Conditions for the Subdivision 126-G roll-over to apply
The roll-over may be chosen for a CGT asset transferred between certain trusts if all of the following requirements from S.126-225 are met:
- Both the transferring trust and the receiving trust are eligible for the roll-over – In effect, this requires that each trust is a ‘fixed trust’ and have both chosen the roll-over.
Broadly, a trust is taken to be a ‘fixed trust’ for this purpose if, at the time of transfer:
- CGT event E4 is capable of happening to all membership interests in both trusts; and
- the beneficiaries’ entitlements in both trusts are not discretionary. Refer to S.126-230.
The second point basically requires that the manner or extent to which each beneficiary of each trust can benefit from the trust is not capable of being ‘significantly affected’ by the exercise or non-exercise of a power by any entity. For example, a power to appoint a beneficiary’s interest in income or capital of the trust to another beneficiary may significantly affect a beneficiary’s interest.
Unlike the former trust cloning exception, there is no requirement for the terms of the trusts to be precisely the same. However, differences that ‘significantly affect’ the nature or extent of beneficiaries’ interests will prevent the roll-over from applying.
- The same beneficiaries have the same interests (with substantially the same market value) in both trusts – Broadly, beneficiaries will have the same proportionate membership interests just before and after transfer, if the total market value of each beneficiary’s interests in the transferring trust of a particular class and in the receiving trust of the matching class are substantially the same just before and after the transfer. Refer to S.126-225(1)(c).
- No exceptions apply – Broadly, S.126-235 provides that the roll-over is not available in any of the following situations:
- The receiving trust is a foreign trust for CGT purposes and the asset is not taxable Australian property (as allowing the roll-over in this case provides a CGT exemption).
- Either trust is a public trading trust at any time in the income year the transfer occurs.
- The trusts have not made the same tax choices. This applies to any choice made under the tax laws where, broadly, the calculation of a trust’s net income or taxable income may be impacted by the absence of the same choice in the other trust (e.g., where one trust makes a family trust election but the other trust does not).
- Both trusts must choose for the roll-over to apply. Furthermore, the transferring trust must provide a written notice containing specified information to each of its beneficiaries to allow them to adjust the cost base of their interests. Refer to S.126-225(3) and S.126-260.
The above conditions basically ensure that CGT roll-over relief may only apply where the asset transfer does not change the underlying ownership of the CGT asset, and that subsequent ownership changes are taxed appropriately.