Thinking of restructuring your trust for some reason? While there are certainly a number of commercial benefits in transitioning from a trust into a company, a common pitfall is failing to acknowledge potential liability for Capital Gains Tax (CGT) or address potential liability for state based transfer duty (Stamp Duty).
Why does CGT apply to me?
CGT applies to CGT Events, which are defined in section 104.10 of the Income Tax Assessment Act 1997 (Cth) (Act). The definition of CGT Event includes the disposal of a CGT Asset (CGT A1 Event). CGT Assets are defined in section 108.5 of the Act to include “any kind of property”. Therefore, if you are selling the Units in a Unit Trust in order to transition to a company structure, you are likely to incur CGT.
How can I minimise my liability for CGT?
There are a number of “rollovers” that apply to CGT Events, which in effect, allow the deferment of a CGT Event to a later time. One of the more common rollovers is a Trust Restructure Rollover under subdivision 124-N of the Act (124-N Rollover).
Am I eligible for a 124-N Rollover?
You may be eligible for a 124-N Rollover if you can answer yes to all of the following questions:
- Will all the assets of your Trust (Trust Assets) be transferred to a Company?
- Is the Company a company which has never traded and has no assets or losses?
- Will all of the unitholders in the Trust obtain a replacement, proportionate, interest in the Company (Replacement Interest)?
- Will the Replacement Interest have a market value that is substantially the same as that of the units immediately prior to the sale?
- Do both the Unit Trust and the Company agree to the 124-N Rollover?
- Will the Unit Trust vest within six (6) months of the date that the first trust asset is rolled over?
These questions are extracted from the requirements of sections 124.860, 124.865, 124.870 and 104.195 of the Act.
Takeaways
A Trust Restructure Rollover pursuant to subdivision 124-N of the Act is a common way of addressing CGT issues as it allows a Unit Trust to be replaced by a Company without any CGT consequences to either the Unitholders or the Trustee. However, it is essential to seek legal and accounting advice when implementing a rollover to ensure that all legal requirements, and any ancillary liabilities such as State based transfer duty, are complied with.
Links and further references
Legislation
Income Tax Assessment Act 1997 (Cth)
Other links
Further information about tax law
If you need assistance with complying with the capital gains tax regime, please telephone me for an obligation free and confidential discussion.
Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
T: +61 7 3221 0013 (preferred)
M: +61 419 726 535
E: mburrows@dundaslawyers.com.au
Disclaimer
This article contains general commentary only. You should not rely on the commentary as legal advice. Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.
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