Why is the ATO concerned with these arrangements?
The ATO is concerned that taxpayers may be entering into these arrangements to avoid tax on large capital gains that would otherwise be made from the disposal of CGT assets. Specific aspects of such arrangements that concern the ATO include the following:
- It may not satisfy all the requirements for the Subdivision 126-G roll-over, in particular:
- the ‘empty trust’ requirement in S.126-225(1)(b)(ii); namely, whether the Receiving Trust's rights under the arrangement (collectively) only facilitate the transfer of assets to it from the Transferring Trust; and
- the ‘same beneficiaries’ requirement in S.126-225(1)(c)(i) – i.e., whether the purchaser's right to subscribe for units in the Receiving Trust creates an interest in the trust such that it does not have the same beneficiaries as the Transferring
TAX WARNING – Receiving Trust may lose capital or revenue losses
The Subdivision 126-G roll-over defers a capital gain of the Transferring Trust that would otherwise apply to the transfer of an asset to a Receiving Trust (e.g., to when the Receiving Trust disposes of the transferred asset). Importantly, any capital or revenue losses of the Receiving Trust that existed just before the asset was transferred to it cannot be utilised to reduce any capital gain or assessable income arising after that time. These capital or revenue losses are effectively extinguished (i.e., they cannot be used) under S.126-240(3).
- The arrangement appears to be designed primarily to allow the Transferring Trust to exploit the Subdivision 126-G roll-over to disregard a capital gain that would otherwise be assessable to the trustee or beneficiaries of that
- The arrangement results in a change in the underlying ownership of the relevant asset without triggering a CGT taxing point, which is contrary to the intent of the roll-over (i.e., to provide roll-over relief only where there is no change in underlying ownership of the assets).
- In the circumstances, a direct sale of the asset by the Transferring Trust to the purchaser would have been simple, viable and commercially
- The commercial substance of the arrangement is a sale of the asset by the Transferring Trust to the purchaser, but the divergent form of the arrangement is explicable only by the tax advantage purportedly obtained by the Transferring
- The Transferring Trust receives (and the purchaser pays) the same total sum under the arrangement as would have been the case if the asset were sold directly to the
The ATO also states that Part IVA of the ITAA 1936 may apply to these arrangements where they would otherwise qualify for roll-over relief under Subdivision 126-G.
TAX TIP – Tax-free capital gains on sale of asset to unrelated party
The most common ways to sell a CGT asset to an unrelated party tax-free is where either of the following concessions apply:
- The Small Business CGT concessions in Division 152 – Broadly, these comprise of four different concessions, which may be combined with the CGT general discount to reduce or eliminate a capital gain on the sale of a business asset, if certain conditions are
- The Small Business Restructure Roll-over (‘SBRR’) in Subdivision 328-G – As noted earlier, effective from 1 July 2016, the SBRR broadly allows small businesses to defer the recognition of gains or losses arising from a transfer of business assets from one entity to another as part of a genuine restructure, provided certain conditions are