Edited version of private advice

Authorisation Number: 1051916649194

Date of advice: 29 October 2021

Ruling

Subject: Capital gain - CGT event C2 - Division 615 roll-over - consolidation - single entity rule

Question 1

Will the redemption of the special units in the A Trust (the Trust) trigger a capital gain for the holders of the special units under CGT event C2?

Answer

No.

Question 2

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?

Answer

Yes.

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?

Answer

Yes.

Question 4

Will the transfer of the units in each New Unit Trust to Hold Co under Step 5 of the Proposed Transactions within the same tax consolidated group be disregarded for income tax purposes?

Answer

Yes.

Question 5

Will the vesting of the Trust, and the distribution of any remaining assets in the Trust to Hold Co on vesting (or immediately prior to vesting) of the Trust, under Step 6 of the Proposed Transactions be disregarded for income tax purposes?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June XXX

The scheme commences on:

X July XX

Relevant facts and circumstances

1. The Trust is a unit trust created by a trust deed made on XX and varied by a deed of variation on XX and a supplemental deed on XX.

2. The Trust currently has X units on issue, comprising X ordinary units, X X class units and X 'special income units' (called 'special units' in the trust deed for the Trust).

3. The ordinary unitholders of the Trust are:

• Person A (X ordinary units)
• Person B (X ordinary units), and
• Person C (X ordinary units).

4. The X class unitholder of the Trust is:

• The B Trust (X X class units).

5. The special income unitholders are:

• B Trust (X special income unit)
• C Trust (X special income unit)
• D Trust (X special income unit)
• Z Pty Ltd (X special income unit)
• Y Pty Ltd (X special income unit)
• Person D (X special income unit)
• E Trust (X special income unit)
• Person A (X special income unit)
• Person B (X special income unit)
• Person C (X special income unit)
• X Pty Ltd (X special income unit)
• W Pty Ltd (X special income unit).

6. The special income units were issued at a unit price of $X each.

7. The Trust will redeem all of the Special Units for the sum of $X per Special Unit and then cancel all of the Special Units before undertaking the Proposed Transactions.

8. The unitholders will at all relevant times be Australian tax residents.

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

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

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

12. 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

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

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

Proposed Transactions

15. The Trust proposes to undertake the following 'Proposed Transactions':

Step 1: Creation of new unit trusts:

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

Step 2: Division 615 roll-over:

17. A new company (Hold Co) is established.

18. Each ordinary unit holder will subscribe for one ordinary share in Hold Co and the X class unit holder will subscribe for one X class share in Hold Co on incorporation.

19. The ordinary shares will have the same rights as the ordinary units:

20. The X class shares in Hold Co will have the same rights as the X class units:

21. The unitholders of the Trust will transfer their units in the Trust to Hold Co.

22. In exchange, Hold Co will issue ordinary shares to the ordinary unitholders and X class shares to the X class 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 are owned by the unitholder, and nothing else.

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

• Person A will hold X ordinary shares
• Person B will hold X ordinary shares
• Person C will hold X ordinary shares
• B Trust will hold X X class shares

24. The shares issued in Hold Co will not be redeemable shares.

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

Step 3 - Tax consolidation election:

26. 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 4: Transfer properties:

27. After the Consolidation Date, the properties of the Trust will be transferred to the New Unit Trusts.

28. The Properties will be transferred by way of sale from the Trust to the New Unit Trusts. As there are substantial external borrowings and mortgages, it is proposed that borrowings will be re-financed in the New Unit Trusts and mortgages held by the Trust will be discharged and re-issued to the New Unit Trusts by agreement with the financiers. The sale will be subject to vendor finance arrangements. The sale will be for a market value price pursuant to contracts of sale.

29. No Properties will be retained by the Trust.

Step 5: Transfer units in each New Unit Trust to Hold Co:

30. At least one day after the completion of step 4, the Trust will transfer 100% of its units in each New Unit Trust to Hold Co, with the consent of the external financiers (if required).

Step 6: The Trust is vested

31. At least one day after the completion of step 4, the unitholder of the Trust, being Hold Co, will resolve to vest the Trust and the Trust will be vested in accordance with the procedures in the Trust Deed.

32. As part of the vesting process, either immediately prior to vesting or upon vesting, any remaining assets in the Trust will be distributed to Hold Co.

33. Hold Co will also assume any remaining liabilities of the New Unit Trust.

34. This transfer of assets either immediately before vesting or on vesting requires a special resolution of all the unitholders, which would be first obtained.

Purpose of Proposed Transactions

35. 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.

Relevant legislative provisions

Reasons for decision

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

Question 1

Will the redemption of the special units in the A Trust (the Trust) trigger a capital gain for the holders of the special units under CGT event C2?

Summary

No, the special unitholders will not make a capital gain on the cancellation of their units.

Detailed reasoning

36. Under section 102-20 you make a capital gain or capital loss only if a CGT event happens.

37. Paragraph 104-25(1)(a) provides CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being cancelled. The time of the event is:

• when you enter into the contract that results in the asset ending, or
• if there is no contract - when the asset ends (Subsection 104-25(2)).

38. You make a capital gain if the capital proceeds from the ending are more than the asset's cost base.

39. Subsection 112-20(1) deems the first element of your cost base and reduced cost base of the CGT asset to be its market value if you did not deal at arm's length with the other entity in connection with the acquisition.

40. Under paragraph 116-30(2)(b), the capital proceeds you received from the CGT event are replaced with the market value of the CGT asset that is the subject of the event, if those capital proceeds are more or less than the market value of the asset, and:

• you and the entity that acquired the asset from you did not deal with each other at arm's length in connection with the event, or
• the CGT event is CGT event C2 (about cancellation, surrender and similar endings).

41. The market value is worked out as at the time of the event.

42. The special income units were issued at a unit price of $X each.

43. The Trust will redeem all of the special units for the sum of $X per special unit and then cancel all of the special units.

44. The value of the special units is determined by the rights attached to the units.

45. The rights attached to the special units of the Trust include:

• the trustee may pay apply or set aside to or for the benefit of the holders of the special units all or such part of the net income of the Trust. Any such payment, application or setting aside may be made for any such holder of the special units to the exclusion of or in a different amount as the other special unitholders
• no entitlement to the capital pre and post termination of the Trust
• no entitlement to vote
• the trustee may at any time redeem a special unit or units for the sum of $X per special unit and upon such redemption the special unit shall be cancelled.

46. The above mentioned rights have not changed since the establishment of the Trust.

47. Clause X of the trust deed provides that with consent from a simple majority of unitholders affected, the trustee may at any time before the termination of the Trust apply any cash surplus to the immediate requirements of the Trust Fund in satisfaction of the interest in the Trust Fund. The schedule sets out the value of the special unit for these purposes shall not exceed $X.

48. The special unitholders have no interest in the assets of the Trust and no interest in the income of the Trust before the exercise of this discretion of the trustee in their favour.

49. The only potential value of the special units is the redemption price of $X. This has not changed since the establishment of the Trust. Therefore, the market value of the units on acquisition and on cancellation of the units would be the same and would not exceed the $X per unit that was paid and will be received by the special unit holders.

50. As the cost base and the capital proceeds of the special units are equal, the special unitholders will not make a capital gain on the cancellation of their units.

Question 2

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

51. 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.

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

1. you are a member of a unit trust (the original entity); and
2. you and at least one other entity (the exchanging members) own all the units in it; and
3. 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
4. the requirements in Subdivision 615-B are satisfied.

53. 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.

54. The unitholders are members in the Trust.

55. Under the Proposed Transactions:

• the unitholders immediately before the transfer 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 ordinary shares carrying the same rights as the ordinary units to each ordinary unitholder and issue B Class shares carrying the same rights as the B Class units to the B Class unitholder and nothing else.

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

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

58. 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

59. 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.

60. 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

61. Section 615-20 states:

1. Immediately after the completion time, each exchanging member must own:
   1. a whole number of shares in the interposed company; and
   2. 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:
      1. owned by the member; and
      2. disposed of, redeemed or cancelled under the *scheme.
2. The following ratios must be equal:
   1. the ratio of:
      1. the *market value of each exchanging member's *shares in the interposed company; to
      2. the market value of the shares in the interposed company issued to all the exchanging members (worked out immediately after the completion time);
   2. the ratio of:
      1. 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
      2. 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:
   1. 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...

62. Under the Proposed Transaction:

• the unitholders of the Trust will transfer their units in the Trust to Hold Co.
• in exchange, Hold Co will issue ordinary shares to each ordinary unitholder and B class shares to the B class 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 owned by the unitholder of each respective class, and nothing else.
• at (and immediately after) completion, the unitholders in the Trust will own all of the shares in Hold Co.
• the ordinary shares will have the same rights as the ordinary units.
• the X class shares in Hold Co will have the same rights as the X class units.

63. 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.

64. The percentage and rights of each class of shares held by the shareholders immediately after the completion time equals the percentage and rights of each class of units in the Trust 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 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.

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

Section 615-25 - requirements relating to the interposed company

66. 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...

67. Under the Proposed Transaction:

• the ordinary and X class shares issued by Hold Co to the unitholders are not redeemable shares.
• the ordinary and X class shareholders of Hold Co (exchanging members) will own all the shares from the time they are issued until at least the completion time.

68. The requirements in section 615-25 will be satisfied.

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

69. 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).

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

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

72. 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.

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 New Unit Trusts without income tax consequences while they are all subsidiary members of the same consolidated group.

Detailed reasoning

73. 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.

74. 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 SER:

7. 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.

8. As a consequence, the SER has the effect that:

1. the actions and transactions of a subsidiary member are treated as having been undertaken by the head company;
2. 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;
3. 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 and paragraphs 26-28); and
4. 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.

9. 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.

75. 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).

76. After the Consolidation Date, the properties of the Trust will be transferred to the New Unit Trusts.

77. 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 they are all subsidiary members of the same consolidated group.

Question 4

Will the transfer of the units in each New Unit Trust to Hold Co under Step 5 of the Proposed Transactions within the same tax consolidated group be disregarded for income tax purposes?

Summary

The SER in section 701-1 will allow for assets held by the Trust to be transferred to Hold Co without income tax consequences while they are members of the same consolidated group.

Detailed reasoning

78. Similar to the reasoning in question 3, the SER in section 701-1 will allow for assets held by the Trust to be transferred to Hold Co without income tax consequences while they are members of the same consolidated group.

Question 5

Will the vesting of the Trust, and the distribution of any remaining assets in the Trust to Hold Co on vesting (or immediately prior to vesting) of the Trust, under Step 6 of the Proposed Transactions be disregarded for income tax purposes?

Summary

The SER in section 701-1 will allow for assets held by the Trust to be distributed to Hold Co without income tax consequences while they are members of the same consolidated group.

Detailed reasoning

79. Similar to the reasoning in question 3, the SER in section 701-1 will allow for assets held by the Trust to be distributed to Hold Co without income tax consequences while they are members of the same consolidated group.