Edited version of private advice

Authorisation Number: 4110075379275

Date of advice: 25 November 2019

Ruling

Subject: Subdivision 122-A of the ITAA 1997 capital gain or loss roll-over relief ('a disposal case')

Question 1

Will the Trustee of the XYZ Family Trust satisfy the conditions to utilise the CGT rollover relief provisions in Subdivision 122-A of the ITAA 1997?

Answer

Yes

Question 2

Will the Trustee of the XYZ Family Trust satisfy the conditions to utilise the capital allowances rollover relief provisions in section 40-340 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

01 July 2019 to 30 June 2020

The scheme commences on:

Income year starting 1 July 2019

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

·        The XYZ Family Trust ('the Trust') is a discretionary family trust.

·        The Trust was established on 200X.

·        You are the trustee of the Trust.

·        You are an Australian resident for taxation purposes.

·        The Trust is a resident trust for CGT purposes

·        Mr X and Mrs X are your sole shareholders and directors.

·        You currently carry on a business of providing software products ('the business').

·        All assets you own are post-CGT assets (acquired after 20 September 1985).

·        You own depreciable assets, including software depreciated under the software pooling provisions.

·        You are seeking to transfer the business to a new wholly owned company ('New Company')

·        New Company will be incorporated in Australia. New Company will be an Australian resident for taxation purposes.

·        New Company will not be an exempt entity.

·        You will dispose all assets of the business to New Company.

·        Immediately after the transfer you will own 100% of the shares in New Company in your capacity as trustee of the Trust. You will own these shares in the same capacity as you owned the assets transferred to New Company.

·        The transfer of all of the business assets to New Company allows for third party investment and/or ownership.

·        The consideration you will receive for all of the assets being transferred to New Company will be ordinary, fully paid shares (non-redeemable shares) in New Company.

·        The market value of the shares received in New Company will be equal to the market value of the assets disposed of, less any liabilities the New Company undertakes to discharge in respect of the asset(s).

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-40

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

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

Income Tax Assessment Act 1997 Section 122-15

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 Paragraph 122-20(3)(a)

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(5)

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

Further issues for you to consider

We have limited our ruling to the questions raised in your application. There may be related issues that you should consider including:

·        Working out the market value of the asset(s) that you dispose of to, New Company under the scheme at the time you dispose it.

·        Working out the cost base of the asset(s) that you dispose of to, New Company under the scheme at the time you dispose it.

·        Any matters in relation to the liabilities New Company undertakes to discharge in respect of the assets of the business, including, but not limited to, the value of the liabilities, working out the allocation of liabilities, or working out any caps on the liabilities.

·        The effect of the rollover on trading stock and similar precluded assets

You may apply for another ruling on these or any other matters.

Does Part IVA apply to this 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 DPT 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 first 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-avoidance rule for income tax'.

Reasons for Decision

These reasons for decision accompany the notice of private ruling for the Trustee for the XYZ Family Trust.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Will you satisfy the conditions to utilise the CGT rollover relief provisions in Subdivision 122-A of the ITAA 1997?

Answer

Yes, you meet the requirements necessary to utilise the CGT rollover relief provisions in Subdivision 122-A of the ITAA 1997.

Question 1 Detailed Reasoning

Subdivision 122-A of the ITAA 1997 allows a taxpayer who is a trustee of a trust to obtain rollover relief from a capital gain or loss where they dispose of all of the assets of their business to a company, so long as the requirements listed in sections 122-20 to 122-35 of the ITAA 1997 are met.

Under section 122-15 of the ITAA 1997, a trustee can choose to obtain a rollover if one of the CGT events specified in the table occurs. You are the trustee of the Trust and will transfer all of the assets of the business to New Company ('a disposal case'). This will trigger CGT event A1, one of the CGT events specified as eligible for the rollover, and you have elected to obtain roll-over relief. This requirement is therefore satisfied.

Pursuant to paragraph 122-20(1)(b) of the ITAA 1997, where the trigger event is a disposal case, any consideration you receive must be only shares in the company and the company undertaking to discharge one or more liabilities in respect of the asset or assets of the business. In your case, the only consideration for the assets being disposed of will be shares in New Company together with an undertaking by New Company to discharge any liabilities in respect of those asset(s). This requirement is therefore satisfied.

Subsection 122-20(2) of the ITAA 1997 states that the shares received as consideration cannot be redeemable shares. In your case, the shares in New Company will be ordinary fully-paid shares, and are not redeemable shares.

Furthermore, paragraph 122-20(3)(a) of the ITAA 1997 requires that the market value of the shares you receive must be substantially the same as the market value of the assets you disposed of, less any liabilities the company undertakes to discharge in respect of the asset(s). In your case, the market value of the shares received will be equal to the market value of the assets disposed of less any liabilities New Company undertakes to discharge. This requirement is therefore satisfied.

Section 122-25 of the ITAA 1997 imposes certain other requirements that must be satisfied.

Subsection 122-25(1) states that you must own all the shares in the company just after the time of the trigger event. 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. You will be the sole shareholder of New Company immediately after the time of the trigger event, and will own the shares in New Company in the same capacity as you held the assets disposed of; that is, as trustee of the Trust. The requirements in Subsection 122-25(1) are met.

Item 2 of the table in subsection 122‐25(2) of the ITAA 1997 clarifies that the rollover contained in Subdivision 122-A will not apply to certain categories of assets where you dispose all of the assets of the business to a company. In your case, you are disposing all of the assets of the business to New Company and none of the assets fall under the categories identified in the table. Consequently, rollover relief under Subdivision 122-A will be available for all of the assets being disposed of.

Furthermore, pursuant to paragraph 122-25(7)(a) of the ITAA 1997, at the time of the trigger event, a trust must be a resident trust for CGT purposes and the company must be an Australian resident. Alternatively, under paragraph 122-25(7)(b), each CGT asset must be a CGT asset of the trust that is 'taxable Australian property' (as defined in Subdivision 855 A of the ITAA 1997) at the time of the trigger event, and the shares in the company must be taxable Australian property just after the time of the trigger event. In your case, the Trust is a resident trust for CGT purposes and New Company is an Australian resident.

Under subsection 122-25(5) of the ITAA 1997, the ordinary and statutory income of the company must not be exempt from income tax because the company is an exempt entity for the income year in which the trigger event occurs. In your case, New Company will not be an exempt entity for the income year in which the trigger event occurs, and the ordinary and statutory income of the company will not be exempt from income tax.

Sections 122-35 and 122-37 of the ITAA 1997 contain rules regarding liabilities undertaken by a company. Subsection 122-35(2) of the ITAA 1997 applies where you dispose all of the assets of a business to a company, and the company undertakes to discharge one or more liabilities in respect of the assets of the business. In your case, New Company will undertake to discharge liabilities in respect of the assets. Therefore, the subsection applies. Under Item 1 of the table in subsection 122-35(2), where you acquired all the assets on or after 20 September 1985, the liabilities the company undertakes to discharge cannot exceed the sum of the market values of the precluded assets and the cost bases of the other assets. In your case, all of the assets were acquired after 20 September 1985. Therefore, the liabilities undertaken by New Company will not exceed the sum of the market values of the precluded assets and the cost bases of the other assets.

In your circumstances, and based on the facts above, you are eligible to obtain roll-over relief and any capital gain or loss that arises on the transfer of shares to New Company is disregarded under section 122-45 of the ITAA 1997.

Pursuant to section 122-50 of the ITAA 1997, the first element of each share's cost base, or reduced cost base, in New Company is the sum of the market values of the precluded assets and the cost bases of the other assets (less any liabilities New Company undertakes to charge in respect of all of those assets) divided by the number of shares. Note that the market value of an asset is worked out when disposed of it. The cost base or reduced cost base of an asset is worked out at the same time.

Pursuant to section 122-70 of the ITAA 1997, the first element of the cost base, or reduced cost base, of each asset transferred to New Company, in the hands of New Company, is the asset's cost base, or reduced cost base, respectively, when you disposed of it.

Question 2

Will you satisfy the requirements to obtain automatic capital allowance roll-over relief under section 40-340 of the ITAA 1997?

Question 2 Summary

Yes, you meet the requirements necessary to obtain automatic rollover relief under section 40-340 of the ITAA 1997

Question 2 Detailed Reasoning

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.

However, pursuant to subsection 40-340(1) of the ITAA 1997, you may be eligible for automatic 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 (see below).

In relation to the first requirement, per paragraph 40-295(1)(a) of the ITAA 1997, a balancing adjustment occurs for a depreciating asset where you stop 'holding' the asset. 'Hold' has the meaning given by section 40-40 of the ITAA 1997, and other than in specific circumstances, generally means the owner, or legal owner (if there is both a legal and equitable owner).

In your case, you will dispose all of your depreciating assets to New Company andstop being the legal owner. You will therefore stop holding the depreciating assets, resulting in a balancing adjustment event for those depreciating assets. You therefore satisfy the requirement in paragraph 40-340(1)(a) of the ITAA 1997. Moreover, the transfer of the depreciating assets of the business to New Company involves CGT event A1, therefore satisfying 40-340(1)(b).

In regards to paragraph 40-340(1)(c) above, in your case, Item 1 of the table applies as you disposed all of your assets to a 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. As concluded in Question 1, you are able to choose a roll-over under Subdivision 122-A for the disposal of the business assets to the new wholly-owned company. You therefore satisfy this condition.

Based on the facts provided, you meet the three requirements in subsection 40-340(1) of the ITAA 1997, and therefore qualify for automatic roll-over relief in respect of the relevant depreciating disposed of to, New Company pursuant to the scheme.