12 Month Holding Period Reset by a Series of Rollovers

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It is no secret that the rules on the various Capital Gains Tax (CGT) concessions and roll-overs are notoriously complex. However, in our experience, it is the interaction between the roll-over provisions and other provisions in the Tax Acts that often trips up unwary tax advisers.

The latest court case demonstrates how the interaction works to deny a discretionary trust the general CGT discount after undertaking a series of roll-overs.

Background Facts

The taxpayers were beneficiaries of the S&TP Paule Family Trust, a discretionary trust. The trust had held units in a unit trust for more than 12 months.

As part of a restructure, the business of the unit trust was transferred to a company (STP Holdings Pty Ltd) and the units were exchanged with shares in the company under Subdivision 124-N of the Income Tax Assessments Act 1997 (ITAA97). A day later, the shares in STP Holdings were exchanged for newly issued shares in E-Quest Holdings Pty Ltd. Shortly after, the shares in E-Quest were then exchanged for shares in Findex Australia Pty Ltd. The trust utilised double scrip-for-scrip rollover reliefs under Subdivision 124-M of the ITAA9 for the share exchanges. The sequence of the roll-overs undertaken by the trust was, therefore: Subdivision 124-N, Subdivision 124-M and Subdivision 124-M.

The S&TP Paule Family Trust then sold the shares in Findex a few days later and realised a capital gain of around $5 million. It claimed the general CGT discount on the capital gain on the basis that the shares were taken to have been held for more than 12 months.

The Decision

While there are specific provisions for each individual roll-over that deem the replacement interests to have been acquired at the time the original interests were acquired (and, thus, preserve the holding period for CGT purposes), they do not interact with each other. As a result, the combination of roll-overs under different provisions undertaken by the trust effectively reset the holding period of the Findex shares for CGT purposes. Accordingly, the trust was not entitled to the general CGT discount on the sale of the Findex shares.

The single Federal Court judge, Thawley J, commented that, in some ways, this was an “unpalatable result”. The underlying policy of the provisions is to allow CGT discount where, as a matter of economic substance rather than legal form, the assets disposed of have been held by a taxpayer for at least 12 months. Although the outcome is harsh for the taxpayers, the clear meaning of the words in the legislation must prevail in the end.

MKT Note

Pending an appeal by the taxpayers, an amendment to the law should be made to rectify the unintended consequences. Alternatively, the Commissioner should consider exercising his remedial power, if this falls within his power, to administer the law in accordance with its policy intention.

Another potential pitfall that we have seen in the past is the interaction between the scrip-for-scrip roll-over and the 45-day rule. Where a client undertakes a scrip-for-scrip roll-over to acquire shares in another company and that company then declares fully-franked dividends shortly after the restructure, the 45-day rule may apply to deny the availability of the franking credits.

If you require advice or a second opinion on the requirements of a particular CGT concession or roll-over as well as its potential interaction with other tax provisions, please contact Sean Pearce or Peter Hong

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