Edited version of private advice

Authorisation Number: 1051795536589

Date of advice: 12 January 2021

Ruling

Subject: Section 328-4 rollover

Question 1

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

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The X Trust

The X Trust is a discretionary trust settled and established by trust deed on X.

The trustee of the X Trust is X Pty Ltd (ACN X).

Shares in X Pty Ltd are held by Mr X and his spouse, Mrs X.

Mr X and Mrs X and their children are primary beneficiaries of the X and X and X are the appointors of that Trust.

The trust deed for the X Trust provides for a wide range of general beneficiaries, which includes, inter alia, the children of the primary beneficiaries, their spouses and remoter issue.

A family trust election was made by the X with effect from the X income year in which Mr X was named as the test individual.

The trust deed for the X provides the trustee with a range of other business and investment powers.

The X Trust was established to purchase land and carry on business activities pursuant to clause 12 of the trust deed.

X Farm

The original X Farm block was acquired by the X in X with an additional two parcels of land added in X (X Block) and X (X Park).

In approximately X the X Trust acquired X ML of water entitlements in the Midlands Irrigation Scheme for the benefit of the X Farm.

This land and the water entitlements are referred to as the "X Farm".

The X Trust has also acquired the properties known as X (X) and X (X). These farms are located in different parts of X.

All the land was acquired by the trustee to produce income for the trust by establishing multiple business enterprises that utilise the land to its best profit‐making potential.

X Farm comprises of approximately X hectares which is used for the following purposes:

•         X plantations - approx. X hectares

•         X plantations - approx. X hectares

•         Native forest (used to generate carbon credits) - approx. X hectares

•         Covenants - approx. 200 hectares

•         Grazing land ‐ balance

The X is comprised of a number of separate titles that are managed having regard to the nature of the land. The business activities extend across the various titles comprising the property.

From the time it was acquired up until 30 June 20XX all business activities on the X Farm were conducted by the X Trust.

The X Trust has at all times conducted a business of X operations and carbon credit farming on those areas of land covered by the X plantations, X plantations and native forest.

With the exception of one title of X Hectares and known as "X", the land mass, and the resultant income, from the balance of the X Farm is utilised for grazing activities. "X" is, however, used mainly for forestry operations.

Grazing area

From 1 July 20XX to 30 June 20XX, the grazing area of X Farm was made available on an informal basis to a partnership, known as X (ABN X), consisting of:

•         X Pty Ltd - 60%; and

•         X Trust (X atf) ‐ 40%.

X used the land, along with other land it also leased, to conduct a large scale X grazing and fine wool operation - turning over circa $X per annum.

X Trust

X Trust was constituted by way of a trust deed dated X.

The Primary Beneficiaries of the X Trust are Mrs X and Mr X.

The trust deed provides for a wide range of general beneficiaries, which includes, inter alia, Mr X and Mrs X, their children, their spouses and remoter issue.

Mrs X is the daughter of Mr X and Mrs X and Mr X is her spouse.

The trustee of the X Trust is X Pty Ltd.

From 1 July 20XX, X Trust leased the grazing area of X Farm from the X Trust.

From all times since 1 July 20XX, X Trust used the leased land in order to undertake a primary production business consisting of X trading and X. The annual turnover of the X Trust from these operations has always been circa $X.

The following received more than 40% of the distribution of income or capital from the X Trust in the years noted:

•         20XX - Mr X

•         20XX - Mrs X

•         20XX - Mrs X

The following received more than 40% of the distribution of income or capital from the X in the years noted:

•         20XX - Each of Mr X and Mrs X

•         20XX - Mrs X

Other farms

The X Trust also owns significant farming lands in addition to those under consideration in the proposed transaction.

These farms include a large tract of land on which the X is situated. This land is part of the "X Farm" - which will be retained by the Trust.

The X is operated by an unrelated third party on land leased from X Trust - and consists of X.

Proposed Transaction

In recognition of the commercial risks associated with the operation of different farming businesses of the X (X and the X properties and their businesses and the X Farm and its leasing and forestry business), where each Farming property is exposed to the risk of the farming operations, it is proposed that:

•         X Trust transfers the X Farm to two new discretionary trusts during the 2021 financial year.

•         This transfer will be subject to the ongoing leasing of the farming property to X Trust and the continuation of the X business by the new land trusts.

Assumptions

The new discretionary trusts will be controlled by Mr X for the purposes of section 328‐125(3) in that:

•         The trustee of the new discretionary trusts will be a new company of which Mr X and Mrs X will be the shareholders and directors.

•         The beneficiaries of each new discretionary trust will be named and will be relatives of Mr X - including X.

•         The appointors of each new discretionary trust will be Mr X and Mrs X or their survivors

Each of the titles that constitute the X Farm will continue to be an active asset, used in the business conducted by either the new discretionary trusts (in the case of X and/or X Trust (in respect of the balance of the property).

The Trustee of the new discretionary trusts will:

•         Make a family trust election in which the specified test individual will be Mr X;

•         In the event the trust has net income for the year ended 30 June 20XX, the Trustee shall pay or apply to the benefit of each of Mr X and Mrs X at least 40% or more of income or capital during the year ended 30 June 20XX; or

In the event the trust has a tax loss, or no net income for the year ended 30 June 20XX, make a nomination pursuant to section 152‐78 (which extends to section 328‐125 for current purposes) in respect of (at least) Mr X and Mrs X as being controllers of the trust for the income year.

The new discretionary trusts, X Trust and the X Trust will all be non‐fixed trusts which are family trusts having made a Family Trust election in respect of the same test induvial and of which all individual beneficiaries are part of the same family group.

The aggregated turnover for the purposes of Division 328 ITAA 1997 of each new discretionary trust (including X Trust, X Trust and all other connected entities and affiliates) is more than $XXX but less than $XXX for the year ended 30 June 20XX.

The Trustee(s) of the new discretionary trusts will be Australian residents.

The X Trust (Transferor) and the two new discretionary trusts (Transferees) will each choose to apply the small business restructure rollover (SBRR).

Relevant legislative provisions

Income Tax Assessment Act 1997 (Cth) Subdivision 328‐G

Income Tax Assessment Act 1997 (Cth) Section 328‐110

Income Tax Assessment Act 1997 (Cth) Section 328‐430

Income Tax Assessment Act 1997 (Cth) Section 328‐435

Income Tax Assessment Act 1997 (Cth) Section 328‐440

Income Tax Assessment Act 1997 (Cth) Section 152‐40

Income Tax Assessment Act 1997 (Cth) Section 152‐78

Income Tax Assessment Act 1936 Schedule 2F

Income Tax Assessment Act 1936 Section 272‐75

Reasons for Decision

These reasons for decision accompany the Notice of private ruling for The Trustee of the X Trust (the taxpayer).

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Is the roll‐over available to the taxpayer in accordance with section 328‐430 of the Income Tax

Assessment Act 1997 (ITAA 1997)?

Summary

Yes, the rollover will be available to the taxpayer.

Detailed reasoning

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.

There are six basic conditions which must be met to qualify for rollover relief under subdivision 328‐G which are set out in section 328‐430(1):

(1) 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 would be satisfied in that income year if paragraph 152-10(1AA)(b) were disregarded; 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.

1. Genuine restructure of an ongoing business ‐ section 328‐430(1)(a)

The transfer of the asset must be, or be part of, a genuine restructure of an ongoing business.

The ongoing business in this respect is:

•         The X business conducted on the X title; and

•         The X business conducted by X Trust on the balance of the property.

The transfer of the business and the associated land and water entitlements is part of a genuine business restructure in that:

•         The business activities of the X Trusts has expanded considerably since the relevant farms where acquired - through the introduction of the X lease, substantial increases in productivity via irrigation development and the establishment of plantations. This results in an entity of substantial diversity and complexity.

•         The restructure enables legal segregation of these separate business activities and assets, and geographical farming businesses, reducing the contagion risk of litigation against one arm of the existing X Trust assets from the others.

•         For instance, the activities carried on by the trustees include significant fire risk spreading to neighbouring properties and towns (this risk was emphasised during the 2019 Tasmanian fires which impacted a number of the Group's properties) and also the use of potent chemicals, environmental considerations and in the case of the wind‐farm activities, significant third party access and infrastructure. Isolating the distinct businesses activities will limit the potential loss associated with any claim.

•         Further, the restructure enables the individual business units to make their own risk-based business decisions without the need to consider any potential adverse impact on other business activities.

•         Additionally, the various properties, whilst all in the X, are considerably diverse in terms of their physical location, topography and the types of farming that the properties could be best applied to. The current scale of operations of X Trust is that the various business units should run independently of each other.

•         The restructure enables operational segregation and management. The X Farm will be under the operational management of X and the remaining X Trust assets will be under the management of other family members (namely Mr X who manages the X lease and X who manages the pastoral leases on the remaining X land). X's experience and educational background (Bachelor of Agricultural Science), enables her to specialise in the grazing and horticultural opportunities that best suits the X Farm.

•         Confining the assets to be used by each business provides operational and financial independence required in order to invoke separate management.

•         The farming units will generally be autonomous - and are being conducted as financially distinct businesses. Cross use of assets across business units is deliberately minimised - however, assets owned by one entity but used by another, including funding advances, will be subject to commercial charges.

•         The restructure also enables more flexibility with capital and debt structuring. Specifically, it provides an increased capacity for "ring fenced" borrowings against those assets which are most directly related to the relative business.

Therefore, the transfer of assets from the X Trust to the two new discretionary trusts is a genuine restructure for the purposes of section 328‐430(1)(a).

2. Small business entity requirement - section 328‐430(1)(b)(i) or (iii)

A small business entity - subparagraph 328‐430(b)(i)

Each party to the transfer is an entity....which...in the year of transfer...is a small business entity for the income year...

Prior to the proposed transfer, part of the X Farm is used in a X farming business and a land rental business conducted by the landowner, namely the X Trust. These activities amount to a business.

X Trust is considered to be carrying on a business:

The businesses being conducted by X Trust (as transferor) with respect to the CGT assets that are a part of the proposed transaction, will continue to be conducted in the same manner by the two new discretionary trusts, (as transferees) to the transaction.

As the aggregated turnover of the transferee, the transferors and other controlled or commonly controlled entities (the group) is less than $XXX, then each party to the transaction is a small business entity pursuant to section 328‐430(1)(b).

An entity which is connected with an entity that is a small business entity - subparagraph 328‐430(b)(iii)

Sub‐paragraph 328‐430(1)(b)(iii) states that roll‐over relief is available if each party to the transfer is connected with an entity that is a small business entity for that income year.

Section 328‐125(1) defines entities as being connected with each other where, inter alia, they are controlled by the same third entity.

Relevantly, to the extent to which a party to the proposed transfer, is not an entity which is a small business entity in its own right, it will nonetheless be an entity which is connected with an entity that is a small business entity, namely the X Trust. They will be connected where they are controlled by the same entity.

As noted above, the X Trust uses the land for the purpose of conducting its substantial primary production business and the X Trust is controlled by Mr X.

Section 328‐125(4) includes in the persons who control a discretionary trust, any person who, in any of the last 4 years of income before that year, received at least 40% of the total amount of income or capital paid or set aside by the Trustee for that year.

On this basis for the year ended 30 June 20XX, the proposed transferor of the land (the X Trust), is controlled by Mr X (the third entity). Similarly, the X Trust is controlled by the same third entity, as Mr X received in excess of 40% of the net income of the trusts, for the year ended 30 June 20XX.

The X Trust is a small business entity as it carries on a primary production business and has an aggregated turnover of less than $XXX.

Therefore, as the X Trust (transferor) is connected with the X Trust, which is a small business entity, it follows that it is a party to the transaction to which section 328‐430(1)(b)(iii) applies.

The proposed transferee of the X Farm will be the two newly formed discretionary trusts. The first income year for the newly formed discretionary trusts will be the year ended 30 June 20XX, which is the year in which it is proposed that the land transfer will occur.

Subsection 328‐125(3) prescribes that a discretionary trust is controlled by an entity if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its *affiliates, or the first entity together with its affiliates.

In this case, the newly formed land trusts will be controlled by Mr X, along with his associate, Mrs X as:

•         The trustee of the new discretionary trusts will be a new company of which Mr X and Mrs X will be the shareholders and directors.

•         The beneficiaries of each new discretionary trust will be named and will be relatives of Mr X - including X.

•         The appointors of each new discretionary trust will be Mr X and Mrs X or their survivors.

It is also noted that it is expected for the year ended 30 June 2021 that the X Trust, along with each the new discretionary trusts will:

•         make 40% or more of any distribution of income or capital to Mrs X during the year ended 30 June 20XX or where there is no income or capital to distribute

•         make a nomination in relation to the year ending 30 June 20XX pursuant to section 152‐78 (which extends to section 328‐125 for current purposes) in favour of (at least) Mr X and Mrs X.

•         Hence, the newly formed trusts (as transferees' to the proposed transaction) will be connected with X Trust as they are controlled by the same third entity, being Mr X.

•         Accordingly, the newly formed trusts, through them being "connected with" X Trust (which is a small business entity), satisfies the test in paragraph 328‐430(1)(b)(iii).

3. No change in the ultimate economic ownership - section 328‐430(1)(c)

There is no change to the underlying economic ownership of the assets pursuant to Section 328‐440 ITAA 1997 which applies to discretionary trusts.

Both the transferor and the proposed transferees are non‐fixed trusts for the purposes of Section 270‐20 of Schedule 2F.

The transferor has, and the transferees will prior to the proposed transaction, make a family trust election in respect of the same test individual, namely Mr X.

X Farm is, prior to the transfer, owned by the trustees of the X Trust, a Family Trust, immediately before the proposed restructure takes place. Therefore paragraph 328‐440(a)(i) is satisfied.

The X Farm will be included in the property of the newly formed trusts. As each of these trusts will be Family Trusts, paragraph 328‐440(a)(ii) will be satisfied.

As the new trusts can only make distributions to persons who are relatives of the Test Individuals - and hence to persons who are in the test individual's Family Group, and as the new trusts and the X Trust have the same test individual section 328‐440(b) and 328‐440(c) will be satisfied.

4. Asset being transferred is an active asset - section 328‐430(d)

The test of whether or not an asset is an active asset is a function of which sub paragraph (i) or (iii) in subsection 328‐430(b) is met in regard to the parties to the transfer.

It is therefore necessary to consider the active asset test against either of these subparagraphs.

s328‐430(d)(i) ‐ where subparagraph 328‐430b(i) applies

Prior to the proposed transfer, the X title (one CGT asset subject to the transaction) is used predominantly in a X farming business conducted by the landowner, namely the X Trust.

The business being conducted by X Trust will continue to be conducted by the transferee. On this basis, both the transferor and the transferee satisfy the active asset requirement prescribed by sub‐paragraph 328‐430(1)(d)(i) with regards to the X land.

s328‐430(d)(ii) ‐ where subparagraph 328‐430b(iii) applies

The balance of the land is currently, and will continue to be used, by X Trust.

The X Trust, the proposed new trusts and X Trust are connected entities as they have all made family trust elections in respect of Mr X and they are all controlled by him.

In this instance, to the extent to which the asset is used other than by its owner either before or after the transfer, the asset must be (as per sub‐paragraph 328‐430(1)(d)ii) - as amended by No 64 of 2020, Section 3 and Schedule 3, item 104)

...an active asset in relation to which subsection 152‐10(1A) is satisfied in that income year; or would be satisfied in that income year if paragraph 152‐10(1AA)(b) were disregarded; or

The relevant tests in 152‐10(1A) requires the entity which uses the asset to be a CGT Small Business Entity for the income year (152‐10(1A)(i)). By virtue of section 152‐10(1AA), this is a reference to an entity that, inter alia, has an aggregated turnover of less than $XX.

However, for the purposes of applying the roll‐over provisions in Division 328‐G, section 152‐10(1AA)(b), is disregarded, such that the relevant threshold for determining aggregated turnover is $XXX, not $XX. The aggregated turnover for the group is under $XXX.

5. Residency requirement - section 328‐430(1)(e)

Both the transferees and transferors are Australian resident trusts for tax purposes.

6. Choice section 328‐430(1)(f)

Both the transferee and transferor will choose to apply a rollover pursuant to subdivision 328‐G in relation to the assets transferred.

7. Conclusion

Therefore, the six basic conditions set out in section 328‐430(1) have been met by the taxpayer in order for it to qualify for rollover relief under subdivision 328‐G.

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