Edited version of private advice

Authorisation Number: 1052073877013

Date of advice: 22 December 2022

Ruling

Subject: Subdivision 124-N roll-over relief

This private ruling applies to the beneficiary of the trust and to the trustee and to any future trustee, for as long as the private ruling remains current.

Question 1

Does the Proposed Restructure satisfy the requirements in section 124-855 of the Income Tax Assessment Act 1997 (ITAA 1997) for roll-over under Subdivision 124-N of the ITAA 1997?

Answer

Yes.

Question 2

Will the Trustee for the Trust be able to disregard any capital gains or capital losses from CGT event A1 happening on disposal of its CGT assets to the Company under the Proposed Restructure pursuant to subsection 124-875(1) of the ITAA 1997?

Answer

Yes.

Question 3

Can HoldCo choose a roll-over under section 124-870 of the ITAA 1997 for each of its units in the Trust?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

The Trust

1.    The Trust was settled on XX/XX/20XX.

2.    The Trust, the Company, HoldCo and ParentCo form the 'Group' amongst other entities.

3.    The Group is in the business of online retailing.

4.    The Trust has XX Ordinary Units on issue, being the only class of units on issue.

5.    The Trust is governed by the trust deed (Trust Deed) which requires that all units are issued as Ordinary Units.

6.    Under the Trust Deed, each Ordinary Unit carries entitlements to income and capital of the trust in proportion to the number of units held, and the Trustee does not have discretion to determine that any payment of trust capital may be made to some unitholders and not to others.

7.    The Trust employs XX directors of the Group.

8.    As at 30 June 20XX the Trust's balance sheet included:

a)      Cash and cash equivalents: $XXXX

b)      Intercompany loan receivables: $XXXX

c)      Domain names: $XXXX

d)      Investment in subsidiaries: $XXXX

e)      Intellectual property: $XXXX

f)       Other assets: $XXXX

9.    None of the assets of the Trust are held as items of trading stock.

10.  As at 30 June 20XX, the Trust's balance sheet included the following liabilities:

a)    Trade and other payables: $XXXX

b)    Intercompany loan payable: $XXXX

The Company

11.  The Company is an Australian resident company limited by shares and is the trustee of the Trust (Trustee). The Company has never carried on business in its own right.

12.  The Company has XX ordinary shares on issue, being the only class of shares on issue.

13.  As at 30 June 20XX, the Company held assets of $XXXX, being cash on hand.

14.  The Company is not an exempt entity as defined in subsection 995-1(1) of the ITAA 1997.

HoldCo

15.  HoldCo is an Australian resident company and is the sole unitholder of the Trust, holding XX Ordinary Units.

16.  HoldCo does not hold its units in the Trust as items of trading stock.

17.  HoldCo is the sole shareholder of the Company, holding XX ordinary shares.

ParentCo

18.  ParentCo is an Australian resident company listed on the Australian Securities Exchange and is the ultimate holding company of the Group.

19.  ParentCo is the sole shareholder of HoldCo.

Proposed Restructure

20.  Under the Proposed Restructure the Trust will dispose of all its CGT assets to the Company and the Company will issue shares to HoldCo.

21.  The Proposed Restructure will be implemented as follows:

Step 1: The Company will undertake a share capital return, resulting in one ordinary share on issue.

Step 2: All CGT assets of the Trust (except cash retained to pay the final distribution to beneficiaries) will be transferred to the Company and the Company will assume all the liabilities of the Trust that exist just before the time the first CGT asset is transferred.

Step 3: All agreements between the Trust and its subsidiaries for the use of intellectual property and employment agreements entered into by the Trust will be transferred to the Company.

Step 4: The Company will issue 1,000,000 ordinary shares to HoldCo. These shares will carry the same rights as the one share remaining in the Company immediately after Step 1.

Step 5: The Trustee and the Company will both choose roll-over under section 124-865 of the ITAA 1997.

Step 6: The Trustee will declare a final distribution to its unitholder pursuant to the terms of the Trust Deed, to be settled with the remaining cash in the Trust.

Step 7: The Trust will be terminated in accordance with the terms of the Trust Deed within six months from the time just before the first CGT asset of the Trust is transferred to the Company.

Other Matters

22.  The Company will not hold the CGT assets transferred from the Trust pursuant to the Proposed Restructure as items of trading stock.

23.  Shares issued by the Company to HoldCo pursuant to the Proposed Restructure will not be held as items of trading stock.

24.  There will be no significant changes in the market value of the assets and liabilities of the Trust during the period just before the first CGT asset is transferred to the Company to just after the time the shares in the Company are issued.

Relevant legislative provisions

Section 124-850 of the Income Tax Assessment Act 1997

Section 124-855 of the Income Tax Assessment Act 1997

Section 124-860 of the Income Tax Assessment Act 1997

Section 124-865 of the Income Tax Assessment Act 1997

Section 124-870 of the Income Tax Assessment Act 1997

Section 124-875 of the Income Tax Assessment Act 1997

Section 104-70 of the Income Tax Assessment Act 1997

Section 104-195 of the Income Tax Assessment Act 1997

Section 995-1 of the Income Tax Assessment Act 1997

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the Trust.

This is to explain how we reached our decision. This is not part of the private ruling.

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997).

Question 1

Does the Proposed Restructure satisfy the requirements in section 124-855 for roll-over under Subdivision 124-N?

Summary

Yes, all of the requirements for roll-over in section 124-855 will be satisfied.

Detailed reasoning

Subdivision 124-N provides that entities can choose to obtain a roll-over if a trust disposes of all of its assets to a company; and units and interests in the trust are replaced by shares in the company (section 124-850).

Subsection 124-855(1) states:

A roll-over may be available for a restructuring (a trust restructure) if:

(a)  a trust, or 2 or more trusts, (the transferor) dispose of all of their CGT assets to a company limited by shares (the transferee); and

(b)  CGT event E4 is capable of applying to all of the units and interests in the transferor; and

(c)   the requirements in section 124-860 are met.

Note: roll-over is not available for a restructure undertaken by a discretionary trust.

Under the Proposed Restructure, the Trust, a unit trust, is the transferor and the Company, a company limited by shares, is the transferee. The Trust is not a discretionary trust.

ATO ID 2010/72 concluded that there will be a disposal under CGT event A1, when a corporate trustee ceases to hold an asset in its capacity as trustee, and begins to hold it in its own capacity.

Under the Proposed Restructure, all CGT assets of the Trust (except cash retained to pay the final distribution to beneficiaries) will be transferred to the Company. There will be a change in the beneficial ownership of all of the transferred CGT assets of the Trust because the Company holds the assets on trust before the Proposed Restructure and will hold the assets in its own right as beneficial owner after the Proposed Restructure. Therefore, the Trust will 'dispose' of all of the transferred CGT assets to the Company.

Subsection 124-860(1) provides that any CGT assets retained by the transferor to pay existing or expected debts of the transferor are ignored for the purpose of determining if all the CGT assets of the transferor are disposed of to the transferee under the trust restructure. Therefore, cash retained by the Trust to pay expected beneficiary entitlements does not preclude the requirements of paragraph 124-855(1)(a) from being satisfied.

Accordingly, the requirements of paragraph 124-855(1)(a) will be satisfied.

Section 104-70 (about capital payments for trust interests) provides that:

(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.

A trust where all the beneficiaries' interests have a fixed capital component will satisfy this requirement; having a discretionary income component will not fail this requirement.[1]

Under the terms of the Trust Deed, all unitholders' interests have entitlements to the income and capital of the trust in proportion to the number of units held, and the Trustee does not have discretion to determine that any payment of trust capital may be made to some unitholders and not to others. Accordingly, any non-assessable capital payment made by the Trustee of the Trust will be made to all unitholders such that unitholders are considered to have a fixed capital component. Therefore, CGT event E4 is capable of applying to all of the units and interests in the Trust and the requirement of paragraph 124-855(1)(b) will be satisfied.

Pursuant to paragraph 124-855(1)(c), the requirements in section 124-860 must be met for roll-over. These requirements are summarised as follows:

(a)  all of the CGT assets owned by the transferor must be disposed of to the transferee during the 'trust restructuring period' specified in subsection 124-860(2) (subsection 124-860(1));

(b)  the transferee must not be an exempt entity (subsection 124-860(3));

(c)   the transferee must also satisfy certain other requirements unless the transferee is the trustee of the transferor (subsections 124-860(4) and (5));

(d)  just after the end of the trust restructuring period, each entity that owned interests in a transferor just before the start of the trust restructuring period must own replacement interests in the transferee in the same proportion as it owned those interests in the transferor (paragraph 124-860(6)(a), the 'proportionate interests test'); and

(e)  just after the end of the trust restructuring period, the market value of the replacement interests each of those entities owns in the transferee must be at least substantially the same as the market value of the interests it owned in the transferor just before the start of the trust restructuring period (paragraph 124-860(6)(b), the 'market value test').

The 'trust restructuring period' starts just before the first CGT asset is disposed of to the transferee under the trust restructure and ends when the last CGT asset of the transferor is disposed of to the transferee (subsection 124-860(2)).

The 'trust restructuring period' for the Proposed Restructure will be not more than a 6 month period commencing on 1 January 20XX, under which the Trust will dispose of all its CGT assets to the Company (except for cash retained to pay expected liabilities of the Trust). Therefore, the requirements of subsection 124-860(1) will be satisfied.

An 'exempt entity' is defined in subsection 995-1(1) as:

(a)  an entity all of whose ordinary income and statutory income is exempt from income tax because of this Act or because of another Commonwealth law, no matter what kind of ordinary or statutory income the entity might have; or

(b)  an untaxable Commonwealth entity.

Section 11-5 provides a list of the type of entities that may be considered exempt entities for income tax purposes.

The Company is not an exempt entity under the above criteria. Therefore, the requirement in subsection 124-860(3) will be satisfied.

The Company, the transferee, is the trustee of the Trust, the transferor. Therefore, the requirements in subsection 124-860(4) will not apply.

Under the Proposed Restructure, HoldCo, the unitholder, will be issued with new ordinary shares in the Company (the transferee). The 1,000,000 new ordinary shares in the Company will be issued to HoldCo in exchange for the ending of HoldCo's units in the Trust under the Proposed Restructure. Accordingly, those shares will be the 'replacement interests' for the purposes of Subdivision 124-N.

The 'proportionate interests test' in paragraph 124-860(6)(a) compares the proportionate ownership of interests in the trust (the transferor) just before the trust disposes of its first CGT asset to the company (the transferee) under the trust restructure, with the proportionate ownership of shares in the company after the trust restructuring period.

Just before the Proposed Restructure, HoldCo is the only unitholder of the Trust, owning XX Ordinary Units.

After the Proposed Restructure, HoldCo will be the only shareholder of the Company, owning 1,000,001 ordinary shares.

As HoldCo is the only unitholder of the Trust just before the Proposed Restructure and will be the only shareholder of the Company just after the Proposed Restructure, the 'proportionate interests test' will be satisfied.

The 'market value test' requires that the market value of the replacement interests must be 'at least substantially the same' as the market value of the interests in the trust just before the start of the trust restructuring period.

Pursuant to the Proposed Restructure, all CGT assets and liabilities will be transferred from the Trust to the Company, and there is no expectation of significant changes in the market value of those assets or liabilities during the trust restructuring period. Therefore, the market value of the Company just after the Proposed Restructure will be substantially the same as the market value of the Trust just before the Proposed Restructure.

The 'replacement interests' will be the 1,000,000 ordinary shares in the Company that will be issued in accordance with Step 4. The only other interest in the Company is one ordinary share remaining after the share capital return in Step 1 (the original share). The original share and replacement interests will be within the same class and carry the same rights. Therefore, the market value of the 1,000,000 ordinary shares to be issued in the Company (replacement interests) will represent over 99.999% of the market value of the Company. Therefore, the market value of the replacement interests in the Company will be 'at least substantially the same' as the market value of the units in the Trust just before the Proposed Restructure and the 'market value test' will be satisfied.

Therefore, all the requirements in section 124-860 will be met.

Accordingly, the Proposed Restructure will satisfy all the requirements in section 124-855 for roll-over under Subdivision 124-N.

Question 2

Will the Trustee for the Trust be able to disregard any capital gains or capital losses from CGT event A1 happening on disposal of its CGT assets to the Company under the Proposed Restructure pursuant to subsection 124-875(1)?

Summary

Yes, all the requirements for roll-over will be satisfied and therefore the Trustee for the Trust will be able to disregard any capital gains or capital losses from CGT event A1 happening on disposal of its CGT assets to the Company under the Proposed Restructure pursuant to subsection 124-875(1).

Detailed reasoning

As outlined in Question 1, the requirements for roll-over in section 124-855 will be satisfied.

Roll-over is only available for the transferor and transferee if both the transferor and transferee choose to obtain it (section 124-865). The Trustee of the Trust (the transferor) and the Company (the transferee) will choose to obtain roll-over.

Roll-over does not apply to a CGT asset if the transferor held the asset as an item of trading stock and/or the asset becomes an item of trading stock when the transferee acquires it (subsection 124-875(5)). None of the assets of the Trust are held as items of trading stock and the Company will not hold the CGT assets transferred from the Trust pursuant to the Proposed Restructure as items of trading stock.

Therefore, pursuant to subsection 124-875(1) any capital gains or capital losses from CGT event A1 happening to the Trust under the Proposed Restructure will be disregarded.

Question 3

Can HoldCo choose a roll-over under section 124-870 for each of its units in the Trust?

Summary

Yes, HoldCo can choose a roll-over under section 124-870 for each of its units in the Trust.

Detailed reasoning

Section 124-870 (about roll-over for owner of units or interests in a trust) provides that:

(1)  You can choose to obtain a roll-over (whether or not the transferor and transferee choose to obtain a roll-over, and even if CGT event J4 applies) if:

(a)  you own units or interests in the transferor (your original interests); and

(b)  the ownership of all your units or interests ends under a trust restructure in exchange for shares in the transferee (your replacement interests).

Note 1: The roll-over consequences are set out in Subdivision 124-A. The original assets are your units and interests in the transferor. The new assets are your shares in the transferee.

Note 2: The effect of the roll-over may be reversed if the transferor does not cease to exist within 6 months: see section 104-195.

(2)  You must make the choice for each of your original interests.

Roll-over does not apply if the unitholder held the interests in the trust as an item of trading stock and/or the replacement interests will be an item of trading stock when the unitholder acquires it (subsection 124-870(5)).

As outlined above, HoldCo owns all the units in the Trust and will receive shares in the Company in exchange for the ownership of its units in the Trust ending under the Proposed Restructure.

HoldCo does not hold its units in the Trust as items of trading stock, nor will it hold the new shares it will receive in the Company as items of trading stock.

Therefore, HoldCo can choose a roll-over under section 124-870 for each of its units in the Trust.

[1] Paragraph 2.15 in the Explanatory Memorandum to Taxation Laws Amendment Bill (No 4) 2002.