Edited version of private advice

Authorisation Number: 1051563898621

Date of advice: 15 August 2019

Ruling

Subject: Subdivision 328-G - restructures of small businesses

Question

Can Trust A apply the small business restructure rollover under subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of a restructure from a unit trust to a company

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.         Trust A was established in 20XX and is an Australian tax resident.

2.         Trust A is s a service entity

3.         Trust A has five unit holders, holding 2 classes of units, class 1 or class 2 units:

·         Class 1 units are entitled to income distribution, capital repayment and voting rights.

·         Class 2 units are only entitled to income distribution and have no entitlement to capital or voting rights.

4.         Two family groups hold the units.

5.         The aggregated annual turnover for the 20XX and 20XX income years is less than $XXm:

6.         In early 20XX Trust A engaged an external business consultant to assist them in growing their business and profitability.

7.         The current business structure was set up based on previous tax advice. This was found not to be suitable for growing the business (currently or in the future) given the structure could not retain profits to assist in growth and investment.

8.         The external business consultants recommended restructuring the current business being Trust A to a company which would enable more efficient business operations, facilitate growth and enable the company to retain profits which will assist in the growth of the business.

Proposed new business structure

9.         The business owners have agreed to set up a new company, NewCo, and transfer all the current assets to the new company.

10.      NewCo will issue shares in the same proportion with the same rights as the unit holders units.

11.      The active assets of Trust A will be transferred to NewCo for no consideration.

12.      Following the transfer of active assets there will be no other assets remaining in Trust A and the economic ownership remains the same.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 328-G

Income Tax Assessment Act 1997 section 328-430

Income Tax Assessment Act 1997 subsection 328-430(1)

Income Tax Assessment Act 1997 paragraph 328-430(1)(a)

Income Tax Assessment Act 1997 paragraph 328-430(1)(b)

Income Tax Assessment Act 1997 subparagraph 328-430(1)(b)(i)

Income Tax Assessment Act 1997 paragraph 328-430(1)(c)

Income Tax Assessment Act 1997 paragraph 328-430(1)(d)

Income Tax Assessment Act 1997 subparagraph 328-430(1)(d)(i)

Income Tax Assessment Act 1997 paragraph 328-430(1)(e)

Income Tax Assessment Act 1997 paragraph 328-430(1)(f)

Income Tax Assessment Act 1997 section 328-435

Income Tax Assessment Act 1997 paragraph 328-430(1)(a)

Income Tax Assessment Act 1997 section 328-445

Reasons for decision

Question 1

Can Trust A apply the small business restructure rollover under subdivision 328-G of the ITAA 1997 in respect of a restructure from a unit trust to a company?

Summary

Trust A can apply the small business restructure rollover under subdivision 328-G of the ITAA 1997 with respect to a restructure from a unit trust to a company.

Detailed reasoning

1.         The small business restructure rollover in Subdivision 328-G allows small businesses to transfer active assets from one entity (the transferor) to one or more other entities (transferees), on or after 1 July 2016, without incurring an income tax liability.

2.         There are six basic conditions which must be met for the application of the rollover concessions to be available. These are contained in subsection 328-430(1). This subsection states that:

A roll-over under this Subdivision is available in relation to an asset that, under a transaction, an entity (the transferor) transfers to one or more other entities (transferees) if:

(a)        the transaction is, or is a part of, a genuine restructure of an ongoing *business; and

(b)        each party to the transfer is an entity to which any one or more of the following applies:

(i)         it is a *small business entity for the income year during which the transfer occurred;

(ii)        it has an *affiliate that is a small business entity for that income year;

(iii)       it is *connected with an entity that is a small business entity for that income year;

(iv)      it is a partner in a partnership that is a small business entity for that income year; and

(c)        the transaction does not have the effect of materially changing:

(i)         which individual has, or which individuals have, the ultimate economic ownership of the asset; and

(ii)        if there is more than one such individual - each such individual's share of that ultimate economic ownership; and

(d)        the asset is a *CGT asset (other than a *depreciating asset) that is, at the time the transfer takes effect:

(i)         if subparagraph (b)(i) applies - an *active asset; or

(ii)        if subparagraph (b)(ii) or (iii) applies - an active asset in relation to which subsection 152-10(1A) is satisfied in that income year; or

(iii)       if subparagraph (b)(iv) applies - an active asset and an interest in an asset of the partnership referred to in that subparagraph; and

(e)        the transferor and each transferee meet the residency requirement in section 328-445 for an entity; and

(f)         the transferor and each transferee choose to apply a roll-over under this Subdivision in relation to the assets transferred under the transaction

Application to your circumstances

Genuine restructures

3.         Law Companion Ruling LCR 2016/3 (LCR 2016/3) explains that whether a transaction is or is part of a 'genuine restructure' will be a question of fact, with the following features indicative of a genuine restructure:

·         a bona fide commercial arrangement undertaken in a real and honest sense to:

·         facilitate growth, innovation and diversification

·         adapt to changed conditions, or

·         reduce administrative burdens, compliance costs and/or cash flow impediments.

·         authentically restructuring the way in which the business is conducted as opposed to a 'divestment' or preliminary step to facilitate the economic realisation of assets.

·         the economic ownership of the business and its restructured assets is maintained.

·         the small business owners continue to operate the business through a different legal structure including continued use of the transferred assets as active assets of the business, continuity of employment of key personnel, and continuity of production, supplies, sales or services.

·         it results in a structure likely to have been adopted had the small business owners obtained appropriate professional advice when setting up the business.

4.         You have advised that Trust A was established following incorrect advice on the basis the current structure is not suitable for retaining profits or growing the business.

5.         The decision to undertake a restructure from a unit trust to a company follows recommendations made by external business consultants that determined restructuring of the ongoing business would enable more efficient business operations, facilitate growth and enable the company to retain profits for reinvestment into the business.

6.         Based on this information, the proposed restructure aligns to the requirements of being a genuine restructure of an ongoing business under paragraph 328-430(1)(a) of the ITAA 1997.

Small business entity

7.         An entity is a small business entity if it carries on business and its aggregated turnover for the previous income year is less than $10 million or is likely to be less than $10 million for the current income year. In considering the aggregated turnover we also need to determine whether any of the individuals or companies are 'connected with' or 'affiliates' as described in Sections 328-125 and 130.

Connected with & direct control

8.         An entity is considered to be connected with another entity if either entity controls the other or a third entity controls both as stated in subsection 328-125(2).

9.         An entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates owns or has the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of income and capital distribution and voting rights.

Affiliates

10.      An individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company.

11.      However, an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share.as explained in the example following subsection 328-130(2)

Example: A partner in a partnership would not be an affiliate of another partner merely because the first partner acts, or could reasonably be expected to act, in accordance with the directions or wishes of the second partner, or in concert with the second partner, in relation to the affairs of the partnership. Directors of the same company, or the company and a director of that company, would be in a similar position.

12.      As each of the unit holders together with their affiliates holds at least a 40% ownership interest with entitlement to income, capital and voting rights as determined by the unit classes we need to include the relevant annual turnovers in considering aggregated turnover.

Annual turnover

13.      An entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.

Ultimate economic ownership

14.      The transfer must not have the effect of 'materially changing' the ultimate economic ownership of the transferred assets and where there is more than one ultimate economic owner, each individual share of that ultimate economic ownership must not be materially changed.

15.      Just before the transfer the unit holders of Trust A hold the following units:

·         Class 1 units - entitled to income distribution, capital repayment and voting rights; and

·         Class 2 units - entitled to income distribution and have no entitlement to capital or voting rights.

16.      Just after the transfer to NewCo the original unit holders will hold shares in NewCo in the exact same proportions as their original unit holdings including the same rights:

·         the ordinary shares are replacing Class B units, which also entitles the shareholders to income distribution, capital repayment and voting rights; and

·         E Class shares, are replacing the Class D units, which also entitles the shareholders to income distribution rights only with no capital entitlement or voting rights.

17.      Based on these facts the economic ownership is remaining exactly the same, satisfying the requirements in subsection 328-430(1)(c) of the ITAA 1997.

Active asset

18.      A CGT asset (whether a tangible or intangible asset) is an active asset at a time if, at that time, you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by you, an affiliate of yours, or by another entity that is connected with you (subsection 152-40(1) of the ITAA 1997).

19.      A CGT asset is also an active asset at a given time if you own it, and:

·         it is either a share in a company that is an Australian resident at that time or an interest in a trust that is a resident trust for CGT purposes for the income year in which that time occurs, and

·         the total of the following is 80% or more of the market value of all of the assets of the company or trust

·         the market values of the active assets of the company or trust, and

·         the market value of any financial instruments of the company or trust that are inherently connected with a business that the company or trust carries on, and

·         any cash of the company or trust that is inherently connected with such a business

1.         The assets held by Trust A along with the units held by the unit holders are considered to be active assets representing at least 80% of the market value of all the assets, satisfying subparagraph 328-430(1)(b).

Residency

20.      The fifth condition which must be met in meeting the small business restructure rollover is the residency requirement. For the purposes of paragraph 328-430(1)(e) of the ITAA 1997, the residency requirement for an entity is that:

(a) if the entity is an individual or a company - the entity is an Australian resident; or

(b) if the entity is a trust - it is a resident trust for CGT purposes; or

(c) if the entity is a partnership (other than a *corporate limited partnership) - at least one of the partners is an Australian resident; or

(d) if the entity is a corporate limited partnership - it is, under section 94T of the Income Tax Assessment Act 1936, a resident for the purposes of the *income tax law.

21.      As both Trust A and NewCo are Australian residents for tax purposes; they satisfy the requirements of section 328-445 of the ITAA 1997.

Choose to apply the relief

22.      The sixth condition requires both the transferor and each transferee to choose to apply the roll-over. As both Trust A and NewCo are choosing to apply the 328-G roll-over subparagraph 328-430(1)(f) of the ITAA 1997 will be satisfied.

Conclusion

23.      Based on satisfying the six conditions above, it is considered that the proposed restructure meets the definition of a 'genuine restructure of an ongoing business' under paragraph 328-430(1)(a) of the ITAA 1997.

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