Edited version of private advice

Authorisation Number: 1051915534009

Date of advice: 4 November 2021

Ruling

Subject: CGT - consolidation - single entity rule

Question 1

Does CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when the Deed of Variation is executed to change the terms of the Trust?

Answer

No.

Question 2

Do any other CGT events in Division 104 of the ITAA 1997 happen in relation to the assets of the Trust when the Deed of Variation is executed to change the terms of the Trust?

Answer

No.

Question 3

Can the Unitholders of the Trust choose to obtain a rollover for the transfer of their Units in the Trust to Hold Co under Division 615 of the ITAA 1997?

Answer

Yes.

Question 4

Will the transfers of properties of the Trust to the New Unit Trusts within the same tax consolidated group be disregarded for income tax purposes?

Answer

Yes.

This ruling applies for the following period

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Trust owns commercial and residential properties (Properties) which are leased to third parties under commercial lease agreements to derive rental income.

The terms of the Trust are changed in the manner set out in the Deed of Variation pursuant to a valid exercise of a power contained within the Trust Deed.

Immediately before the Proposed Transactions, the Trust:

•         will not have any unpaid present entitlements, or

•         Division 7A loans or any other liabilities owing to an associate.

There has never been an asset revaluation of the Trust for accounting purposes.

There will not be an asset revaluation immediately before the Proposed Transactions.

There is no current intention to issue additional units in the Trust or New Unit Trusts after the Proposed Transactions.

The Proposed Transactions are not steps which from part of a broader scheme or arrangement.

Proposed Transactions

The Trust proposes to undertake the following 'Proposed Transactions' in the 20XX-XX income year.

Step 1: Execution of the Deed of Variation

The provisions of the Trust Deed will be varied in the manner set out in the Deed of Variation.

As part of these changes, and at the date of the Deed of Variation, the Trust will issue

X ordinary units (Units) to (together, the Unitholders):

•         Person A - X ordinary units

•         Trust B -X ordinary units, and

•         Trust C - X ordinary units.

These Unitholders will at all relevant times be Australian tax residents.

Step 2: Creation of new unit trusts

Separate new unit trusts (New Unit Trusts) will be established with the Trust as the sole unitholder of each New Unit Trust.

Step 3: Division 615 roll-over

A new company (Hold Co) is established.

Each Unitholder will subscribe for one ordinary share in Hold Co on incorporation.

The ordinary shares (Shares) will have the same rights as the Units (but in respect of the income, capital and voting rights of Hold Co).

The Unitholders will transfer their Units in the Trust to Hold Co.

In exchange, Hold Co will issue Shares to each Unitholder so that after the issue of shares, each shareholder has shares of a whole number and in the same percentage as the Units that were previously owned by the Unitholder, and nothing else.

At (and immediately after) completion, the Unitholders will own all of the shares in Hold Co.

Hold Co will choose that section 615-65 of the ITAA 1997 applies, within two months after the completion time.

Step 4 - Tax consolidation election

Hold Co will elect to form a consolidated group, comprising Hold Co as the head company, and the Trust and each of the New Unit Trusts as subsidiary members, pursuant to section 703-50 of the ITAA 1997. Hold Co will specify the date of consolidation as the day immediately after all the above steps have been completed (Consolidation Date).

Step 5: Transfer Properties

After the Consolidation Date, the Properties of the Trust will be transferred to the New Unit Trusts, except for one or more (but not all) Properties that will be retained by the Trust. Each New Unit Trust will own one or more Properties currently owned by the Trust.

Purpose of Proposed Transactions

The purpose of the Proposed Transactions is to enable assets of the Trust (Property) to be separated across different trusts to allow greater flexibility for future succession planning, asset protection, ring-fence financing, asset management and divestment flexibility. In particular:

•         the new land holding entity, being the New Unit Trust, will have limited Properties exposed to any cause of action relating to that entity's activities (e.g. development activities, leasing activities), rather than exposing the entire portfolio of Properties to those liabilities;

•         enable each Property or sub-group of Properties to be managed separately and the family to separately manage their succession planning with respect to each Property or sub-group of Properties;

•         provide financial ease in obtaining borrowings against any Property or sub-group of Properties (e.g. for renovations or developments) and ring-fence security for the borrowing to that particular Property or sub-group of Properties, by having separate entities that own one or a sub-group of Properties; and

•         provide divestment flexibility for the family by ensuring that the structure is capable of divestment in respect of a particular Property or sub-group of Properties by divestment of securities and thereby facilitating divestment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 104-10(1)

Income Tax Assessment Act 1997 Subsection 104-25(1)

Income Tax Assessment Act 1997 Paragraph 104-35(5)(d)

Income Tax Assessment Act 1997 Subdivision 104-E

Income Tax Assessment Act 1997 Section 104-55

Income Tax Assessment Act 1997 Subsection 104-55(1)

Income Tax Assessment Act 1997 Section 104-60

Income Tax Assessment Act 1997 Subsection 104-60(1))

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

Income Tax Assessment Act 1997 Subsection 104-80(1)

Income Tax Assessment Act 1997 Subsection 104-85(1)

Income Tax Assessment Act 1997 Paragraph 104-155(5)(d)

Income Tax Assessment Act 1997 Division 615

Income Tax Assessment Act 1997 Subsection 615-5(1)

Income Tax Assessment Act 1997 Paragraph 615-5(1)(a)

Income Tax Assessment Act 1997 Paragraph 615-5(1)(b)

Income Tax Assessment Act 1997 Paragraph 615-5(1)(c)

Income Tax Assessment Act 1997 Paragraph 615-5(1)(d)

Income Tax Assessment Act 1997 Subdivision 615-B

Income Tax Assessment Act 1997 Section 615-15

Income Tax Assessment Act 1997 Section 615-20

Income Tax Assessment Act 1997 Subsection 615-20(1)

Income Tax Assessment Act 1997 Subsection 615-20(2)

Income Tax Assessment Act 1997 Subsection 615-20(3)

Income Tax Assessment Act 1997 Section 615-25

Income Tax Assessment Act 1997 Section 615-30

Income Tax Assessment Act 1997 Section 615-65

Income Tax Assessment Act 1997 Section 701-1

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

Income Tax Assessment Act 1997 Subsection 701-1(3)

Income Tax Assessment Act 1997 Section 703-50

Income Tax Assessment Act 1997 Section 960-130

Income Tax Assessment Act 1997 Subsection 995-1(1)

Question 1

Does CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 happen when the Deed of Variation is executed to amend the terms of the Trust?

Summary

No. CGT event E1 and E2 do not happen when the Deed of Variation is executed to amend the terms of the Trust pursuant to a valid exercise of a power contained within the Trust Deed.

Detailed reasoning

CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement (subsection 104-55(1)).

CGT event E2 happens if you transfer a CGT asset to an existing trust (subsection 104-60(1))

The Commissioner's view on CGT events E1 or E2 in relation to changes to a trust deed is contained in Taxation Determination TD 2012/21 Income tax: does CGT event E1 or E2 in sections 104-55 or 104-60 of the Income Tax Assessment Act 1997 happen if the terms of a trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, or varied with the approval of a relevant court? (TD 2012/21).

TD 2012/21 states[1]:

•         CGT event E1 and E2 will not happen where the terms of the trust are changed pursuant to a valid exercise of a power contained within the trust's constituent document, or varied with the approval of a relevant court unless:

­   the change causes the existing trust to terminate and a new trust to arise for trust law purposes, or

­   the effect of the change or court approved variation is such as to lead to a particular asset being subject to a separate charter of rights and obligations such as to give rise to the conclusion that that asset has been settled on terms of a different trust.

•         Where there is some continuity of property and membership of the trust, an amendment to the trust that is made in proper exercise of a power of amendment contained under the deed will not result in the termination of the trust so long as the amendments are properly supported by the power.

The changes set out in the Deed of Variation will be executed pursuant to a valid exercise of a power contained with the Trust Deed.

There will be no change in the property that the Trust holds immediately before and immediately after the execution of the Deed of Variation.

The Unitholders will be beneficiaries of the Trust immediately before and immediately after the Deed of Variation is executed.

As the changes will be made pursuant to a valid power under the Trust Deed and there is some continuity of property and membership, the trust will not terminate or be resettled or cause any of the assets to be transferred to a separate and existing trust.

In accordance with TD 2012/21, neither CGT event E1 nor CGT event E2 will happen when the Deed of Variation is executed to change the terms of the Trust that is made pursuant to a valid exercise of a power contained within the Trust Deed.

Question 2

Do any other CGT events in Division 104 of the ITAA 1997 happen in relation to the assets of the Trust when the Deed of Variation is executed to change the terms of the Trust?

Summary

No other CGT events will happen when the Deed of Variation is executed pursuant to a valid exercise of a power contained within the Trust Deed.

Detailed reasoning

All references are to the Income Tax Assessment Act 1997 unless otherwise indicated.

Section 105-25 sets out that if more than one event can happen, the one you use is the one that is the most specific to your situation.

Subdivision 104-E contains CGT events specifically related to trusts.

As above E1 or E2 do not apply.

CGT event E3 happens if a trust over a CGT asset is converted to a unit trust and just before the conversion, a beneficiary was absolutely entitled to the asset as against the trustee (subsection 104-65(1).

The issue of absolute entitlement is discussed in Draft Taxation Ruling TR 2004/D25 Income tax: capital gains: meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust' as used in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997. It states:

The core principle underpinning the concept of absolute entitlement in the CGT provisions is the ability of a beneficiary, who has a vested and indefeasible interest in the entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction.

In this case, just before the conversion none of the beneficiaries will have a vested and indefeasible interest in any trust asset. Therefore, CGT event E3 will not happen on the execution of the Deed of Variation.

CGT event E4 happens if the trustee of a trust makes a payment to you in respect of your unit or your interest in the trust (with some exceptions) and some or all of the payment is not included in your assessable income (subsection 104-70(1)).

The Execution of the Deed of Variation does not result in the trustee making a payment to a beneficiary and accordingly CGT event E4 will not happen.

CGT event E6 or E7 will happen if the trustee of a trust disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's right to income or capital, respectively (see subsections 104-80(1) and 104-85(1)).

CGT events E6 and E7 will not happen as there will not be any disposal of a CGT asset by the trustee to a beneficiary on the execution of the Deed of Variation.

CGT event E8 may happen where a beneficiary disposes of their capital interest in a trust to a party other than the trustee.

There is no disposal of a beneficiary's capital interest upon the execution of the Deed of Variation and as a result CGT event E8 will not happen.

While the E Events are specific to trusts, they are not the only CGT events that can happen.

CGT event A1 happens when a CGT asset is disposed of (subsection 104-10(1)).

The Trustee has not disposed of a CGT asset and therefore, CGT event A1 will not happen.

CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity (subsection 104-25(1).

CGT event H2 happens if an act, transaction, or event occurs in relation to a CGT asset you own that does not result in an adjustment being made to the assets cost base or reduced cost base.

However, neither CGT event D1 nor CGT event H2 happen in relation to an issue of units by the trustee (paragraphs 104-35(5)(d) and 104-155(5)(d)).

The Deed of Variation results in the issue of new units in the Trust. Accordingly, neither CGT event D1 nor CGT event H2 will happen on the execution of the Deed of Variation.

No other CGT events are considered to apply.

No other CGT events will happen when the Deed of Variation is executed pursuant to a valid exercise of a power contained within the Trust Deed.

Question 3

Can the Unitholders of the Trust choose to obtain a roll-over for the transfer of their Units in the Trusts to Hold Co under Division 615?

Summary

The Unitholders of the Trust can choose to obtain a roll-over for the transfer of their Units in the Trust to Hold Co under Division 615.

Detailed reasoning

Division 615 states that you can choose for transactions under a scheme to restructure a company's business to be tax neutral if, under the scheme you cease to own shares in the company and, in exchange, you become the owner of new shares in another company.

Subsection 615-5(1) states that you can choose to obtain the roll-over if:

(a)  you are a member of a unit trust (the original entity); and

(b)  you and at least one other entity (the exchanging members) own all the units in it; and

(c)   under a scheme for reorganising its affairs, the exchanging members dispose of all their units in it to a company (the interposed company) in exchange for shares in the interposed company (and nothing else); and

(d)  the requirements in Subdivision 615-B are satisfied.

Subsection 995-1(1) states that a 'member', in relation to an entity, has the meaning given by section 960-130. Section 960-130 sets out that where an entity is a trust, a unitholder is a member of the trust.

The Unitholders are thus members in the Trust.

Under the Proposed Transactions:

•         immediately before the transfer the Unitholders will own all the units in the Trust and will transfer all their interests in the Trust to Hold Co.

•         in exchange, Hold Co will issue Shares carrying the same rights as the Units to each ordinary Unitholder and nothing else.

The interposition of Hold Co is a scheme for reorganising the affairs of the Trust.

Therefore, the requirements of paragraphs 615-5(1)(a)-(c) will be satisfied.

The further requirements under Subdivision 615-B are spread across sections 615-15 to 615-30.

Section 615-15 - interposed company must own all the original interests

Section 615-15 states:

The interposed company must own all the units in the original entity immediately after the time (the completion time) all the exchanging members have had their units in the original entity disposed of under the scheme.

Under the Proposed Transaction, Hold Co (the interposed company) will own all the units in the Trust immediately after the completion time, satisfying the requirements of section 615-15.

Section 615-20 - requirements relating to your interests in the original entity

Section 615-20 states:

(1)    Immediately after the completion time, each exchanging member must own:

(a)  a whole number of shares in the interposed company; and

(b)  a percentage of the shares in the interposed company that were issued to all the exchanging members that is equal to the percentage of the shares or units in the original entity that were:

i.      owned by the member; and

ii.     disposed of, redeemed or cancelled under the *scheme.

(2)    The following ratios must be equal:

(a)  the ratio of:

i.      the *market value of each exchanging member's *shares in the interposed company; to

ii.     the market value of the shares in the interposed company issued to all the exchanging members (worked out immediately after the completion time);

(b)  the ratio of:

i.      the market value of that member 's shares or units in the original entity that were disposed of, redeemed or cancelled under the *scheme; to

ii.     the market value of all the shares or units in the original entity that were disposed of, redeemed or cancelled under the scheme (worked out immediately before the first disposal, redemption or cancellation).

(3)    Either:

(a)  you are an Australian resident at the time your *shares or units in the original entity are disposed of, redeemed or cancelled under the *scheme; or...

Under the Proposed Transaction:

•         the Unitholders will transfer their units in the Trust to Hold Co.

•         in exchange, Hold Co will issue Shares to each Unitholder so that after the issue of Shares, each shareholder (the former Unitholder) has shares of a whole number and in the same percentage as the Units that were owned by the Unitholder of each respective class, and nothing else.

•         at (and immediately after) completion, the Unitholders will own all of the shares in Hold Co.

•         the Shares will have the same rights as the Units.

The requirements of subsection 615-20(1) will be satisfied, as immediately after the completion time:

•         each of the shareholders (exchanging members) of Hold Co will own a whole number of shares in Hold Co.

•         the shareholders of Hold Co will hold a percentage of the respective class of shares in Hold Co (interposed entity) that is equal to the percentage of the respective class of units they held in the Trust (original entity) immediately before they transferred the units to Hold Co under the proposed restructure.

The percentage and rights of Shares held by the shareholders immediately after the completion time equals the percentage and rights of the Units immediately before the transfer under the Proposed Transaction. The shareholders will own all the Shares on Hold Co. It follows that the proportionate market value of the interest of each shareholder in Hold Co immediately after the completion time will be the same as the proportionate market value of the prior interest that was held by the former Unitholder in the Trust immediately before the first disposal to Hold Co. As continuity of market value will be preserved, the requirements in subsection 615-20(2) will be satisfied.

The Unitholders will at all relevant times be Australian tax residents, including at the time their Units are transferred to Hold Co. The requirement in subsection 615-20(3) will thus be satisfied.

Section 615-25 - requirements relating to the interposed company:

Section 615-25 states:

(1)  The shares issued in the interposed company must not be redeemable shares.

(2)  Each exchanging member who is issued shares in the interposed company must own the shares from the time they are issued until at least the completion time.

(3)  Immediately after the completion time the exchanging members must own all the shares in the interposed company...

Under the Proposed Transaction:

•         the Shares issued by Hold Co to the unitholders are not redeemable shares.

•         the shareholders of Hold Co (exchanging members) will own all the shares from the time they are issued until at least the completion time.

The requirements in section 615-25 will be satisfied.

Section 615-30 - interposed company must make a particular choice

Under section 615-30, the interposed company must choose that section 615-65 applies within 2 months after the completion time (where the original entity is not a head of a consolidated group immediately before the completion time).

The Trust is not a head entity of a consolidated group immediately before the completion time and Hold Co will choose that section 615-65 applies, within two months after the completion time. The requirements of section 615-30 are thus satisfied.

All the requirements of Subdivision 615-B and subsection 615-5(1) will be satisfied.

The Unitholders of the Trust can choose to obtain a roll-over for the transfer of their Units to Hold Co under Division 615.

Question 3

Will the transfers of properties of the Trust to the New Unit Trusts within the same tax consolidated group be disregarded for income tax purposes?

Summary

The single entity rule (SER) in section 701-1 will allow for assets held by the Trust to be transferred to the Sub-Trusts without income tax consequences while they are all subsidiary members of the same consolidated group.

Detailed reasoning

The SER operates for the purposes set out in subsections 701-1(2) and (3) (the core purposes). These purposes are to work out the amount of the head company and subsidiary member's liability for income tax and the amount of a loss for a relevant period. They include all matters relevant and incidental to those calculations. The intended operation of the SER is to apply the income tax laws to a consolidated group as if it were a single entity.

Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997 sets out the Commissioner's view on the consequences of the operation of the SER:

For income tax purposes the SER deems subsidiary members to be parts of the head company rather than separate entities during the period that they are members of the consolidated group.

As a consequence, the SER has the effect that:

(a)  the actions and transactions of a subsidiary member are treated as having been undertaken by the head company;

(b)  the assets a subsidiary member of the group owns are taken to be owned by the head company (with the exception of intra-group assets) while the subsidiary remains a member of the consolidated group;

(c)   assets where the rights and obligations are between members of a consolidated group (intra-group assets) are not recognised for income tax purposes during the period they are held within the group whether or not the asset, as a matter of law, was created before or during the period of consolidation (see also paragraph 11

(d)  and paragraphs 26-28); and

(e)  dealings that are solely between members of the same consolidated group (intra-group dealings) will not result in ordinary or statutory income or a deduction to the group's head company.

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.

Hold Co will elect to form a consolidated group, comprising Hold Co as the head company, and the Trust and each New Unit Trust as subsidiary members, pursuant to section 703-50. Hold Co will specify the date of consolidation as the day immediately after all the transfer of units and issue of shares has been completed (Consolidation Date).

After the Consolidation Date, the properties of the Trust will be transferred to the New Unit Trusts, except for one or more (but not all) properties that will be retained by the Trust.

The SER in section 701-1 will allow for assets held by the Trust to be transferred to the New Unit Trusts without income tax consequences while the Trust and the New Unit Trusts are subsidiary members of the same consolidated group.

[1] Refer paragraph 1 of TD 2012/21.