Edited version of private advice

Authorisation Number: 1052315934979

Date of advice: 4 December 2024

Ruling

Subject: CGT - rollovers - transfer to wholly owned company

Question 1

Will the Trustees of A Trust be eligible for roll-over relief under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the Proposed Transaction?

Answer 1

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Relevant facts and circumstances

A Trust

A Trust is a discretionary investment trust. A Trust was established on XX October 20XX. Central management and control of A Trust is in Australia

Co-trustees of A Trust

Business ABC Pty Ltd (ABC) and Business ABC Nominees Limited (ABCD) (collectively Trustees) are co-trustees of A Trust.

ABC is an Australian resident company for taxation purposes. ABCD is incorporated in another country.

Business X Limited

The primary asset held by the Trustees on behalf of A Trust is 50% of the shares in Business X Limited (X1). X1 is incorporated in Australia.

A Trust's 50% shareholding in X1 has a market value of approximately $X.

The shares in X1 were acquired by the Trustees on behalf of the A Trust after 20 September 1985 and are therefore post-CGT assets.

Business Z Pty Ltd

X1 holds 100% of the shares in Business Z Pty Ltd (Z). Z is incorporated in Australia and carries on a business.

Proposed Transaction

A Trust is seeking to transfer its 50% shareholding in X1 to a new wholly owned company (New Company) of which it will be the 100% shareholder (the Proposed Transaction).

Under the Proposed Transaction:

•                     New Company:

-                    will be incorporated by A Trust who will own all the ordinary shares in New Company on incorporation

-                    will be incorporated in Australia and will be an Australian resident for taxation purposes

-                    will not be an 'exempt entity' as defined in section 995-1 of the ITAA 1997, and

-                    will hold no other assets or liabilities just before the Proposed Transaction.

•                     A Trust will dispose of its 50% shareholding in X1 to New Company. As consideration for the transfer, X1 additional ordinary fully paid shares in New Company at $1 per share will be issued to A Trust.

•                     Immediately after the disposal the Trustees will own 100% of the ordinary shares in New Company in their capacity as co-trustees of A Trust.

•                     No liabilities will be transferred or assumed as part of the Proposed Transaction.

The market value of the shares the Trustees will receive (i.e. New Company shares) for the disposal of the shares in X1 will be substantially the same as the market value of the Trustees' shares in X1.

The Trustees and New Company will enter into a share sale agreement in relation to the transfer of the shares in X1.

The Trustees do not have any current plans to dispose of X1 or New Company after the Proposed Transaction is implemented.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 11-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 108-5(2)

Income Tax Assessment Act 1997 Subdivision 122-A

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 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(3)

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

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

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

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

Income Tax Assessment Act 1997 section 122-35

Income Tax Assessment Act 1997 subsection 122-40(1)

Income Tax Assessment Act 1997 subsection 960-100(2)

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

All subsequent legislative references are to the ITAA 1997.

Summary

The Trustees of A Trust will be eligible for roll-over relief under Subdivision 122-A in respect of the Proposed Transaction since all the requirements necessary to choose the roll-over are satisfied.

Detailed Reasoning

Broadly, Subdivision 122-A sets out when an individual or trustee of a trust can obtain CGT roll-over relief if they transfer a CGT asset, or all the assets of a business, to a company.

Section 122-15: Disposal of shares giving rise to CGT event A1

Section 122-15 states that if you are an individual or a trustee of a trust, you can choose to obtain a roll-over if one of the CGT events (trigger events) specified in the table in the section happens involving you and a company in the circumstances set out in sections 122-20 to 122-35.

Meaning of 'trustee'

An issue arises as to whether the roll-over under Subdivision 122-A is available where a trust has more than one trustee, and those trustees transfer an asset of the trust to a company in exchange for shares issued to the trustees. ATO ID 2004/8 (Withdrawn)[1] Income Tax: Capital gains tax: rollover by trustee to wholly owned company - meaning of 'trustee' provides that the fact a trust has several trustees will not prevent the trustees obtaining roll-over relief under Subdivision 122-A. This is on the basis that subsection 960-100(2) provides that the 'trustee of a trust' is taken to be an 'entity consisting of the person who is the trustee, or the persons who are the trustees, at any given time'. Therefore, for the purposes of determining whether the conditions in Subdivision 122-A such as that in section 122-15 is satisfied, the trustees are treated as a single entity.

CGT event A1

The CGT events specified in the table in section 122-15 include CGT events A1, D1, D2, D3 and F1.

CGT event A1 happens under section 104-10 if you dispose of a CGT asset. Under subsection 104-10(2), you dispose of a CGT asset if a change of ownership occurs from you to another entity. Under subsection 104-10(3), the time of the event is when you enter into a contract for the disposal or if there is no contract when the change of ownership occurs.

Under the Proposed Transaction, the Trustees will dispose of their shares in X1 (the roll-over assets) to New Company by entering into a share sale agreement. The shares in X1 are 'CGT assets' as defined in section 108-5, which is any kind of property or a legal or equitable right that is not property. Shares in a company is specifically given as an example of a CGT asset under Note 1 to subsection 108-5(2).

Therefore, the disposal of the shares in X1 to New Company will give rise to CGT event A1 for the Trustees which is one of the 'trigger events' mentioned in the table in section 122-15. The Trustees will be able to choose to obtain a roll-over if all the relevant conditions in sections 122-20 to 122-35 are satisfied.

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

Section 122-20 contains a number of conditions that must be satisfied if consideration is received for the trigger event.

Consideration must be shares and discharge of liabilities - subsection 122-20(1)

Subsection 122-20(1) states that the consideration you receive for the trigger event happening must be only:

•                     shares in the company - paragraph 122-20(1)(a), or

•                     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) - paragraph 122-20(1)(b).

Under the Proposed Transaction, the Trustees will dispose of the shares in X1 to New Company, which is a disposal case referred to in paragraph 122-20(1)(b). The consideration that the Trustees will receive for the disposal of the shares in X1 will comprise of only the shares in New Company since New Company will not undertake to discharge any liabilities.

Therefore, the requirement in subsection 122-20(1) is satisfied.

No redeemable shares - subsection 122-20(2)

Subsection 122-20(2) requires that the shares that the trustee will receive in the company cannot be redeemable shares. The term 'redeemable shares' is defined in section 995-1 as shares that are liable to be redeemed or shares that, at the option of the company that issued them, are liable to be redeemed. The shares that will be issued by New Company to the Trustees will be ordinary shares and not be 'redeemable shares' as defined in section 995-1. Therefore, the requirement in subsection 122-20(2) is satisfied.

Market value of shares must be substantially the same as assets less liabilities - subsection 122-20(3)

For a disposal case, paragraph 122-20(3)(a) requires the market value of the shares that the trustee receives for the trigger event happening to be 'substantially the same' as the market value of the asset or assets the trustee disposes of, less any liabilities the company undertakes to discharge in respect of the asset or assets (as appropriate).

The market value of the shares the Trustees will receive (i.e. New Company shares) for the disposal of the shares in X1 will be substantially the same as the market value of the Trustees' shares in X1. New Company will hold no assets or liabilities just before the Proposed Transaction and the only asset held by New Company just after the transfer will be the shares in X1.

Therefore, the requirement in subsection 122-20(3) is satisfied and all the requirements under section 122-20 are satisfied.

Section 122-25 - Other requirements

Subsection 122-25(1) requires the trustee to own all the shares in the company just after the time of the disposal in the same capacity as it owned the assets that company now owns.

As discussed, the Trustees are treated as a single entity for the purposes of determining if the conditions in Subdivision 122-A (including subsection 122-25(1)) are satisfied.

Subsection 122-25(1) will be satisfied under the Proposed Transaction since:

•                     the Trustees own the shares in X1 in their capacity as co-trustees of A Trust just prior to the disposal of those shares, and

•                     the Trustees will own 100% of the shares in New Company in their capacity as co-trustees of A Trust just after the disposal of the shares in X1.

Excluded assets

Subsection 122-25(2) provides that Subdivision 122-A does not apply to the disposal of any of the assets specified in the table in that subsection. Table item 1 of subsection 122-25(2) applies where you dispose of a CGT asset to the company. Table item 2 applies where you dispose of all the assets of a business to the company.

Item 1 applies here since the Trustee is disposing of a CGT asset rather than all the assets of a business. Under item 1, Subdivision 122-A does not apply to the following assets:

•                     a collectable or personal use asset

•                     a decoration awarded for valour or brave conduct

•                     a precluded asset (as defined)

•                     an asset that becomes trading stock of the company just after the disposal, or

•                     an asset that becomes a registered emissions unit held by the company just after the disposal.

A 'precluded asset' is defined in subsection 122-25(3) as a depreciating asset, trading stock or certain copyright interests in a film or a registered emissions unit. The shares in X1 are not any of the assets listed in table item 1 of subsection 122-25(2) so roll-over relief under Subdivision 122-A in respect of the disposal of the shares is not denied by this provision.

Ordinary income and statutory income of the company must not be exempt from income tax

Subsection 122-25(5) requires that 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.

An 'exempt entity' is defined in section 995-1 as 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. Section 11-5 contains a list of such entities, which broadly includes charities, societies and educational or scientific institutions.

The ordinary and statutory income of New Company will not be exempt from income tax and New Company will not be an exempt entity for the income year in which the trigger event occurs. Therefore, subsection 122-25(5) is satisfied.

Residency requirement

Subsection 122-25(7) is applicable if the taxpayer is the trustee of a trust and requires that at the time of the trigger event:

•                     the trust must be a 'resident trust for CGT purposes' and the company must be an Australian resident (paragraph 122-25(7)(a)), or

•                     each asset must be a CGT asset of the trust that is taxable Australian property at the time of the trigger event and the shares in the company must be taxable Australian property just after that time (paragraph 122-25(7)(b)).

The term 'resident trust for CGT purposes' is defined in section 995-1 and for a trust that is not a unit trust requires that a trustee is an Australian resident or the central management and control of the trust is in Australia.

A Trust is a resident trust for CGT purposes since the central management and control of the trust is in Australia. New Company will be incorporated in Australia so will be an Australian resident. Therefore, the conditions in subsection 122-25(7) will be satisfied.

Section 122-35 - Company undertakes to discharge a liability in a disposal case

Section 122-35 is only relevant if the company undertakes to discharge one or more liabilities in respect of the asset which is disposed of to the company. Since New Company will not undertake to discharge any liabilities in respect of the acquisition of the shares in X1, section 122-35 is not applicable.

Conclusion

Since the relevant requirements in sections 122-15, 122-20 and 122-25 are satisfied, the Trustees may choose to obtain a roll-over on the disposal of the shares in X1 to New Company, and disregard any capital gain or capital loss realised on the disposal in accordance with subsection 122-40(1).

[1] ATO ID 2004/8 was withdrawn because it is a restatement of the law and does not contain an interpretative decision.