Edited version of private advice

Authorisation Number: 1051659884980

Date of advice: 1 May 2020

Ruling

Subject: CGT - small business restructure roll-over relief

Question 1

Is the proposed restructure part of a genuine restructure of an ongoing business for the purposes of section 328-430 of the Income Tax Assessment Act (ITAA 1997)?

Answer

No.

Question 2

Will the transfer of land be eligible for the small business restructure rollover under subdivision 328-G of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2020

Year ended 30 June 2021

The scheme commences on:

1 July 2019

Relevant facts and circumstances

You are an Australian resident company for income tax purposes.

You hold a number of parcels of farming land.

The land has been used in farming businesses.

Your shares are currently owned by siblings following the death of their parents.

You are proposing to transfer the land to the family trusts of the siblings such that each trust will own 100% of the respective property.

Each party of the transfer is a CGT small business entity or connected with a CGT small business entity.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 328-G

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 328-430

Income Tax Assessment Act 1997 section 328-435

Income Tax Assessment Act 1997 section 328-440

Income Tax Assessment Act 1997 section 328-455

Reasons for decision

Subdivision 328-G of the ITAA 1997 allows flexibility for owners of small business entities to restructure their businesses and the way their business assets are held while disregarding tax gains and losses that would otherwise arise.

Section 328-430 of the ITAA 1997 discusses when a roll-over is available. There are six basic conditions which must be met for the application of the rollover concessions for the 'Restructures of small businesses' which are contained in subsection 328-430(1) of the ITAA 1997. 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.

Genuine Restructure

Whether a transaction is or is part of a 'genuine restructure of an ongoing business' is a question of fact that is determined having regard to all of the circumstances surrounding the restructure.

The Law Companion Guideline 2016/3 provides further guidance on whether a transaction will be part of a "genuine restructure of an ongoing business",

A 'genuine restructure of an ongoing business' is one that could be reasonably expected to deliver benefits to small business owners in respect of their efficient conduct of the business going forward. It is a composite phrase emphasising that the SBRR is not available to small business owners who are restructuring in the course of winding down or realising their ownership interests.

Factors that tend to indicate that a restructure is not a 'genuine restructure of an ongoing business' include:

·                     where the restructure is a preliminary step to facilitate the economic realisation of assets, or takes place in the course of a winding down to transfer wealth between generations

·                     where the restructure effects an extraction of wealth from the assets of the business (including accumulated profits) for personal investment or consumption or otherwise designed for use outside of the business

·                     where artificial losses are created or there is a bringing forward of their recognition

·                     the restructure effects a permanent non-recognition of gain or the creation of artificial timing advantages, and/or

·                     there are other tax outcomes that do not reflect economic reality.

Example 6 in LCR 2016/3 describes a situation where a shareholder in a company that owns two businesses transfers the active assets of one business to a newly incorporated company that he also owns. The shareholder subsequently retires and transfers the shares in the two businesses to his two sons so that each of the sons can run their own businesses separately. The rollover is not available as the restructure is undertaken in the course of winding down and facilitating an inter-generational transfer of wealth as opposed to a bona fide restructure of an ongoing business.

Section 328-435 of the ITAA 1997 provides a safe harbour rule whereby, a transaction will be, or will be part of, a genuine restructure if, for a period of three years after the transaction occurs:

·                     there is no change in ultimate economic ownership of any of the significant assets of the business that were transferred under the transaction; and

·                     those significant assets continue to be active assets; and

·                     there is no significant or material use of those significant assets for private purposes.

In circumstances where the safe harbour rule is satisfied, it is not necessary to consider whether the restructure would otherwise be a 'genuine restructure of an ongoing business' under paragraph 328-430(1)(a).

The general anti-avoidance rule in Part IVA of ITAA 1936 is a provision of last resort and can still apply in appropriate cases to restructures notwithstanding that the safe harbour rule is satisfied.

Application to your circumstances

In your case it is not considered that proposed restructure will be a genuine restructure for the purposes of the small business restructure rollover. The proposed restructure is designed to split the assets between the shareholders in the company and will create distinct businesses. Your situation is comparable to example 6 in LCR 2016/3. While the transfers in your case have occurred after the death of the shareholders, the main purpose of the proposed restructure is to enable a tax-effective inter-generational transfer of wealth. Consequently, the transaction won't be a genuine restructure for the purposes of section 328-430 of the ITAA 1997.

However, provided that in the three years after the transaction occurs:

·                     there is no change in ultimate economic ownership of any of the significant assets of the business that were transferred under the transaction; and

·                     those significant assets continue to be active assets; and

·                     there is no significant or material use of those significant assets for private purposes.

the safe harbour rule will apply and the transaction will be deemed to be part of a genuine restructure under section 328-435 of the ITAA 1997.

Conclusion

Based on the facts the provided, the transfer of the land will be part of a genuine restructure under the safe harbour provision, each party to the transfer is either a small business entity or connected with a small business entity, the transaction does not have the effect of changing the ultimate economic ownership, the residency requirements will be met, and the transferor and each transferee will elect to use the rollover. Consequently, the transfer of the land will satisfy the requirements of the Small Business Restructure Rollover in accordance with Subdivision 328-G of the ITAA 1997.

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