Edited version of private advice

Authorisation Number: 1051761889615

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Date of advice: 7 October 2020

Ruling

Subject: Business restructure

Question

Will paragraph 328-430(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) be satisfied for the proposed restructure?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

During the income year ended 30 June 20XX

Relevant facts and circumstances

The Company is a proprietary limited company and is an Australian tax resident.

Within the existing company structure, The Company effectively runs two businesses. The first of these is a service business. However, in addition to that business, the Company has developed another product and runs the 'Product' business.

The Product is branded independently from the Company due to the different product offerings and customer profile to the Company's core business. The Product business name is separately registered.

The Product business operates independently of the traditional business of the Company. Product business assets are used to carry on this business.

The Product business unit utilises only a small amount of fixed assets for administration. In addition to that, the business assets of the Product business include in-house intellectual property development costs for the Product.

All shares in the Company are legally owned by the Company Z as trustee for the Family Trust.

The Director and Public Officer of the Company is Individual B.

The Family Trust is an Australian tax resident and has made a family trust election in 2020 in which Individual A has been nominated as Test Individual under that election.

The appointors of the Family Trust are Individual A and Individual B.

The beneficiaries of the Family Trust are Individual A and Individual B and their children. Individual A and Individual B are the primary beneficiaries.

The shareholders of the Company are seeking to transfer business assets used in the Product business to a new company, for the purpose of separating the two core businesses and business assets, thus improving the business structure, allowing for future expansion and growth of the separate business offerings, and mitigating risk with respect to the operation of the business.

Under the proposed restructure, the existing Product business assets will be transferred from the Company to a new trading company (Company P) which will be wholly owned by the Family Trust. Company Z will remain as the corporate trustee of which Individual A is the sole shareholder and sole director.

All shares in Company P are legally owned by Company Z as trustee for the Family Trust.

The Director and Public Officer of Company P is Individual B.

Under the proposed restructure, some fixed assets will be transferred from the Company to Company P.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 328-G.

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

Income Tax Assessment Act 1997 section 328-440

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

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

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

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

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

Reasons for decision

Summary

Paragraph 328-430(1)(c) of the ITAA 1997 will be satisfied for the proposed restructure.

Detailed reasoning

Subdivision 328-G of the ITAA 1997 provides tax-neutral consequences for a small business entity that restructures the ownership of the assets of the business, without changing the ultimate economic ownership of the assets.

Ultimate economic ownership - discretionary trusts

For the restructure roll-over provided for by Subdivision 328-G to be available, there is a requirement that the restructure does not have the effect of materially changing which individual has, or which individuals have, the ultimate economic ownership of the business assets (paragraph 328-430(1)(c) of the ITAA 1997).

Paragraph 328-430(1)(c) of the ITAA 1997 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.

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. Generally, a beneficiary of a discretionary trust 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.

However, section 328-440 of the ITAA 1997 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.

Section 328-440 Ultimate economic ownership - discretionary trusts

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:

(a) either or both of the following applies:

(i) just before the transaction took effect, the asset was included in the property of a non-fixed trust that was a family trust; or

(ii) just after the transaction takes effect, the asset is included in the property of a non-fixed trust that is a family trust; and

(b) every individual who, just before the transfer took effect, had the ultimate economic ownership of the asset was a member of the family group (within the meaning of Schedule 2F to the Income Tax Assessment Act 1936) relating to the trust or trusts referred to above; and

(c) every individual who, just after the transfer takes effect, has the ultimate economic ownership of the asset is a member of that family group.

Section 328-440 is satisfied if the assets are included in the property of a family trust, as defined in Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936), either just before or just after the transaction takes 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.

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.

The Family Trust is a non-fixed trust for the purposes of section 272-70 of Schedule 2F of the ITAA 1936 and a family trust election nominating Individual A as the test individual has been made under section 272-80 of Schedule 2F to the ITAA 1936. As the assets are the property of Family Trust immediately before the proposed restructure takes effect, this will satisfy the requirement in paragraph 328-440(a)(i).

Just before the proposed restructure and the resulting transfer of assets takes effect, the individual who has the ultimate economic ownership of the assets of Family Trust is Individual A. Just after the proposed restructure and the transfer of assets will take effect, the same individual will have the ultimate economic ownership of the assets as the sole shareholder and sole director of Company Z, which will remain as the corporate trustee of the Family Trust, thereby satisfying subsections 328-440(b) and (c).

Consequently, as the alternative ultimate economic ownership test under section 328-440 of the ITAA 1997 will be satisfied, this will satisfy the requirement of paragraph 328-430(1)(c) of the ITAA 1997.

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