Edited version of private advice

Authorisation Number: 1052095199996

Date of advice: 14 March 2023

Ruling

Subject: Roll-over relief - transfer of assets

Question 1

Are the roll-over relief requirements under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) satisfied if certain CGT assets owned by New Trustee as trustee of the Trust are transferred to Retiring Trustee, a company that will be wholly owned by New Trustee as trustee of the Trust?

Answer

Yes.

Question 2

Are the roll-over relief requirements under section 40-340 of the ITAA 1997 satisfied if certain depreciating assets owned by New Trustee are transferred to Retiring Trustee, a company that will be wholly owned by New Trustee?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.         On XX XX XXXX the Trust was established.

2.         Retiring Trustee as trustee of the Trust has carried on a business.

3.         Retiring Trustee and New Trustee are Australian resident companies.

4.         The Trust is a resident trust with central management and control in Australia.

5.         The sole shareholders of Retiring Trustee are currently Mrs A and Mr B, with each of them holding 1 ordinary share. Mr B is the sole director of Retiring Trustee.

6.         The sole director and sole shareholder of New Trustee is Mr B. Mr B holds 10 ordinary shares in the New Trustee.

7.         Other than the initial share capital of $2.00, Retiring Trustee holds no assets other than the assets it owns in its capacity as trustee of the Trust. The value of the shares in Retiring Trustee at this time and at the time of the restructure is $2.00 - as determined by the directors of the company.

8.         A restructure of the affairs of the business conducted by the Retiring Trustee is proposed with the effect that Retiring Trustee will continue to operate the business but will do so in its own right and not as trustee of the Trust, with the shares in the Retiring Trustee will be wholly owned by New Trustee as trustee of the Trust.

9.         The restructure steps are as follows:

Step 1: The Trust Deed will be amended to prevent New Trustee, upon it becoming trustee, and any future trustee of the Trust, from being a beneficiary of Trust.

Step 2: Immediately after Step 1, Retiring Trustee will be removed as trustee of the Trust and New Trustee will be appointed as trustee of the Trust.

Step 3: Immediately after Step 2, the 2 shares in Retiring Trustee will be transferred to New Trustee in its capacity as trustee of the Trust for $2.00, being the value of the shares in New Trustee - as determined by the directors of the company. From this time, New Trustee in its capacity as trustee of the Trust will be the sole shareholder of Retiring Trustee;

Step 4: Immediately after Step 3, Retiring Trustee and New Trustee will enter into a Business and Asset Sale Agreement ('BSA') under which:

(a)    New Trustee will agree to certain business assets of the Trust, none of which are personal use or collectable assets, to Retiring Trustee (the 'Sale Assets'); and

(b)    in consideration for which, Retiring Trustee will issue 1,556,000 ordinary shares in Retiring Trustee to New Trustee in its capacity as trustee of the Trust (the Rollover Shares). The number shares issued will be equal to the value of the assets transferred to Retiring Trustee, as recorded in the financial statements for the Trust.

Step 5: Immediately after Step 4, Completion of the BSA will happen, which will include the following:

(a)    the share issue documentation will be issued for Retiring Trustee to issue the Rollover Shares to New Trustee;

(b)    where any further steps are required to vest any of the Sale Assets in the Retiring Trustee in accordance with the BSA, such steps will be taken; and

(c)    Retiring Trustee will, to the extent necessary, make offers of employment to the employees employed in the business. This may be unnecessary given that the employment contracts are already between Retiring Trustee and the employees.

10.      The key aspects of the BSA are as follows:

(i)    Retiring Trustee will purchase the Sale Assets, being certain business assets of the Trust from New Trustee, with certain assets specifically excluded: see definition of Assets in clause 1 of the BSA and clauses 2 and 4 of the BSA;

(ii)   the consideration payable for the Sale Assets is the Rollover Shares: see definition of Consideration in clause 1 of the BSA and clause 4 of the BSA;

(iii)  Retiring Trustee will not be assuming the liabilities of New Trustee in its capacity as trustee of the Trust: see clause 5 of the BSA; and

(iv)  Retiring Trustee and New Trustee will choose to apply the rollover in Subdivision 122-A of the ITAA 1997: see clause 3 of the BSA.

11.      The Sale Assets will include CGT assets and depreciating assets. The Trust does not own trading stock. The CGT assets transferred by New Trustee as trustee of the Trust to Retiring Trustee will not be trading stock of Retiring Trustee

12.      No capital loss or a deduction will result on the disposal of the assets from the New Trustee to the Retiring Trustee.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 Subdivision 40-D

Income Tax Assessment Act 1997 paragraph 40-295(1)(a)

Income Tax Assessment Act 1997 section 40-340

Income Tax Assessment Act 1997 section 40-340(1)

Income Tax Assessment Act 1997 section 40-340(1)(a)

Income Tax Assessment Act 1997 section 40-340(1)(b)

Income Tax Assessment Act 1997 section 40-340(1)(c)

Income Tax Assessment Act 1997 section 40-340(2)(b)

Income Tax Assessment Act 1997 paragraph 40-295(1)(a)

Income Tax Assessment Act 1997 section 70-10

Income Tax Assessment Act 1997 section 70-12

Income Tax Assessment Act 1997 section 108-10

Income Tax Assessment Act 1997 subsection 108-10(2)

Income Tax Assessment Act 1997 section 108-20

Income Tax Assessment Act 1997 subsection 108-20(2)

Income Tax Assessment Act 1997 paragraph 108-20(2)(a)

Income Tax Assessment Act 1997 Subdivision 122-A

Income Tax Assessment Act 1997 section 122-15108

Income Tax Assessment Act 1997 section 122-20

Income Tax Assessment Act 1997 subsection 122-20(1)

Income Tax Assessment Act 1997 paragraph 122-20(1)(a)

Income Tax Assessment Act 1997 subsection 122-20(2)

Income Tax Assessment Act 1997 subsection 122-20(3)

Income Tax Assessment Act 1997 paragraph 122-20(3)(a)

Income Tax Assessment Act 1997 subsection 122-20(4)

Income Tax Assessment Act 1997 section 122-25

Income Tax Assessment Act 1997 subsection 122-25(1)

Income Tax Assessment Act 1997 subsection 122-25(2)

Income Tax Assessment Act 1997 subsection 122-25(2) Item 1(a) of the table

Income Tax Assessment Act 1997 subsection 122-25(2) Item 1(b) of the table

Income Tax Assessment Act 1997 subsection 122-25(2) Item 1(c) of the table

Income Tax Assessment Act 1997 subsection 122-25(2) Item 1(d) of the table

Income Tax Assessment Act 1997 subsection 122-25(2) Item 1(e) of the table

Income Tax Assessment Act 1997 subsection 122-25(3)

Income Tax Assessment Act 1997 subsection 122-25(4)

Income Tax Assessment Act 1997 subsection 122-25(5)

Income Tax Assessment Act 1997 subsection 122-25(6)

Income Tax Assessment Act 1997 subsection 122-25(6)(a)

Income Tax Assessment Act 1997 subsection 122-25(7)

Income Tax Assessment Act 1997 subsection 122-30

Income Tax Assessment Act 1997 subsection 122-30(4)

Income Tax Assessment Act 1997 section 122-35

Income Tax Assessment Act 1997 Subdivision 170-D

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

Income Tax Assessment Act 1997 section 124ZO

Income Tax Assessment Act 1997 section 124ZQ

Reasons for decision

Question 1

Summary

Yes, the roll-over relief requirements under Subdivision 122-A of the ITAA 1997 are satisfied.

Detailed reasoning

Unless otherwise stated all references are to the Income Tax Assessment Act 1997 (ITAA 1997).

13.  Subdivision 122-A allows a taxpayer who is a trustee of a trust to obtain rollover relief from a capital gain or loss where they dispose of a CGT asset to a company, so long as the requirements listed in sections 122-20 to 122-35 are met.

14.  Section 122-15 states:

If you are an individual or a trustee, you can choose to obtain a roll-over if one of the *CGT events (the trigger event) specified in this table happens involving you and a company in the circumstances set out in sections 122-20 to 122-35.

Table 1: Relevant CGT events

15.  The disposal of the Sale Assets from the trustee of the Trust to the company will result in an A1 event as listed in the table. If the conditions in sections 122-20 to 122-35 are satisfied, New Trustee as trustee of the Trust will be able to choose to obtain a roll-over.

Section 122-20 - What you receive for the trigger event

16.  Subsection 122-20(1) provides:

The consideration you receive for the trigger event happening must be only:

(a) *shares in the company; or

(b) for a *disposal of a *CGT asset, or all the assets of a business, to the company (a disposal case) - shares in the company and the company undertaking to discharge one or more liabilities in respect of the asset or assets of the *business (as appropriate).

Note: There are rules for working out what are the liabilities in respect of an asset: see section 122-37.

17.  In return for the Sale Assets, New Trustee as trustee of the Trust will receive ordinary shares in Retiring Trustee, so paragraph 122-20(1)(a) will be satisfied.

18.  Subsection 122-20(2) provides:

The *shares cannot be *redeemable shares.

19.  The term 'redeemable shares' is defined in subsection 995-1(1):

redeemable shares means:

(a) *shares that are liable to be redeemed; or

(b) shares that, at the option of the company that issued them, are liable to be redeemed.

20.  The shares being issued by Retiring Trustee to New Trustee as trustee of the Trust will be ordinary shares in Retiring Trustee and will not be 'redeemable shares' as that term is defined in subsection 995-1.

21.  Subsection 122-20(3) states:

The *market value of the *shares you receive for the trigger event happening must be substantially the same as:

(a) for a disposal case - the market value of the asset or assets you disposed of, less any liabilities the company undertakes to discharge in respect of the asset or assets (as appropriate); or

(b) for another trigger event (a creation case) - the market value of the CGT asset created in the company (the created asset).

22.  New Trustee as trustee of the Trust will dispose of the Sale Assets to Retiring Trustee, which is a disposal case under paragraph 122-20(3)(a).

23.  In respect of paragraph 122-20(3)(a), subsection 122-30(4) states:

In working out if the requirement in paragraph (3)(a) is satisfied, if the *market value of the *shares is different to what it would otherwise be only because of the possibility of liabilities attaching to the asset or assets, disregard the difference.

24.  As no liabilities will be transferred as part of the business asset sale, subsection 122 20(4) has no application.

25.  As Retiring Trustee has no assets, the market value of the shares issued in retiring trustee will equal to the market value of the assets acquired from New Trustee as trustee of the Trust.

Section 122-25 - Other requirements to be satisfied

26.  Subsection 122-25(1) provides:

You must own all the *shares in the company just after the time of the trigger event.

Note: You must own the shares in the same capacity as you owned or created the assets that the company now owns.

27.  As a result of Step 3, New Trustee as trustee of the Trust will own all the shares in Retiring Trustee before the Completion of the BSA.

28.  On Completion of the BSA, Retiring Trustee will issue shares to New Trustee as trustee of the Trust.

29.  As such, New Trustee as trustee of the Trust will own all of the shares in Retiring Trustee.

30.  The Note contained in subsection 122-25(1) clarifies that you must own the shares in the same capacity as you owned or created the assets that the company now owns.

31.  The Sale Assets are held by the New Trustee as trustee of the Trust and the shares in Retiring Trustee will be held in the same capacity, by New Trustee as trustee of the Trust. Therefore the requirements in section 122-25(1) will be satisfied.

32.  Subsection 122-25(2) provides:

This Subdivision does not apply to the *disposal or creation of any of the assets specified in this table:

Table 2: Assets to which Subdivision does not apply

33.  New Trustee as trustee for the Trust is disposing the Sale Assets to Retiring Trustee. The disposal is not in respect of all asset of the business. As such, Item 1 of the table in subsection 122-25(2) is the relevant item in respect of the disposal of assets.

34.  In respect of Item 1(a) of the table, a collectable is defined in subsection 995-1(1) to have the meaning in section 108-10, and subsection 108-10(2) defines a collectable as:

(a) *artwork, jewellery, an antique, or a coin or medallion; or

(b) a rare folio, manuscript or book; or

(c) a postage stamp or first day cover;

that is used or kept mainly for your (or your *associate's) personal use or enjoyment.

35.  A personal use asset is defined in subsection 995-1(1) to have same meaning as section 108-20 and paragraph 108-20(2)(a) states:

a *CGT asset (except a *collectable) that is used or kept mainly for your (or your *associate's) personal use or enjoyment

36.  We understand none of the Sale Assets are personal use or collectable assets.

37.  An award for valour, per Item 1(b) of the table in subsection 122-25(2), is not applicable to the Sale Assets.

38.  In respect of Item 1(c) of the table in subsection 122-25(2), a precluded asset is defined in subsection 122-25(3) as:

(a) a *depreciating asset; or

(b) *trading stock; or

(c) an interest in the copyright in a *film referred to in section 118-30; or

(d) a *registered emissions unit.

39.  A depreciating asset is defined in subsection 995-1(1) to have the meaning in section 40-30. The depreciating assets transferred will be precluded assets.

40.  In respect of Item 1(d) of the table in subsection 122-25(2), Trading stock is defined in subsection 995-1(1) to have the meaning contained in section 70-10, as modified by section 70-12 and sections 124ZO and 124ZQ of the Income Tax Assessment Act 1936 ('ITAA 1936'). No trading stock is to be transferred as part of the sale.

41.  Item 1(c) of the table in subsection 122-25(2), none of the assets transferred are an interest in the copyright in a film referred to in section 118-30.

42.  In respect of Item 1(d), none of the assets transferred are a registered emissions unit is defined in subsection 995-1(1).

43.  As such the assets transferred by New Trustee as trustee of the Trust to Retiring Trustee, other than the depreciating assets, are not an asset listed in the table in subsection 122-25(2) and to which subdivision 122-A does not apply.

44.  Subsection 122-25(4) provides:

If:

(a) the *CGT asset or any of the assets of the *business is a right, option, *convertible interest or *exchangeable interest; and

(b) the company *acquires another CGT asset by exercising the right or option or by converting the convertible interest or in exchange for the disposal or redemption of the exchangeable interest;

the other asset cannot become *trading stock of the company just after the company acquired it.

45.  We understand the CGT assets transferred by New Trustee as trustee of the Trust to Retiring Trustee will not be trading stock of Retiring Trustee.

46.  Subsection 122-25(5) states:

The *ordinary income and *statutory income of the company must not be exempt from income tax because it is an *exempt entity for the income year of the trigger event.

47.  As Retiring Co is not an exempt entity as defined in subsection 995-1(1), this subsection does not apply.

48.  Subsection 122-25(6) provides:

If you are an individual at the time of the trigger event, either:

(a) you and the company must both be Australian residents at that time; or

(b) both of the following requirements must be satisfied:

(i) each asset must be *taxable Australian property at that time;

(ii) the shares in the company mentioned in subsection 122-20(1) must be taxable Australian property just after that time.

49.  As New Trustee and the Trust are not individuals, section 122-25(6) has no application.

50.  Subsection 122-25(7) states:

If you are a trustee of a trust at the time of the trigger event, either:

(a) at that time, the trust must be a *resident trust for CGT purposes and the company must be an Australian resident; or

(b) both of the following requirements must be satisfied:

(i) each *CGT asset must be a CGT asset of the trust that is *taxable Australian property at that time; and

(ii) the shares in the company mentioned in subsection 122-20(1) must be taxable Australian property just after that time.

51.  We understand the Trust, New Trustee and Retiring Trustee are all Australian residents. As such, paragraph 122-25(7) will be satisfied.

52.  All the relevant subsection of section 122-25 will be satisfied in respect of New Trustee as trustee of the Trust disposing of the Sale Assets, other than the depreciating assets, to Retiring Trustee.

Section 122-35 - What if the company undertakes to discharge a liability (disposal case)

53.  Retiring Trustee is not undertaking to discharge of a liability of the Trust as part of the disposal of the Sale Assets to Retiring Trustee. Therefore section 122-35 has no application.

54.  As the requirements of sections 122-15, 122-20 and 122-25 are satisfied, New Trustee as trustee of the Trust may choose to obtain a roll-over on the transfer of the Sale Assets, other than the depreciating assets, in exchange for shares in Retiring Trustee, and thus disregard the capital gain realised on the disposal of those CGT Assets in accordance with subsection 122-40(1).

Question 2

Summary

Yes, the roll-over relief requirements under section 40-340 of the ITAA 1997 are satisfied.

Detailed reasoning

55.  Subdivision 40-D of the ITAA 1997 contains rules regarding the taxation consequences that arise when you stop holding a depreciating asset. In summary, you may have to make a balancing adjustment that adjusts your taxable income based on the difference between the actual value of the asset when you stop holding it and its adjustable value.

56.  However, pursuant to subsection 40-340(1) of the ITAA 1997, you may be eligible for rollover relief, such that you do not need to adjust your taxable income, where three requirements are met:

(a)  there is a balancing adjustment event because an entity, the transferor, disposes of a depreciating asset in an income year to another entity, the transferee,

(b)  the disposal involves a CGT event, and

(c)   any relevant conditions in the table in paragraph 40-340(1)(c) are satisfied

57.  In relation to the first requirement, per paragraph 40-295(1)(a), a balancing adjustment occurs for a depreciating asset where you stop 'holding' the asset.

58.  Hold' has the meaning given by section 40-40, and other than in specific circumstances, generally means the owner, or legal owner (if there is both a legal and equitable owner).

59.  New Trustee as trustee of the Trust will dispose depreciating assets to Retiring Trustee and stop being their legal owner. New Trustee as trustee of the Trust will therefore stop holding the depreciating assets resulting in a balancing adjustment event for those depreciating assets. The requirement in paragraph 40-340(1)(a) is therefore satisfied for the disposal of the depreciating assets.

60.  The transfer of the depreciating assets from New Trustee as trustee of the Trust to Retiring Trustee results in a CGT event A1, satisfying paragraph 40-340(1)(b).

61.  In respect of paragraph 40-340(1)(c), the relevant table item would be item 1, disposal of asset to wholly-owned company. Therefore, the relevant condition is that the transferor is able to choose a roll-over under Subdivision 122-A for the CGT event.

62.  In this regard, when considering whether a rollover under Subdivision 122-A would be applicable for the CGT event, paragraph 40-340(2)(b) provides that subsection 122-25(3) (which excludes certain assets, such as depreciating assets, from some kinds of CGT roll-over), is to be disregarded so far as they relate to depreciating assets disposed of.

63.  As discussed in Question 1, New Trustee as trustee of the Trust can choose to apply roll-over under Subdivision 122-A for the disposal of the Sale Assets (other than the depreciating assets) to Retiring Trustee. As the depreciating assets in Question 1 were only precluded from rollover due to subsection 122-25(3), and for the purposes of 40-340(2)(b) that subsection is now disregarded, the condition in paragraph 40-340(1)(c) is satisfied.

64.  Therefore, the three requirements in subsection 40-340(1) are met and New Trustee as trustee of the Trust will qualify for roll-over relief in respect of the depreciating assets disposed of to Retiring Trustee.

65.  Section 40-340(8) provides that there is no roll-over relief if Subdivision 170-D applies to the disposal of the depreciating asset or the change in interests in it. Broadly, Subdivision 170-D defers the recognition of a capital loss or a deduction where there has been a transfer of a CGT asset between companies in the same linked group or between associates.

66.  As there is no capital loss or a deduction that will result on the disposal of the assets from New Trustee to Retiring Trustee, Subdivision 170-D and consequently section 40-340(8) will have no application.