Capital gains tax (CGT) is applied to and calculated on the realisation of “capital gains”. If a business wants to transition from a Unit Trust to a company structure (for example) and the value of the Units in the Trust has increased then it’s likely that the sale or transfer of the Units will result in a capital gain by the Unitholder. In circumstances where the Unitholder may not have actually received any cash to pay the capital gains tax, surely there must be an exception?
What is CGT?
CGT applies to CGT Events, which are defined in Division 104.10 of the Income Tax Assessment Act 1997 (Cth) (Act). The definition of CGT Event includes the disposal (sale) a CGT Asset (CGT A1 Event). CGT Asset is defined in section 108.5 of the Act as:
“(1) (a) any kind of property; or
(b) a legal or equitable right that is not property”.
Selling the Units in a Unit Trust is likely to attract CGT, as it involves a CGT A1 Event happening to a CGT Asset, namely the Units in the Trust.
What are the exceptions or exemptions to CGT?
There are a number of exceptions that apply to CGT Events, which in effect, allow the deferment of a CGT Event to a later time. These are referred to as “rollovers”.
The CGT Events that apply to a sale of Units may be capable of being rolled over pursuant to:
- section 128.870 of the Act (Trust Restructure Rollover); or
- section 124.780 of the Act (Scrip for Scrip Rollover).
This article only considers the law in relation to Trust Restructure Rollovers.
Trust Restructure Rollover
There are essentially two (2) paths that can be taken to restructure a trust to comply with the CGT rollover requirements, these are:
- the disposal of assets by the Trustee to the wholly-owned Company pursuant to subdivision 122-A of the Act (122-A Rollover); and
- the disposal of assets by the Trust to the Company pursuant to subdivision 124-N of the Act (124-N Rollover).
Obtaining an 124-N Rollover
The requirements for obtaining a 124-N Rollover are set out in division 122-N.
Requirements of section 124.860
To obtain a rollover:
- all assets of the Trust must be sold to the Company (124.860(1));
- the Company must be a company that:
- has never traded (124.860(4)(a));
- has no assets (124.860(4)(b)); and
- has no losses of any kind (124.860(4)(c));
- all unitholders in the Trust must obtain a replacement, proportionate, interest (Replacement Interest) in the Company (124.860(6)(a)); and
- the Replacement Interest must have a market value that is substantially the same as the units were immediately prior to the sale (124.860(6)(b)).
Requirements of section 124.865
A rollover is only available for one entity if the other also chooses to obtain a rollover. In other words, both the Unit Trust and the entity which acquires the assets must choose to obtain the rollover.
Requirements of section 124.870
Section 124.870 sets out the requirements that must be satisfied for the Unitholder to obtain rollover relief if:
- the Trust undergoes a trust restructure (124.870(1)); and
- pursuant to the restructure, the Unitholder receives shares in the Company (124.870(1)).
Requirements of section 104.195
Where a 124-N Rollover is obtained and the Trust does not vest within six (6) months of the trust restructure period, the rollover may be reversed. This is an important section to comply with as it can lead to catastrophic cost consequences if the rollover is not completed by this time.
Takeaways
Regardless of the commercial reason for wanting to engage in a trust restructure, care must be taken to avoid or minimise problems associated with CGT and other taxes. A Trust Restructure Rollover pursuant to subdivision 124-N of the Act is an efficient way to avoid CGT problems as it effectively allows a Unit Trust to be replaced by a Company without any CGT consequences to either the Unitholders or the Unit Trust. That said care must also be taken to consider any issues with State based transfer duty. Implementing, a 124-N Rollover involves a number of steps that must be properly executed, so it is best to seek legal and accounting advice when implementing the rollover.
Further references
Legislation
Income Tax Assessment Act 1997 (Cth)
Related articles by Dundas Lawyers
Transfer Duty and issuance of units in a unit trust
Eligibility for the Trust Restructure Rollover
Structuring contracts and capital gains tax
Changes to capital gains tax roll-over relief regime
Further information
If you need assistance with trust restructure relief and capital gains tax, please telephone me for an obligation free and confidential discussion.
Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
Telephone: (07) 3221 0013 (preferred) | Fax: (07) 3221 0031
Mobile: 0419 726 535
e: mburrows@dundaslawyers.com.au
Disclaimer
This article is not legal advice. It is general comment only. You are instructed not rely on the commentary unless you have consulted one of our Lawyers to ascertain how the law applies to your particular circumstances.