Edited version of private advice

Authorisation Number: 1052241135073

Date of advice: 29 May 2024

Ruling

Subject: Roll-over relief - transfer of assets

Question

Does Company A Pty Ltd ('Company A' or 'the Trustee') as trustee for A Unit Trust ('Trust A' or 'the Trust') satisfy all the relevant conditions of Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) and is therefore eligible to apply the rollover specified in sections 122-40 and related consequences in sections 122-60 and 122-70 to the proposed transfer of business assets?

Answer

Yes.

This ruling applies for the following period:

Year ending DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

1.      Trust A, an Australian resident unit trust, currently operates a franchise ('the Business'). The Business originally commenced in YYYY (i.e. 'pre-CGT').

2.      It is proposed as part of a restructure plan to reposition the Business into a corporate structure, by transferring the Business from the Trustee to Company B, a private company ('the Company') with two (2) 'ordinary' class shares on issue, wholly-owned by Trust A.

3.      The unitholding of Trust A is held as follows:

Table 1: The unitholding of Trust A is held as follows:

The Investment Trust is a unit trust, the units of which are wholly owned by Company D Pty Ltd as trustee for the D Super Fund. Both of trusts (referred to in the table above), were established under Australian law via the execution of a trust deed.

Detailed description of the proposed restructure

4.      The Trust will transfer the majority (i.e. not all) of its business assets to the Company, in consideration for the issuance of non-redeemable shares in the Company, a private company which is wholly owned by The Trust . Additionally, the Company will provide an undertaking to assume certain liabilities in relation to the assets transferred. It is noted that the Company is not a tax-exempt entity and that both the Trust and the Company are Australian tax residents.

5.      After the disposal of business assets to the Company, the Trust will remain the sole shareholder of the Company. The assets disposed of / transferred will consist of business assets (referred to as the 'transferred assets') including:

•         business equipment, including registered motor vehicles and other plant and equipment

•         business contracts

•         business names

•         trade marks

•         goodwill

•         inventory, predominantly spare parts, and

•         freehold land and buildings within Australia.

The business to be transferred will include both pre-CGT and post-CGT business assets.

6.      The market value of the shares in the Company to be received by the Trust will be based on the market value of the assets transferred (i.e. the business assets, inclusive of goodwill) less the liabilities the Company undertakes to discharge in respect of the assets.

7.      The business assets transferred as part of the proposed restructure will include some inventory (trading stock). However, all other assets transferred will not be trading stock of the Company after the transfer.

8.      In respect of the post-CGT assets to be transferred to the Company, the value of the liabilities to be assumed in relation to the assets will not exceed the cost base of the relevant assets.

9.      In respect of the pre-CGT assets to be transferred to the Company, the value of liabilities to be assumed in relation to the pre-CGT assets will not exceed the market value of the relevant asset.

10.   Any liabilities assumed by the Company will be taken into account to determine the shares' cost base to the extent the liabilities are in respect of those transferred assets. Where the liability is in relation to more than one asset, the liability will be apportioned across those assets. The apportionment will be in accordance with a formula whereby the liability is multiplied by a fraction determined by dividing the market value of each asset by the sum of the market value of all of the assets to which the liability relates (section 122-37).

11.   The transfer of the business assets will be appropriately documented in a Business Sale Agreement (BSA) which will reflect the consideration for the CGT assets transferred in lieu of the shares in the Company (number to be determined, market value equivalent to the assets transferred and liabilities assumed).

Relevant legislative provisions

Income Tax Assessment Act 1997 section118-30

Income Tax Assessment Act 1997 section 122-15

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 paragraph 122-20(1)(b)

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 of the table

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 paragraph122-25(3)(a)

Income Tax Assessment Act 1997 paragraph 122-25(3)(b)

Income Tax Assessment Act 1997 paragraph 122-25(3)(c)

Income Tax Assessment Act 1997 paragraph 122-25(3(d)

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)

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

Income Tax Assessment Act 1997 paragraph 122-25(7)(a)

Income Tax Assessment Act 1997 section 122-70

Income Tax Assessment Act 1997 subsection 122-35

Income Tax Assessment Act 1997 section 122-35

Income Tax Assessment Act 1997 subsection 122-35(1)

Income Tax Assessment Act 1997 paragraph 122-35(1)(a)

Income Tax Assessment Act 1997 paragraph 122-35(1)(b)

Income Tax Assessment Act 1997 section 122-37

Income Tax Assessment Act 1997 subsection 122-37(1)

Income Tax Assessment Act 1997 subsection 122-37(2)

Income Tax Assessment Act 1997 subsection 122-37(3)

Income Tax Assessment Act 1997 section 122-40

Income Tax Assessment Act 1997 section 122-60

Income Tax Assessment Act 1997 section 122-70

Income Tax Assessment Act 1997 section 420-10

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

Income Tax Assessment Act 1996 section 124ZO

Income Tax Assessment Act 1996 section 124ZQ

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for decision

Summary

Will the roll-over relief requirements of Subdivision 122-A be satisfied?

The requirements of sections 122-15 to 122-35 of Subdivision 122-A will be satisfied or have no application in relation to the proposed restructure, other than in relation to the depreciating assets (including motor vehicles) and trading stock (inventory) transferred.

Will the Trustee be able to choose to obtain roll-over-relief as provided under sections 122-40, 122-60 and 122-70 of Subdivision 122-A?

As the requirements of sections 122-15 to 122-135 of Subdivision 122-A will be satisfied or have no application in relation to the proposed restructure, the Trustee may choose to obtain roll-over relief as provided under sections 122-40, 122-60 and 122-70 of Subdivision 122-A on the disposal of the Transferred Assets to the Company, other than the depreciating assets (including motor vehicles) and trading stock (inventory).

Detailed reasoning

1.    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.

2.    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 2: 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 122-365.

3.    The disposal of the business 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, the 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

4.         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.

5.         In return for the disposal of business assets of the Trust, the Trustee will only receive ordinary shares in the Company and an undertaking by the Company to assume certain liabilities in relation to the assets transferred. Therefore, subsection 120-20(1) will be satisfied.

6.         Subsection 122-20(2) provides:

The *shares cannot be *redeemable shares.

7.         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.

8.         The shares being issued to the Trustee will be ordinary shares in the Company and will not be 'redeemable shares' as that term is defined in subsection 995-1. Therefore, subsection 122-2-(2) will be satisfied.

9.         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).

10.      The Trustee as trustee of the Trust will dispose of the business assets to the Company, which is a disposal case under paragraph 122-20(3)(a).

11.      The market value of the shares in the Company to be received by the Trustee will be based on the market value of the assets transferred less any liabilities the Company undertakes to discharge in respect of the assets. Therefore, subsection 122-20(3) will be satisfied.

12.      In respect of paragraph 122-20(3)(a), subsection 122-20(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.

13.      As all known liabilities will be taken into account in calculating the market value of the shares transferred / disposed of as part of the business asset transfer, subsection 122-20(4) has no application.

Section 122-25 - Other requirements to be satisfied

14.      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.

15.      The Trustee currently owns all the shares (2 'ordinary' class shares) in the Company.

16.      Under the Business Sale Agreement (BSA) under which the business assets will be transferred to the Company and the shares issued as consideration to the Trustee for the transfer of the assets, the Trustee as trustee of the Trust will own all the shares in the Company on disposal of the assets.

17.      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.

18.      The business assets transferred to the Company were held by the Trustee as trustee of the Trust and the new shares in the Company will be held in the same capacity, as the Trustee of the Trust. Therefore, the requirements in section 122-25(1) will be satisfied.

19.      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 3: Subsection 122-25(2) does not apply to the *disposal or creation of any of the assets specified in this table.

20.      The Trustee is disposing the business assets to the Company. The disposal is not in respect of all assets 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 the assets transferred.

21.      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.

22.      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

23.      None of the assets to be transferred will be personal use or collectable assets.

24.      In respect of Item 1(b) of the table in subsection 122-25(2), none of the assets to be transferred fall within the description of 'a decoration awarded for valour or brave conduct (except if you paid money or gave any other property for it)'.

25.      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.

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

27.      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). The trading stock (including inventory) transferred will be precluded assets.

28.      None of the assets transferred will be an interest in the copyright in a film referred to in section 118-30.

29.      In respect of Item 1(c) of the table in subsection 122-25(2), 'trading stock' is defined as referenced above (in paragraph 68). The inventory transferred (which will be precluded assets) will be the only assets that will be trading stock of the company just after the disposal.

30.      A registered emissions unit is defined in subsection 995-1(1) as having the meaning given by section 420-10. No assets transferred will be an asset that becomes a registered emissions unit held by the Company just after the *disposal or creation.

31.      Therefore, the assets transferred by the Trustee to the Company, other than any depreciating assets and trading stock, are not assets listed in the table in subsection 122-25(2) and to which Subdivision 122-A does not apply.

32.      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.

33.      None of the business assets transferred by the Trustee as trustee of the Trust to the Company (other than the inventory transferred) will become trading stock of the Company after the transfer. Therefore, subsection 122-25(4) has no application.

34.      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.

35.      The Company is not an exempt entity as defined in subsection 995-1(1). Therefore, this subsection does not apply.

36.      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.

37.      As the Trustee of the Trust is not an individual, section 122-25(6) has no application.

38.      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.

39.      The Trust and the Company are Australian residents. Therefore, paragraph 122-25(7) will be satisfied.

40.      All the relevant requirements of section 122-25 will be satisfied in respect of theTrustee as trustee of the Trust disposing of the business assets to the Company, other than in relation to the depreciating assets and the trading stock transferred.

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

41.  Subsection 122-35(1) provides:

One of the requirements in this table must be satisfied if:

(a) you *dispose of a *CGT asset; and

(b) the company undertakes to discharge one or more liabilities in respect of it.

(The *market value, or the *cost base, of an asset is worked out when you disposed of it.)

Table 4: Subsection 122-35(1) provides:

Note:

There are rules for working out what are the liabilities in respect of an asset: see section122-37.

20.   In respect of Item 1 of the table, the value of the liabilities to be assumed in relation to the post-CGT assets transferred to the Company will not exceed the cost base of the relevant assets.

21.   In respect of Item 2 of the table, the value of liabilities to be assumed in relation to the pre-CGT assets to be transferred by the Company (comprising only goodwill) will not exceed the market value of the relevant asset.

22.   The rules under section 122-37 will be adhered to when working out what the liabilities in respect of an asset are in relation to the assets transferred.

23.   Therefore, subsection 122-31(1) will be satisfied.

24.   Subsection 122-35(2) applies where a trust disposes of all the assets of the business. As the Trust is not disposing of all of the assets of the Trust to the Company, Subsection 122-35(2) has no application.

Will the roll-over relief requirements of Subdivision 122-A be satisfied?

25.   As detailed above, the requirements of sections 122-15 to 122-135 of Subdivision 122-A will be satisfied or have no application in relation to the proposed restructure, other than in relation to the depreciating assets (including motor vehicles) and trading stock (inventory) transferred.

Will the Trustee be able to choose to obtain roll-over-relief as provided under sections 122-40, 122-60 and 122-70 of Subdivision 122-A?

26.   As the requirements of sections 122-15 to 122-135 of Subdivision 122-A will be satisfied or have no application in relation to the proposed restructure, the Trustee may choose to obtain roll-over relief as provided under sections 122-40, 122-60 and 122-70 of Subdivision 122-A on the disposal of the Transferred Assets to the Company, other than the depreciating assets (including motor vehicles) and trading stock (inventory).