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1 Will the transfer of assets in the Unit Trust to New Co meet the requirements for CGT roll-over relief under Subdivision 124-N of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes Question 2 Will the unitholder of the Unit Trust, being the Trustee of Trust, be eligible to choose a rollover under section 124-870 of the ITAA 1997? Answer Yes This ruling applies for the following period: 1 July XXXX to 30 June XXXX

The Unit Trust (the reference to the Unit Trust will be taken to be a reference to the trustee of the Unit Trust where relevant) is a unit trust that holds assets that are used within related business entities (collectively described as the Group businesses). The Trust (the reference to the Trust will be taken to be a reference to the Trustee of the Trust where relevant) owns 100% of the units in the Unit Trust There is only one class of units in the Unit Trust. All the units in the Unit Trust carry fixed entitlements to income and capital with no discretionary entitlements. The proposed restructuring (Proposed Restructure) is to take place by way of the following steps: 1)    Creation of New Co to act as transferee for the assets from the Unit Trust. New Co will be a newly incorporated Australian resident company limited by shares. Shares in New Co to be issued to the unit holder of the Unit Trust (for example, the Trust). 2)    Assets such as cash, trade debtors and prepayments to be retained by the Unit Trust. 3)    As at 30 June XXXX, the assets and liabilities of the Unit Trust which will be offset are as follows: XXXX

The value of the assets are substantially the same as the liabilities. As such, these assets will not be transferred but rather retained in the Unit Trust to offset its liabilities. Any assets not ultimately used to settle the debts of the Unit Trust will be transferred to New Co within the trust restructuring period. 4)    The Unit Trust is to settle all liabilities accrued up to the date of transfer using cash and trade debtors. 5)    Any employee entitlement liabilities under the Unit Trust are to be transferred to New Co. 6)    Any inventory held by the Unit Trust is to be transferred to New Co. For completeness, the inventory of the Unit Trust will be considered trading stock for tax purposes subject to the trading stock rules under Division 70 of the ITAA 1997 and is not subject to tax under the CGT provisions when disposed of under a business acquisition. 7)    The goodwill will be transferred from the Unit Trust to New Co. 8)    Any unsecured liabilities, being loans from related entities and finance lease liability, will be transferred across to New Co. 9)    Any secured liabilities under the Unit Trust to be settled.

10) The Unit Trust to redeem all units in itself as these units will be "replaced" with shares in New Co. 11) The units in the Unit Trust are to be redeemed by the Unit Trust, with the Trust subsequently issued with the same interests in New Co (as shares instead). The Trust will receive shares in New Co that will be equivalent to the units held in the Unit Trust - the shares in New Co will carry the same rights as the units currently held in the Unit Trust. 12) The market value of the replacement shares will take into account assets that are retained to meet liabilities, including the extent to which any assets not ultimately used to settle the debts of the Unit Trust are transferred to New Co within the trust restructuring period. The Trust is the only unitholder of the Unit Trust just before the proposed restructure and will be the only shareholder of New Co at the conclusion of the proposed restructure. 13) Once the above steps have taken place, the Unit Trust will be wound up. This will occur within six months from just before the transfer of the first CGT asset.

The Trust will choose to obtain roll-over as it owns all the units in the Unit Trust and the ownership of all the units will end with the exchange for all the shares in New Co following the proposed restructure. The Unit Trust and Trust are Australian tax residents. The Trust does not foresee making a capital loss from a CGT event that happens to its units in the Unit Trust. The Trust does not hold its units in the Unit Trust as trading stock and nor will it hold the shares in New Co as trading stock.

Income Tax Assessment Act 1997 Subdivision 124-N 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

Questions 1 and 2 Summary The Proposed Restructure will satisfy the requirements of Subdivision 124-N of the ITAA 1997. The Trust will be eligible to choose the roll-over in accordance with section 124-870 of the ITAA 1997. Detailed reasoning Subdivision 124-N of the ITAA 1997- disposal of assets by a trust to a company Broadly, Subdivision 124-N of the ITAA 1997 provides CGT roll-over relief to the trust and its beneficiaries for the restructuring of the trust, where the trust disposes of all its assets to a company and the beneficiaries' interests in the trust are exchanged for shares in the company. Subsection 124-855(1) of the ITAA 1997 provides that there is a roll-over if: 124-855(1) 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: A roll-over is not available for a restructure undertaken by a discretionary trust.

Disposal of trust assets to a company- paragraph 124-855(1)(a) of the ITAA 1997 Paragraph 124-855(1)(a)of the ITAA 1997 provides: 124-855(1)(a)(1) 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 ); ... Subsection 124-860(1) of the ITAA 1997 provides an exception to the requirement that all the assets have to be disposed of to the company for assets that are retained in the trust for the purposes of discharging existing or expected debts. Such assets are to be ignored for the purposes of paragraph 124-855(1)(a) of the ITAA 1997. Section 995-1 of the ITAA 1997 defines 'dispose of a CGT asset' to mean where the disposal of the CGT assets gives rise to CGT event A1 under section 104-10. Section 104-10 of the ITAA 1997 provides: 104-10(1) CGT event A1 happens if you *dispose of a *CGT asset. 104-10 (2) You dispose of

a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. ... Under the Proposed Restructure, the Unit Trust will transfer all of its CGT assets (other than the CGT assets retained to meet its liabilities) to New Co. As legal and beneficial ownership of the transferred assets of the Unit Trust will be acquired by New Co, the Proposed Restructure will trigger CGT event A1 for the transferred CGT assets. As such, the requirement in paragraph 124-855(1)(a) of the ITAA 1997 will be satisfied. CGT event E4 (capital payment for trust interest) must be capable of applying to all of the interests in the trust - paragraph 124-855(1)(b) of the ITA 1997 Paragraph 124-855(1)(b) of the ITAA 1997 provides: 124-855(1)(b) *CGT event E4 is capable of applying to all of the units and interests in the transferor; ...

Under section 104-70 of the ITAA 1997, CGT Event E4 happens if the trustee of a trust makes a distribution to a beneficiary of the trust in respect of the beneficiary's ongoing unit or interest in the trust and some or all of the payment is not assessable. The amount that is not included in the taxpayer's assessable income is referred to as the 'non-assessable part'. The note to subsection 124-855(1) of the ITAA 1997 states that rollover over is not available for a restructure undertaken by a discretionary trust. For CGT event E4 to be capable of applying all the beneficiaries' interest must have a fixed capital component. Noting that there is only one unitholder, all the units in the Unit Trust carry fixed entitlements to income and capital with no discretionary entitlements. In effect, the trustee cannot make non-assessable distributions to different unitholders - any capital distribution made will be considered to be a fixed capital component. Therefore, CGT event E4 is capable of applying to all of the units in the Unit Trust and the requirement in paragraph 124-855(1)(b) of the ITAA 1997 would be satisfied.

The requirements in section 124-860 of the ITAA 1997 are met - paragraph 124-855(1)(c) Subsection of the 124-860 of the ITAA 1997 sets out the conditions that must be satisfied in order for roll-over to be available - broadly: The requirement that all the assets have to be disposed of to the company is subject to the exception for assets that are retained in the trust to meet its liabilities: subsection 124-860(1) of the ITAA 1997. Requirements relating to the trust restructuring period: subsection 124-860(2) of the ITAA 1997. Requirements relating to the characteristics of the transferee company: subsections 124-860(3), 124-860(4) and 124-860(5) of the ITAA 1997. Requirements relating to proportional interests: subsections 124-860(6) and 124-860(7) of the ITAA 1997. Subsection 124-860(1) of the ITAA 1997 Subsection 124-860(1) of the ITAA 1997 provides: (1) All of the *CGT assets owned by the transferor must be disposed of to the transferee during the *trust restructuring period. However, ignore any CGT assets retained by the transferor to pay existing or expected debts of the transferor. ... In

ATO Interpretative Decision ATO ID 2003/340 Income Tax Capital Gains Tax: trust to company rollover - CGT assets retained by the trustee - availability of rollover and ATO ID 2003/341 Income Tax Capital Gains Tax: trust to company rollover - CGT assets retained by the trustee to pay existing or expected debts not used for this purpose explains the circumstances in which where CGT assets retained in the trust to pay existing or expected debts of the trust remain after meeting those liabilities will not cause the trust to fail to meet the requirement of 124-N of the ITAA 1997 as it relates to the disposal of trust assets to the transferee company. Broadly, it is where the remaining CGT assets are transferred to the company within the trust restructuring period or with the disposal of the remaining CGT assets upon the vesting of the trust.

The Unit Trust has made a reasonable determination of the CGT assets needed to be retained in the trust to pay existing or expected debts of the trust. The value of the CGT assets retained are substantially the same as the liabilities. Any assets not ultimately used to settle the debts of the Unit Trust will be transferred to New Co within the trust restructuring period. Therefore, subsection 124-860(1) of the ITAA 1997 will be satisfied. Subsection 124-860(2) of the ITAA 1997 The 'trust restructuring period' is defined in subsection 124-860(2) of the ITAA 1997 as: (2) The trust restructuring period for a trust restructure: (a) starts just before the first *CGT asset is *disposed of to the transferee under the trust restructure, which must happen on or after 11 November 1999; and (b) ends when the last CGT asset of the transferor is disposed of to the transferee. ...

Under the Proposed Restructure, the Unit Trust will dispose of all of its CGT assets (other than those it will retain to meet its liabilities) to New Co during the 'trust restructuring period'. It is noted that any assets not ultimately used to settle the debts of the Unit Trust will be transferred to New Co within the trust restructuring period. The trust restructuring period will commence just before the first CGT asset of the transferor (i.e., the Unit Trust) is disposed of to the transferee (i.e. New Co) and ends when the last CGT asset of the transferor is disposed of to the transferee. The Unit Trust will be wound up within six months from just before the transfer of the first CGT asset. Therefore, subsection 124-860(2) of the ITAA 1997 would be satisfied. Subsection 124-860(3) of the ITAA 1997 Subsection 124-860(3) of the ITAA 1997 provides: (3) The transferee must not be an exempt entity. An 'exempt entity' is defined in subsection 995-1(1) of the ITAA 1997 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 income or statutory income the entity might have; or (b) an *untaxable Commonwealth entity. Subdivision 50-A of the ITAA 1997 provides a list of the type of entities that may be considered exempt entities for income tax purposes. As New Co will be an incorporated company and not characterised as any type of exempt entity listed in Subdivision 50-A of the ITAA 1997, the requirement in subsection 124-860(3) of the ITAA 1997 will be satisfied. Subsection 124-860(4) of the ITAA 1997 Subsection 124-869(4) of the ITAA 1997 provides: The transferee must be a company that: (a) has never carried on commercial activities; and (b) has no *CGT assets, other than any or all of the following: (i) small amounts of cash or debt; (ii) its rights under an *arrangement, if (collectively) those rights only facilitate the transfer of assets to the transferee from the transferor; and (c) has no losses of any kind. Example: It could be a shelf company.

New Co will be incorporated to facilitate a restructure, that is, it will be a newly incorporated company that has not previously existed. Therefore, the requirement in subsection 124-860(4) of the ITAA 1997 will be satisfied. Subsection 124-860(5) of the ITAA 1997 Subsection 124-860(5) of the ITAA 1997 provides that subsection 124-860(4) does not apply to a transferee that is the trustee of the transferor. This requirement will not be applicable. Subsection 124-860(6) of the ITAA 1997 Subsection 124-860(6) of the ITAA 1997 states: Just after the end of the *trust restructuring period: (a) 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 that transferor; and (b) 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 or transferors just before the start of the trust restructuring period. ...

Satisfying the conditions in subsection 124-860(6) of the ITAA 1997 requires determining what is meant by the term 'replacement interests'. The term 'replacement interests' is defined in paragraph 124-870(1)(b) of the ITAA 1997 as the shares in a transferee company where ownership of units in a transferee trust end under a trust restructure in exchange for those shares. The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 2002, which introduced Subdivision 124-N of the ITAA 1997, explains the interaction between the exception to the disposal of the assets of the trust and the market value test for the proportionate interest requirements:

2.18 However, the value of those retained assets are not ignored in testing whether the market value test in paragraph 124-860(6)(b) is satisfied. The market value test requires that the market value of the interests the beneficiaries of the trust own just before the trust restructuring period, be at least substantially the same as the market value of the shares those former beneficiaries own in the company just after the end of the trust restructuring period. As a result, the trust may fail this test if the assets it does not dispose of to the company cause the market value of the shares in the company to be less than the market value of the beneficiaries interests in the trust. The replacement interests are the shares in New Co that are intended to replace the units held by the Trust in the Unit Trust following the Proposed Restructure. The Trust holds all of the units in the Unit Trust and will hold all the shares in New Co.

The 'proportionate interest' test in paragraph 124-860(6)(a) of the ITAA 1997 compares the proportionate ownership of interests held by the Trust in the Unit Trust (the transferor) just before the trust disposes of its first CGT asset to New Co (the transferee) under the trust restructure, with the proportionate ownership of shares in New Co that the Trust will have just after the trust restructuring period. The Trust will have the same proportionate holding in New Co that it had in the Unit Trust. Therefore, the requirement in paragraph 124-860(6)(a) of the ITAA 1997 will be satisfied. The 'market value test' in paragraph 124-860(6)(b) of the ITAA 1997 requires that the market value of the replacement shares in New Co just after the trust restructuring period be at least substantially the same as the market value of the interests in Unit Trust just before the start of the trust restructuring period.

It is noted that the market value of the replacement shares will take into account assets that are retained to meet liabilities, including the extent to which any assets not ultimately used to settle the debts of the Unit Trust are transferred to New Co within the trust restructuring period. The Trust will have the same rights under the ordinary shares in New Co that it had under the units in the Unit Trust and the value of the CGT assets retained in the Unit Trust will be substantially the same as its liabilities. Accordingly, the market value of the ordinary shares in New Co will be substantially the same as the market value of the units in the Unit Trust. Therefore, the requirement in paragraph 124-860(6)(b) of the ITAA 1997 will be satisfied. Accordingly, the requirements in subsection 124-860(6) of the ITAA 1997 will be satisfied. Conclusion Accordingly, the transfer assets the Unit Trust to New Co and the issue of shares in New CO to the Trust will meet the requirements for CGT roll-over relief in Subdivision 124-N of the ITAA 1997.

It is noted that if the CGT asset is trading stock of the trust or if the CGT asset becomes trading stock of the company on acquisition of the asset, the roll-over in Subdivision 124-N is not available. Consequently, the inventory of the Unit Trust that is considered trading stock for tax purposes will be subject to the trading stock rules under Division 70 of the ITAA 1997. Consequences of roll-over relief under Subdivision 124-N being available For the Unitholders Since all the requirements of subsection 124-855(1) of the ITAA 1997 would be satisfied, roll-over will be available for the Trust, irrespective of whether the Unit Trust and New Co choose to obtain the roll-over, if it chooses to obtain it in accordance with section 124-870 of the ITAA 1997 because: The Trust own units in the Unit Trust; and The Trust's ownership of all of its units in the Unit Trust will end under a trust restructure in exchange for shares in New Co.