In this issue of Public Accountant, the focus is on the future. In the previous issue, | foreshadowed a further look at each of the tools available in a restructure from a trust to a company. With company tax rates expected to come down in the years ahead, the demand for company structures is expected to increase.
Division 122 provides rollover relief when:
. a trust transfers assets to a company in exchange for shares in that company (a 122-A rollover);
. a partnership (this may be a partnership of discretionary trusts) transfers assets to a company in exchange for shares in that company (a 122-B rollover).
The effect of a 122-A or 122-B rollover is to insert a company between the trust and the assets held by the trust. The assets are transferred from the trust to the company and, in exchange, the company issues shares to the trustee of the trust.
The 122-A and 122-B rollovers push the assets down into the company and the trust structure and its beneficiaries are unaffected. There is no restriction as to the type of trust that may be able to use the rollover, as the rollover applies to the trustee of a trust. After the restructure is undertaken, the shares in the company will be held by a trustee, and a family trust election will be necessary. As a result, this rollover will not suit many unit and hybrid trusts.
This type of rollover may be used to deal with asset protection issues. For example, a sole trader will very often incorporate in order to limit their liability. The business assets may be transferred to a newly incorporated company using a 122-A rollover.
Key features of a 122-A rollover
. The rollover applies to disposal of asset cases and creation of asset cases (creating contractual or other rights in the company or granting an option to the company).
. The rollover is only available in respect of listed CGT events. In the context of a disposal case, the most common CGT event is A1.
. The rollover may be applied for a single CGT asset or ‘all the assets of a business’.
. Assets such as collectable or personal use assets, trading stock and assets that become trading stock in the company just after the time of the CGT event are excluded. Further, in a single asset rollover, depreciating assets are also excluded.
. The consideration received by the trustee of the trust is restricted to non-redeemable shares in the company or the issue of such shares and the assumption of liabilities by the company in respect of the assets.
. The shares issued must meet the market value test.
. The company must not be an exempt entity.
. The trustee of the trust must choose to apply a subdivision 122-A rollover.
. Just after the rollover, the trustee of the trust must own all the shares in the company.
. The shares in the company issued to the trustee of the trust (the replacement assets) will have the same tax characteristics as the assets that were subject to the rollover and the assets that are subject to transfer will have the same tax characteristics in the hands of the company as they had in the hands of the trustee.
