deed defines Fixed Entitlement in relation to any interest in Net Income or the Trust Fund has the same meaning as in Division 272 in Schedule 2F to the Income Tax Assessment Act 1936 (Cth).

Subsection 126-230(4) is not relevant in the present case as the trusts are not managed investment trusts.

As subsections 126-230(1) and 126-230(2) are met at the transfer time, paragraph 126-225(1)(d) is satisfied.

Paragraph 126-225(1)(e) - Exceptions in section 126-235 do not apply

Paragraph 126-225(1)(e) requires that none of the exceptions in section 126-235 apply. There are three exceptions.

(i) Foreign Trusts

Under subsection 126-235(1), an exception will apply where the receiving trust is a foreign trust for CGT purposes, and the roll-over asset is not taxable Australian property just after the transfer time.

The term 'foreign trust for CGT purposes' is defined in subsection 995-1(1) as a trust that is not a resident for CGT purposes. Subsection 995-1(1) provides that a unit trust is a resident trust for CGT purposes for an income year if:

•         either any property of the trust is situated in Australia or the trust carries on business in Australia

and

•         either the central management and control of the trust is in Australia or Australian residents hold more than 50% of the beneficial interests in the income or property of the trust.

In this case, the applicant has confirmed that the New Trust is a resident trust for CGT purposes.

The exception in subsection 126-235(1) in respect of foreign trusts therefore will not apply.

(ii) Corporate Unit Trusts and Public Trading Trusts

Subsection 126-235(2) provides an exception where either of the transferring trust or receiving trust is a corporate unit trust (within the meaning of section 102K of the Income Tax Assessment Act 1936 (ITAA 1936)) or a public trading trust (within the meaning of section 102S of the ITAA 1936) for the income year that includes the transfer time.

In this case, neither the Trust nor the New Trust will be a corporate unit trust or public trading trust for the income year that includes the transfer time. The exception in subsection 126-235(2) will therefore not apply.

(iii) Mirror Choices

Subsection 126-235(3), as qualified by subsections 126-235(4) and (5), provides in broad terms that an exception applies if both trusts do not have the same tax choices (or elections) in force, just after the transfer time.

The applicant has requested the Commissioner to rule on the basis that New Trust will make all other necessary mirror choices, either at the transfer or by such time that paragraph 126-235(4)(a) would apply.

Paragraph 126-225(1)(e) will therefore be met as none of the exceptions in section 126-235 will apply.

Conclusion regarding CGT roll-over under Subdivision 126-G

On the basis of the above analysis, it is considered that all of the requirements in subsection 126-225(1) will be met. Therefore, the New Trust will be eligible to choose roll-over relief under Subdivision 126-G in relation to the transfer of the Property by the Trust to New Trust under the New Trust Arrangement. However, under subsection 126-225(3), the roll-over will only happen if the trustees of both the transferring trust and receiving trust choose to obtain it. As the trustee of both the Trust and the New Trust will choose to obtain the roll-over, subsection 126-225(3) will allow the roll-over to happen.