Edited version of private advice

Authorisation Number: 1051821774644

Date of advice: 11 May 2021

Ruling

Subject: Transfer of assets under a restructure of a small business

Question

Does the proposed transfer of land from individual taxpayer to new discretionary trusts qualify for relief under subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period periods:

Financial year ending 30 June 20XX

Financial year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You do not carry on a business individually.

You own interest in various parcels of land (the Land).

The Land has been used in a primary production business since the date of purchase.

The primary production business has operated through a discretionary trust (the Trading trust).

You are a joint trustee of the Trading trust along with your spouse.

You and your spouse are appointers of the Trading trust.

You and your spouse are beneficiaries of the Trading trust.

The Trading trust has a family trust election in place with you as the specified individual.

The business carried on by the Trading trust is solely for the benefit of you and your spouse and your family.

The Trading trust is financially dependent on the Land.

You and your spouse are financially dependent on the Trading trust business and act in concert to ensure that Trading trust is run in such a way as to meet your financial requirements.

There is no formal lease in place with the Trading trust in respect to the use of the Land due to the close intertwined relationship between you and the Trading trust.

The aggregated turnover for the trading trust is under $10 million for the current and foreseeable future financial years.

The Trading trust will be a small business entity as per the meaning in s 328-110 of the ITAA 1997 in the ruling years.

Proposed restructure

The Land will be transferred to Discretionary trusts (Holding trusts) with a corporate trustee.

Each Holding trust will have a family trust election in place in accordance with s 272-80 of Schedule 2F to the ITAA 1936, with you as the specified individual.

You and your family will be beneficiaries of the Holding trusts.

You, your spouse and child will be the joint appointors of the Holding trusts.

You, your spouse and child will be the directors of the corporate trustee of the Holding trusts.

Family member X will be the secretary of the corporate trustee of the Holding trusts.

All entities party to the restructure are Australian Residents for tax purposes.

The Land will continue to be used by the Trading trust in the carrying on of its business activities.

The purpose of the restructure is to:

•         provide protection for assets that are integral to the running of the business

•         enable improved financing availability to assist in the operation and growth of the business

•         reflect current land holding practices.

Both you (the transferor) and the Discretionary trusts (the transferees) will choose to apply the roll-over in relation to the Land transferred under the transactions.

Relevant legislative provisions

Section 328-110 of the Income Tax Assessment Act 1997

Section 328-125 of the Income Tax Assessment Act 1997

Section 328-130 of the Income Tax Assessment Act 1997

Paragraph 152-10(1AA)(b) of the Income Tax Assessment Act 1997

Subsection 152-10(1A) of the Income Tax Assessment Act 1997

Section 328-430 of the Income Tax Assessment Act 1997

Section 328-440 of the Income Tax Assessment Act 1997

Section 328-460 of the Income Tax Assessment Act 1997

Section 995-1 of the Income Tax Assessment Act 1997

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

Section 272-72 of Schedule 2F of the Income Tax Assessment Act 1936

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

Reasons for decision

Summary

The transfer of land and water licences from the individual taxpayer to the new discretionary trusts qualifies for relief under subdivision 328-G of the ITAA 1997 as the relevant requirements have been satisfied under the proposed transactions.

Detailed reasoning

The rollover under Subdivision 328-G of the ITAA 1997 is designed to facilitate flexibility for owners of small business entities to restructure their business, and the way their business assets are held, while disregarding the tax gains and losses that would otherwise arise.

To be eligible for the rollover several conditions under section 328-430 of the ITAA 1997 must be satisfied.

Section 328-430 of the ITAA 1997 When a roll-over is available

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.

Genuine restructure - 328-430(1)(a) of the ITAA 1997

Paragraph 328-430(1)(a) of the ITAA 1997 requires that the transaction is, or is part of, a genuine restructure of an ongoing business.

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.

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

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.

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.

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

Further that 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.

Application to your circumstances

The Commissioner considers that the proposed transactions are an authentic restructure of the small business that will improve asset protection and enhance financing options. The resultant structure reflects current land holding practices. You and your spouse will continue to operate the primary production business using the Land through a different legal structure.

As the transfers are considered to be part of a genuine restructure of an ongoing business, paragraph 328-430(1)(a) of the ITAA 1997 is satisfied.

Small business entities, affiliates or connected entities - 328-430(1)(b) of the ITAA 1997

Subparagraph 328-430(1)(b) of the ITAA 1997 requires that each party to the transfer is an entity to which 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.

Subsection 328-125(1) of the ITAA 1997 provides that 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.

An entity controls a discretionary trust if the trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the entity, its affiliates, or the first entity together with its affiliates (subsection 328-125(3) of the ITAA 1997).

Subsection 328-130(1) of the ITAA 1997 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 a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share (subsection 328-130(2) of the ITAA 1997).

The Full High Court, in FC of T v. Peabody (1994) 181 CLR 359; 94 ATC 4663; (1994) 28 ATR 344, held that the phrase 'might reasonably be expected' requires more than a possibility.

An entity, the first entity, 'could reasonably be expected' to act in accordance with another entity's, the second entity's, wishes where the second entity has a relationship of control or influence over the first entity. Such a relationship can be evidenced by the entities' behaviours and the presence of any influential relationships, such as:

(a) family or other close personal relationships

(b) financial relationships and dependencies

(c) relationships created through links such as common directors, partners or shareholders.

Application to your circumstances

Due to the influential family relationships and financial dependencies that exist, for the purpose of applying the small business restructure under 328-G of the ITAA 1997, the Commissioner considers that your spouse is an affiliate of yours (subsection 328-130(1) of the ITAA 1997).

It is accepted that you, together with your affiliate (your spouse) control the Trading trust (subsection 328-125(3) of the ITAA 1997) and are therefor connected to it (paragraph 328-125(1)(a) of the ITAA 1997). In this case the trustee of the Trading either acts, or might reasonably be expected to act, in accordance with your directions or wishes. This is on the basis that you and your spouse:

•         provide the Land to the Trading trust for it to utilise to produce its income

•         are joint trustees of the Trading trust

•         are the primary beneficiaries of the Trading trust and along with your family members have benifited from it.

•         are the appointers of the Trading trust.

Under the proposed transactions you will be a director of the corporate trustee for the Holding trust along with your spouse and child. The Commissioner considers that it is reasonable to expect that the corporate trustees for the Holding trusts will act in accordance with the directions of you and your affiliate (your spouse). You will therefore control the Holding trusts (section 328-125(3) of the ITAA 1997) and be connected to them (paragraph 328-125(1)(a) of the ITAA 1997).

As both the Holding trusts and the Trading trust will be controlled by you and your affiliate (your spouse), the Holding trusts will also be connected to the Trading trust (paragraph 328-125-125(1)(b) of the ITAA 1997).

As you (the transferor) and each of the Holding trusts (the transferees) will be connected to a small business entity (the Trading Trust) in the income year of the proposed transaction, subparagraph 328-430(1)(b)(iii) of the ITAA 1997 will be satisfied.

Ultimate economic ownership - 328-430(1)(c) of the ITAA 1997

Paragraph 328-430(1)(c) of the ITAA 1997 requires that the transaction does not materially change the ultimate economic ownership of the asset. The proposal does not meet this ultimate economic ownership test as the current ultimate economic ownership will not be maintained after the transfer to the Holding trusts.

An alternative economic test is available for discretionary trusts with family trust elections in place under section 328-440 of the ITAA 1997:

Section 328-440 Provides that 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;

(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 in paragraph (a); 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.

Application to your circumstances

Section 328-440 is satisfied by the proposed transactions as:

•         just after the transactions, the Land will be included in the property of the Holding trusts which will be non-fixed trusts that will be family trusts; and

•         every individual who had the ultimate economic ownership of the land and water licence assets just before the transfer is a member of the family group (within the meaning of Schedule 2F to the ITAA 1936) relating to the family trusts; and

•         every individual who, just after the transfer takes effect, will have the ultimate economic ownership of the land and water licence assets will be a member of the same family group.

As section 328-440 of the ITAA 1997 is satisfied, paragraph 328-430(1)(c) of the ITAA 1997 is also satisfied under the proposed arrangement.

Active asset - 328-430(1)(d) of the ITAA 1997

As subparagraph 328-430(1)(b)(iii) of the ITAA 1997 applies, the assets will need to be CGT assets (other than a depreciating asset) and 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.

Paragraph 152-10(1AA)(b) of the ITAA 1997 serves to disregard the reduction in the turnover threshold to $2 million for the purposes of the small business restructure test requirements. For the purpose of this test the aggregated turnover threshold will be $10 million for the income year.

Subsection 152-10(1A) of the ITAA 1997 allows access to the small business conditions where passively held assets are held by taxpayers who are connected to a small business entity. The provision is set out as follows:

Subsection 152-10(1A)

The conditions in this subsection are satisfied in relation to the *CGT asset in the income year if:

(a) your *affiliate, or an entity that is *connected with you, is a *CGT small business entity for the income year; and

(b) you do not carry on a *business in the income year (other than in partnership); and

(c) if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and

(d) in any case - the CGT small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b) ) in relation to the CGT asset.

Application to your circumstances

For the proposed transactions section 152-10(1A) of the ITAA 1997 will be satisfied in relation to the CGT assets (land and water licences), as, in the income year in which the transaction will occur:

•         an entity connected with you (the Trading trust) will be a small business entity for the income year; and

•         you do not carry on a business in the income year (other than in partnership); and

•         the CGT asset (the Land) is not an interest in an asset of a Partnership business; and

•         the Trading trust will carry on the business in relation to the CGT assets (the Land).

As subsection 152-10(1A) of the ITAA 1997 is satisfied, therefore for the purposes of the rollover requirements, subparagraph 328-430(1)(b)(ii) of the ITAA 1997 is satisfied.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).