Where a business operates through a unit trust, there are a number of reasons why transitioning to a corporate structure may be contemplated, such as alignment with long-term business development strategies, addressing working capital needs or obtaining taxation benefits. A 'trust to company' restructure may also be desirable in the context of a looming business sale, as buyers (and in particular overseas buyers) often prefer to purchase shares in a company over units in a trust.
Importantly, business restructures often involve the disposal of assets (e.g. units in a unit trust) to a new business entity. If the value of such assets has increased, the disposal will likely result in a 'capital gain'. Consequently, capital gains tax ('CGT') issues frequently arise when transitioning from a trust to a corporate structure. However, there is scope to avoid CGT problems by utilising the CGT rollover relief provisions provided in the Income Tax Assessment Act 1997 (Cth) ('Act'). We outline a few ways in which the immediate tax consequences arising out of a trust restructure can be deferred.
- 122-A Rollover – Disposal of assets by a trustee to a wholly-owned company
Where a trust is seeking to move into a corporate structure, the trustee may opt to obtain CGT rollover relief under Subdivision 122-A of the Act by disposing of either a single CGT asset or all the assets to a company fully-owned by the trust.
Under the 122-A rollover, the consideration the trustee receives for the transfer must consist only of shares in the company, and they must own 100% of the shares in the company immediately following the transfer, in the same capacity as they owned the trust units. Additionally, the market value of the shares must be substantially the same as the market value of the units disposed of.
The overall tax consequence of a 122-A rollover is that any capital gain realised on the disposal of trust assets is deferred. Structurally, the unit trust continues to exist within the overall business structure, but the assets are held by the company who becomes the new operating entity, and the unit trust becomes the shareholder of that company.
- 124-N Rollover – Disposal of assets from a unit trust to a company
Another method by which a trust restructure can be undertaken is via Subdivision 124-N of the Act. This provision allows the unit trust to be replaced by a company owned by the unitholders.
Under a 124-N rollover, all assets (i.e. all units or interests) held by the trust are transferred to the new company. Unitholders must obtain shares in the new company in the same proportion as they owned units in the trust. In other words, the units held by unitholders are replaced by shares in the company, and these replacement shares must have a market value that is substantially the same as the market value of the units transferred. Essentially, the application of a 124-N rollover results in the unit trust being replaced by a company owned by the beneficial owners of the trust, with the advantage that CGT consequences are deferred.
A critical procedural requirement for a 124-N rollover is that the unit trust must be vested within 6 months of the transfer of assets. If the trust does not cease to exist within this timeframe, the effect of the rollover may be reversed.
- 328-G Rollover – Small business restructure rollover
Where the small business requirement is met, a rollover under Subdivision 328-G may be utilised when a trust transfers its business asset to another small business entity without altering the ultimate economic ownership of the asset. A key advantage of this provision is its applicability to a broad range of active assets, including non-CGT assets such as trading stock, depreciating assets and revenue assets. If executed successfully, a 328-G rollover results in tax-neutral consequences that would normally arise out of the transfer of active assets.
Several conditions must be met for the rollover to apply. First, each party to the transfer must satisfy the definition of 'small business entity' (i.e. a business with an aggregated turnover of less than $10 million). The 328-G rollover also requires that the 'ultimate economic ownership' of the business remains the same, and that the transaction forms part of a 'genuine restructure of an ongoing business'. Whether or not this hurdle can be met depends on the specific circumstances, but some indicators of a 'genuine restructure' include demonstrating that the restructure is undertaken for bona fide commercial purposes, as distinct from artificial or unduly tax-driven reasons.
- 615 Rollover – Inserting a holding company between unitholders and a company
This rollover applies where unitholders cease to own units in the trust, and in exchange, they become the owners of new shares in an interposed company.
Importantly, the original unit trust must have more than one unitholder, and the interposed company must own all the units in the original entity immediately after all exchanging unitholders have disposed of their units in the original trust.
The structural consequence of a 615 rollover is that a company is inserted between the unit trust and its unitholders, allowing the business to continue operating through the original trust while profits are retained in the interposed company. For exchanging unitholders who choose the 615 rollover, the overall CGT outcome is that any capital gains made on the disposals will be disregarded.
A business considering restructuring to a more suitable legal structure may explore some of these rollover options to alleviate tax burdens. It is important to keep in mind that rollover provisions have different eligibility requirements and compliance obligations. When contemplating a rollover or restructure, businesses should seek professional advice tailored to their unique circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
