Edited version of private advice

Authorisation Number: 1051724806061

Date of advice: 22 July 2020

Ruling

Subject: Small business restructure

Question

Is the roll-over available to the taxpayer in accordance with section 328-430 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Answer

Yes

This ruling applies for the following period(s)

1 July 20XX to 30 June 20XX

The scheme commences on

The date in the 202XX income year when a favourable ruling is obtained.

Relevant facts and circumstances

1.               X Pty Ltd (X) is the trustee for the Y Family Trust (the taxpayer).

2.               The taxpayer is a trading discretionary trust that operates a business (Business) in Australia.

3.               The taxpayer was created pre-CGT with a spouse 1 and spouse 2 signing the Trust Deed in their capacity as Directors of X.

4.               The Trust Deed gave X as trustee the powers to operate as a trading entity.

5.               Variations to the Trust Deed have replaced the spouse 1 and spouse 2 as primary beneficiaries and First and Successor Principals, with their child (A) and their spouse 2 (B).

6.               A and B as Directors of X executed a further Deed of Amendment to the Trust Deed on 30 June 20XX to assist with the tax administration of the trust.

7.               On XX/XX/20XX, a Deed of Amendment to the taxpayer was executed by X to define 'general beneficiaries' as being the issue and their dependents of A.

8.               X as trustee for the taxpayer has made a family trust election for the purposes of Schedule 2F of the Income Tax Assessment Act 1936 that will continue to be in force before, during and after the proposed transaction. The specified individual is A.

9.               The directors of Newco will be the same individuals who are equal shareholders and directors of X, that is, A and B.

10.            Every individual who has the ultimate economic ownership of the assets before the transfer, will retain their ultimate economic ownership after the transfer.

11.            Every individual after the transfer takes place is a member of the family group of the test individual specified in the Family Trust Election.

12.            X intends to incorporate a new Australian company (Newco) who will be wholly owned by X as trustee for the taxpayer.

The Proposed Transaction

13.            The taxpayer proposes to transfer all the active assets of the Business (including plant, equipment and goodwill) to Newco.

14.            The assets that will remain with the taxpayer are:

(a)             Real property

(b)             Shares in a family holding company

(c)             Non-current receivables

(d)             Cash assets

(e)             Investments in two Unit Trusts.

15.            It is intended that there will be consideration for the transfer of the assets of approximately $X,XXX,000 which is equal to the market value of the assets including $X.X million in cash and the assumption of liabilities by Newco that are currently owed by the taxpayer.

16.            During the 20XX and 20XX financial years, the taxpayer borrowed approximately $X million to renovate two adjoining properties under separate title that are owned by separate entities, as one business premises.

17.            Newco intends to borrow approximately $X.X million as part of the consideration for the assets of the Business.

18.            The taxpayer will use the $X.X million to repay the loan it used to renovate the two properties.

19.            The remaining amount of consideration for the Business is $X,XXX,000 which will be paid in the form of a transfer of liabilities from the taxpayer to Newco.

20.            The taxpayer is a resident trust as its central management and control is in Australia. Newco will be an Australian resident company. Both choose to employ the rollover provisions in subdivision 328G in relation to assets transferred under the transaction.

Genuine Restructure

21.            There will be:

·        continued use of the transferred assets as active assets of the business

·        continuity of employment, and

·        continuity of production, supplies, sales or services

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

23.        It is no longer appropriate for the business to be operated via a discretionary trust due to the significant growth in the business and the administrative burden in comparison to a company structure.

Further information received:

24.            The taxpayer's detailed financial accounts for the year ended 30 June 20XX.

25.            The following was advised:

Distributions from the taxpayer for the past 4 income years are as follows:

·        2019 - fifty per cent each to A and B

·        2018 - fifty per cent each to A and B

·        2017 - fifty per cent each A and B

·        2016 - franked dividends distributed to A and B and the balance to the L Investment Trust.

There are no entities connected to or affiliated with the taxpayer or Newco (other than the C Unit Trust) that generate income from business operations.

The aggregated turnover of the taxpayer and C Unit Trust is less than $10 million

The unitholders and proportions of each of the unit trusts are as follows:

D Unit Trust

1.               B Coy as trustee for the Family Retirement Fund - 57.85%

2.               X as trustee for the Y Family Trust - 42.15%

L Unit Trust

Family Coy as trustee for the Family Retirement Fund - 100%

C Unit Trust

X Pty Ltd as trustee for the taxpayer - 100%

26.            On XX/XX/20XX, the following was advised:

The directors and shareholders of Family Coy are A and B

After the death of the father of A in XX 20XX, A and B gained full control to the business. This provided them the opportunity to run and structure the business in a contemporary way.

This included not only major renovations to the premises to bring them to a modern standard and to allow for increased efficiencies in the whole business process but also allowed them (subject to the Ruling) to move away from a very old and unwieldy trust deed that has had numerous amendments and was essentially the father and mother's preferred structure many decades ago, to a structure of their choice, being a new company - they felt this was a much simpler and more efficient administrative structure and it is also much easier and cheaper for dealing with suppliers and making credit applications compared to a complex trust structure.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-340

Income Tax Assessment Act 1997 Subsection 40-340(1)

Income Tax Assessment Act 1997 Paragraph 152-40(1)(a)

Income Tax Assessment Act 1997 Subparagraph 152-40(1)(a)(iii)

Income Tax Assessment Act 1997 Paragraph 152-40(1)(b)

Income Tax Assessment Act 1997 Subsection 152-40(4)

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Paragraph 328-110(1)(a)

Income Tax Assessment Act 1997 Section 328-115

Income Tax Assessment Act 1997 Subsection 328-115(1)

Income Tax Assessment Act 1997 Subsection 328-115(2)

Income Tax Assessment Act 1997 Subsection 328-115(3)

Income Tax Assessment Act 1997 Section 328-120

Income Tax Assessment Act 1997 Subsection 328-120(1)

Income Tax Assessment Act 1997 Subsection 328-120(2)

Income Tax Assessment Act 1997 Subsection 328-120(3)

Income Tax Assessment Act 1997 Subsection 328-120(4)

Income Tax Assessment Act 1997 Subsection 328-120(5

Income Tax Assessment Act 1997 Subsection 328-120(6)

Income Tax Assessment Act 1997 Section 328-125

Income Tax Assessment Act 1997 Subsection 328-125(1)

Income Tax Assessment Act 1997 Subsection 328-125(2)

Income Tax Assessment Act 1997 Subparagraph 328-125(2)(a)(ii)

Income Tax Assessment Act 1997 Subsection 328-125(3)

Income Tax Assessment Act 1997 Subsection 328-125(4)

Income Tax Assessment Act 1997 Subsection 328-125(5)

Income Tax Assessment Act 1997 Section 328-130

Income Tax Assessment Act 1997 Subdivision 328-G

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 Paragraph 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)(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 Subsection 328-430(2)

Income Tax Assessment Act 1997 Section 328-435

Income Tax Assessment Act 1997 Section 328-440

Income Tax Assessment Act 1997 Subparagraph 328-440(a)(i)

Income Tax Assessment Act 1997 Paragraph 328-440(b)

Income Tax Assessment Act 1997 Paragraph 328-440(c)

Income Tax Assessment Act 1997 Section 328-445

Income Tax Assessment Act 1997 Paragraph 328-445(a)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Income Tax Assessment Act 1936 Section 272-70 of Schedule 2F

Income Tax Assessment Act 1936 Section 272-80 of Schedule 2F

Taxation Administration Act 1953 Section 370-5 of Schedule 1

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Is the roll-over available to the taxpayer in accordance with section 328-430?

Summary

The disposal of the assets of the Business by the taxpayer to Newco in accordance with the Proposed Transaction will satisfy the conditions for roll-over under section 328-430.

Detailed reasoning

27.            Subdivision 328-G 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.

28.            Section 328-430 discusses when a roll-over is available. There are six basic conditions contained in subsection 328-430(1) that must be met as follows:

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.

Note: The roll-over of a depreciating asset transferred in the restructuring of a small business is addressed in item 8 of the table in subsection 40-340(1).

29.            The transferor is the taxpayer who will retain shares, property and units in a unit trust from the Business, but will be transferring the operating plant, equipment, and personnel with the goodwill to the transferee, Newco. The taxpayer will retain 100% of shares in Newco.

30.            In addition, subsection 328-430(2) provides that roll-over is not available under Subdivision 328-G if the transferor or any transferee is either an exempt entity or a complying superannuation entity. As all the parties to the Proposed Transaction are not either of these types of entities, subsection 328-430(2) does not prevent roll-over being available in this situation.

31.            Each requirement in subsection 328-430(1) will now be considered in detail.
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Paragraph 328-430(1)(a) - genuine restructure

32.            Paragraph 328-430(1)(a) requires that the transaction is, or is part of, a genuine restructure of an ongoing business.

33.            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.

34.            Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters provides guidance on whether a transaction will be part of a 'genuine restructure of an ongoing business'.

35.            LCR 2016/3 states that 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. It can encompass a restructure of the way in which business assets are held where that structure is likely to have been adopted had the business owners obtained appropriate professional advice when setting up the business.

36.            Paragraph 7 of LCR 2016/3 outlines the following features that indicate a transaction is, or is part of, a genuine restructure of an ongoing business:

·                 it is a bona fide commercial arrangement undertaken to facilitate growth, innovation and diversification, to adapt to changed conditions, or to reduce administrative burdens and compliance costs

·                 it is authentically restructuring the way the business is conducted, as opposed to a divestment or a 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, and

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

37.            However, the restructure of an ongoing business by a business owner is not genuine if it is done in the course of winding down to transfer wealth between generations or realising their ownership interests. A restructure is likely to not be a genuine restructure of an ongoing business if:

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

·                 it effects an extraction of wealth from the assets of the business for personal investment or consumption

·                 it creates artificial losses or brings forward their recognition

·                 it effects a permanent non-recognition of gain or creates artificial timing advantages, and/or

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

38.            The Business will continue to be carried on after the Proposed Transaction has been implemented to achieve the efficiencies and growth expected from the modernisation of the business premises. The ultimate owners, A and B, will maintain control and ownership of the renovated two adjoining properties under separate title after the restructure. This is achieved through their ownership of X as trustee for the taxpayer and Family Coy as trustee for the Family Retirement Fund. This satisfies the 'ongoing business' requirement of paragraph 328-430(1)(a).

39.            Therefore, the issue that remains is whether the proposed restructure is a genuine restructure of the Business.

40.            It has been stated that the main reason for implementing the Proposed Transaction is to adapt to changed conditions and reduce cash flow impediments. In particular, it is no longer appropriate for the Business to be operated by a discretionary trust structure due to the significant growth in the Business and the administrative burden in comparison to a company structure. A and B consider a company is a much simpler and more efficient administrative structure and it is also much easier and cheaper for dealing with suppliers and making credit applications compared to a complex trust structure.

41.            A and B have renovated the adjoining properties to modernise the business which will allow for increased efficiencies in the whole funeral process.

42.            A and B have been provided with appropriate professional advice to move away from a very old and unwieldy trust deed that has had numerous amendments, to a simpler company structure that will deliver benefits for the business and provide better asset protection.

43.            Further, there are no further proposed transactions, transfers or restructures of the business under contemplation. Other than the transfer of active assets and personnel, there is no intention to sell any of the assets of the Business, the Business itself, or to extract wealth from the Business. The assets will all be retained under the ultimate ownership of A and B. Additionally, the arrangement will not give rise to any losses or artificial tax outcomes.

44.            All of these factors in combination indicate that the proposed restructure is a genuine restructure of an ongoing business. Consequently, the requirement in paragraph 328-430(1)(a) is satisfied.

Paragraph 328-430(1)(b) - small business or related entity

45.            Paragraph 328-430(1)(b) requires both the transferor and the transferee to be one or more of the following entities in the income year the Proposed Transaction occurs:

(i)               a small business entity

(ii)              an affiliate of a small business entity

(iii)            connected with a small business entity

(iv)            a partner in a partnership that is a small business entity.

Transferor - The Taxpayer

46.            Section 328-110 provides that you are a small business entity for an income year if:

(a)             you carry on a *business in the current year; and

(b) one or both of the following applies:

(i) you carried on a business in the income year (the previous year) before the current year and your *aggregated turnover for the previous year was less than $10 million;

(ii) your aggregated turnover for the current year is likely to be less than $10 million.

47.            The term 'business' is defined in subsection 995-1(1) to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

48.            The taxpayer is a trading discretionary trust, that is conducting the business and would therefore satisfy the requirement in paragraph 328-110(1)(a).

49.            The next requirement is to determine if the aggregated turnover of the taxpayer is less than $10 million in the relevant income year. 'Aggregated turnover' for an income year is defined in subsection 328-115(1) as the sum of the relevant annual turnovers excluding any amounts covered by subsection (3).

50.            The 'relevant annual turnovers' are defined in subsection 328-115(2) as:

(a)             your *annual turnover for the income year; and

(b)             the annual turnover for the income year of any entity (a relevant entity) that is *connected with you at any time during the income year; and

(c)             the annual turnover for the income year of any entity (a relevant entity) that is an *affiliate of yours at any time during the income year.

51.            The amounts excluded under subsection 328-115(3) are amounts derived from dealings between you and any entities that are connected with you or are your affiliates, or amounts derived from dealings between those entities.

52.            'Annual turnover' for an income year is defined in subsection 328-120(1) as the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.

53.            Subsections 328-120(2) to (6) provide certain exclusions and special rules in calculating the annual turnover. These exclusions and special rules do not apply in this situation.

54.            To calculate the aggregated turnover of the taxpayer, it first must be determined if any entities are connected with, or are affiliates of, the taxpayer.

55.            You advised that there are no entities connected to or affiliated with the taxpayer or Newco (other than the C Unit Trust) that generate income from business operations.C Unit Trust is owned 100% by the taxpayer.

56.            Subsection 328-125(1) provides an entity is connected with another entity if:

(a)             either entity controls the other entity in a way described in this section; or

(b)             both entities are controlled in a way described in this section by the same third entity.

57.            There are two control tests in section 328-125 that apply depending on what type of entity is being tested.

Direct control of an entity other than a discretionary trust

328-125(2) An entity (the first entity) controls another entity if the first entity, its *affiliates, or the first entity together with its affiliates:

(a)   except if the other entity is a discretionary trust - own, or have 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:

(i)               any distribution of income by the other entity; or

(ii)              if the other entity is a partnership - the net income of the partnership; or

(iii)             any distribution of capital by the other; or

(b)   if the other entity is a company - own, or have the right to acquire the ownership of, *equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage) that is at least 40% of the voting power in the company.

58.            The taxpayer owns 100% of the units in the C Unit Trust. It therefore has a 100% control percentage and entitlement to a full distribution of C Unit Trust's income and capital. Therefore, C Unit Trust is connected to the taxpayer under paragraph 328-125(2)(a).

59.            The 'direct control of a discretionary trust test' will apply to determine who is connected with the taxpayer.

Direct control of a discretionary trust

(a) the trustee of the trust paid to, or applied for the benefit of:

(i) the first entity; or

(ii) any of the first entity's *affiliates; or

(iii) the first entity and any of its affiliates;

any of the income or capital of the trust; and

(b) the percentage (the control percentage) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year.

(a) an *exempt entity; or

(b) a *deductible gift recipient.

60.            X is the trustee of the taxpayer, a discretionary trust. The two shareholders and directors of X are A and B. The taxpayer acts in accordance with the directions and wishes of the two directors and shareholders of its trustee, X. A and B are 'first entities' for the purposes of subsection 328-125(3).

61.            For the last three income years, A and B have each received a 50% distribution from the taxpayer and would therefore also be said to control the taxpayer under subsection 328-125(4). As neither individual is an exempt entity or a deductible gift recipient, subsection 138-125(5) will not apply.

62.            Section 328-130 provides that 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. However, an individual or company is not your affiliate merely because of the nature of the business relationship you and the individual or company share.

63.            An affiliate must carry on a business. You advised that no entities affiliated with the taxpayer or Newco, other than the connected entity C Unit Trust, generate income from business operations. The taxpayer has no affiliates and acts in accordance with the directions and wishes of its trustee, X's directors and shareholders, A and B.

Conclusion

64.            A and B own X the trustee of the taxpayer. The taxpayer owns C Unit Trust and Newco. In the 2019 income year, A and B who derive their income from the business operations and from their investments in the assets of the business did not exceed $10 million in aggregated turnover for that income year. The aggregated turnover of the taxpayer was therefore less than $10 million in 20XX satisfying paragraph 328-110(a)(i). As the taxpayer is carrying on a business, it fully satisfies section 328-110 and is considered a small business as Transferor. Likewise, Newco as transferee, is also a small business entity by virtue of its likely turnover in the current year as it carries on a business.

65.            The transferor and the transferee to the Proposed Transaction are small business entities in the 2020 income year for the purposes of subparagraph 328-430(1)(b)(i).

Paragraph 328-430(1)(c) - ultimate economic owner

66.            Paragraph 328-430(1)(c) requires the transaction to not have the effect of materially changing which individual has, or which individuals have, the ultimate economic ownership of the assets. Additionally, where more than one individual holds the ultimate economic ownership of the asset, each individual's share of that ownership must not materially change.

67.            Where ownership passes to or from a discretionary trust, this requirement would generally not be able to be met. Under ordinary legal concepts, a beneficiary of a discretionary trust is not entitled to income or capital of the trust until the trustee exercises their discretion to distribute income or to make an appointment of capital: Commissioner of Stamp Duties (NSW) v. Buckle (1998) 192 CLR 226. A beneficiary of a discretionary trust only has a right to require the trustee to consider whether or not to exercise their discretion. Instead, a beneficiary of a discretionary trust generally has a 'mere expectancy' in the income or capital of a trust and does not have an interest in possession: Gartside v. Inland Revenue Commissioner [1968] AC 553.

68.            However, section 328-440 contains an alternative ultimate economic ownership test for discretionary trusts. Section 328-440 states that for the purposes of paragraph 328-430(1)(c), a transaction does not have the effect of changing the ultimate economic ownership of an asset, or any individual's share of that ultimate economic ownership, if the requirements in that section are satisfied.

69.            Section 328-440 is satisfied if the assets are included in the property of a family trust (as defined in Schedule 2F to the ITAA 1936) either just before or just after the transaction takes / took effect. Additionally, every individual who had the ultimate economic ownership of the asset just before and just after the transfer must be members of the family group (within the meaning of Schedule 2F to the ITAA 1936) relating to the family trust.

70.            The phrase 'ultimate economic ownership' is not defined in the ITAA 1997. However, the Explanatory Memorandum to the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 (the EM) states:

1.29 The ultimate economic owners of an asset at the individuals who, directly or indirectly, beneficially own an asset.

1.30 Ultimate economic ownership of an asset can only be held by natural persons. Therefore, where a company, partnership or trust owns an asset it will be the natural person owners of the interests in these interposed entities that will ultimately benefit economically from that asset.

71.            The taxpayer is a non-fixed trust for the purposes of section 272-70 of Schedule 2F of the ITAA 1936 and has made a family trust election nominating a specified individual, A, under section 272-80 of Schedule 2F to the ITAA 1936. As the assets are the property of the taxpayer immediately before the Proposed Transaction takes effect, this will satisfy the requirement in subparagraph 328-440(a)(i).

72.            Just before the transaction takes effect, the natural persons who have the ultimate economic ownership of the assets of the taxpayer are A and B through their interest in X as trustee of the taxpayer. Just after the Proposed Transaction will take effect A and B will maintain their ultimate economic ownership of the assets as the taxpayer will own 100% of Newco to whom the assets are transferred, thereby satisfying paragraphs 328-440(b) and (c).

73.            Consequently, as the alternative ultimate economic ownership test under section 328-440 will be satisfied, this will satisfy the requirement of paragraph 328-430(1)(c).

Paragraph 328-430(1)(d) - active assets

74.            Each party to the Proposed Transaction (the taxpayer and Newco) are small business entities for the income year during which the transfer is to occur.[1] The requirement in subparagraph 328-430(1)(d)(i) requires the asset to be a CGT asset that is, at the time the transfer takes effect, an active asset.

75.            Paragraph 152-40(1)(a) provides that a tangible or intangible CGT asset is an active asset if you own the asset and it is used, or held ready for use, in a business carried on (whether alone or in partnership) by you, your affiliate or another entity that is connected with you.

76.            Additionally, if the CGT asset is an intangible asset, paragraph 152-40(1)(b) provides that the asset will be an active asset if you own the asset and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate or another entity that is connected with you.

77.            However, certain types of CGT assets are excluded from being active assets under subsection 152-40(4). The types of excluded assets that are relevant to this situation are financial instruments.

78.            The assets being transferred by the taxpayer to Newco are the assets that are used in carrying on the Business. These assets include the plant and equipment, vehicles, stock on hand and the goodwill developed by two generations of Business operators. As these tangible and intangible assets have been used, or are inherently connected with the business, they will be active assets of the taxpayer.

79.            Any CGT asset being transferred under the Proposed Transaction that are specifically excluded from being an active asset under subsection 152-40(4) will not be eligible to be rolled-over under Subdivision 328-G. This will include any financial instruments, such as any loans of the Business.

80.            Therefore, the requirement in subparagraph 328-430(1)(d)(i) will be met.

Paragraph 328-430(1)(e) - residency

81.            Paragraph 328-430(1)(e) requires both the transferor and the transferee to meet the residency requirements outlined in section 328-445.

82.            Section 328-445 contains different types of residency tests for different types of entities. If the entity is a trust, the definition of a resident trust in subsection 995-1(1) requires the trust to be managed and controlled in Australia. The taxpayer is managed and controlled in Australia. If the entity is a company, paragraph 328-445(a) requires a company to be an Australian resident. Newco will be a resident of Australia. This requirement is satisfied in respect of the transferor and transferee.

83.            Consequently, the requirement in paragraph 328-430(1)(e) will be satisfied.

Paragraph 328-430(1)(f) - roll-over choice

84.            Paragraph 328-430(1)(f) requires both the transferor and the transferee to choose to apply the roll-over under Subdivision 328-G in relation to the assets transferred under the transaction.

85.            You have stated that X as trustee for the taxpayer and Newco will choose to apply the roll-over under Subdivision 328-G, so this requirement will be satisfied.

Consequences of the roll-over

86.            Section 328-450 provides that if the transfer of an asset occurs under a transaction to which section 328-430 applies, the transfer of the asset has no direct consequences under the income tax law.

87.            The roll-over remains available even where the business assets that are to be transferred to Newco under the Proposed Transaction subsequently are sold, transferred, upgraded or replaced.

88.            There is no requirement in section 328-430 that the ultimate economic ownership of the asset must be held for a certain period of time. It is noted that the safe harbour rule in section 328-435 does specify a three year, time period in which the ultimate economic ownership of the asset must not change. However, the safe harbour rule is an alternative test to that contained in paragraph 328-430(1)(a) and does not limit that paragraph.

89.            This is confirmed in LCR 2016/3 at paragraphs 77-80, in particular paragraph 78 which states:

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

Depreciating Assets

90.            The note to subsection 328-430(1) states that the roll-over of a depreciating asset transferred in the restructuring of a small business is addressed in item 8 of the table in subsection 40-340(1).

91.            Section 40-340 outlines the circumstances in which roll-over relief is available where specified balancing adjustment events have occurred for a depreciating asset.

92.            Roll-over relief is available under section 40-340 if there is a balancing adjustment event because an entity disposes of a depreciating asset to another entity, and the disposal involves a CGT event. Additionally, one of the conditions listed in the table in subsection 40-340 must be satisfied.

93.            Item 8 of the table in subsection 40-340(1) outlines the consequences where there is a transfer of an asset under the small business restructure roll-over. In this situation, roll-over relief is available under section 40-340 if a roll-over under Subdivision 328-G would be available in relation to the asset if the asset were not a depreciating asset.

94.            Note that the Commissioner has exercised his remedial power in section

95.            370-5 of Schedule 1 to Taxation Administration Act 1953 to modify the operation of section 40-340. The effect of this modification is to ensure that where the restructure otherwise satisfies the conditions for roll-over under Subdivision 328-G, the transfer of depreciating assets will have no direct income tax consequences.

96.            Consequently, the transfer of any depreciating assets under the Proposed Transaction will also not have any direct consequences under the income tax law.

[1] Subparagraph 328-430(1)(b)(i)

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