Arrangements being targeted by the ATO in TA 2019/2
The ATO is reviewing certain arrangements that purportedly allow a unit trust to effectively dispose of a CGT asset to an arm's length purchaser with no CGT consequences by exploiting the Subdivision 126-G rollover for trust restructures.
Broadly, under these arrangements, a trustee of a unit trust (the ‘Transferring Trust’) sells a CGT asset with a large unrealised capital gain to an arm's length purchaser for an agreed price by:
- transferring the relevant asset to a trustee of a new unit trust (the ‘Receiving Trust’) for the purchase price which gives rise to a debt owing to the Transferring Trust;
- choosing to apply the CGT roll-over under Subdivision 126-G for the transfer of the asset;
- the purchaser subscribing for new units in the Receiving Trust equal in value to the purchase price; and
- the Receiving Trust repaying the debt to the Transferring Trust with the funds received from the issue of the new units.
In the ATO’s view, by entering into these arrangements rather than selling the asset directly to the purchaser, the Transferring Trust effectively avoids tax on the capital gain that would otherwise have been made on the sale of the asset, despite the underlying ownership of the asset transferring to the purchaser.
TAX WARNING – Arrangements with non-arm’s length related parties
While the purchaser in the arrangement described in TA 2019/2 is an arm’s length party, the ATO states that its concerns about these arrangements (as set out further below) would equally apply if the purchaser was a non-arm’s length related party.