Edited version of private advice

Authorisation Number: 1052204242582

Date of advice: 23 January 2024

Ruling

Subject: Small business restructure roll-over - transfer of shares

Question

Is a roll-over available under section 328-430 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the transfer of your shares to the family trust?

Answer

No.

This private ruling applies for the following period:

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The company was incorporated in 20YY.

You are the sole director and shareholder of the company and have been since the company was incorporated.

The company is a small business entity as defined by section 328-110 of the ITAA 1997.

The company commenced trading during the year ended DD MM 20YY.

Both you and the company are residents of Australia for tax purposes.

Over the past X years, the business has steadily grown.

You are concerned that the current structure can no longer accommodate the growth which has been evident over the past X years.

You are also concerned that you are exposed to risk outside of the company and your shares will also be at risk.

You plan to transfer your shares to a discretionary family trust. The trustee of the family trust will be company B.

The family trust will have a family trust election in place and you will be the test individual.

You and the family trust will both choose to apply a roll-over under Subdivision 328-G of the ITAA 1997 in relation to the planned transfer.

Reasons for decision

Subsection 328-430(1) of the ITAA 1997 outlines the conditions to be met for the roll-over relief to be available:

a)    The transfer of the asset is, or is part of, a genuine restructure of an ongoing business

b)    Each party to the transfer is either a small business entity, or affiliate of or connected with a small business entity, or a partner in a partnership that is a small business entity

c)    There is no material change in the ultimate economic ownership of the transferred asset

d)    The asset being transferred is an active asset of the relevant small business entity at the time of the transfer

e)    Both the transferor and each transferee are residents of Australia, and

f)    Both the transferor and each transferee choose to apply the roll-over.

All conditions need to be met for the roll-over to be applied.

Active asset

Paragraph 328-430(1)(d) sets the requirement that the asset to be transferred 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

Subsection 152-10(1A) of the ITAA 1997 states that 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

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

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.

Law Companion Ruling 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters (LCR 2016/3) sets out the following example:

Example 11: Active assets

Facts

97. Di provides accommodation services for young travellers in an inner-Melbourne suburb. She operates the business through a company, Fair Dinkum Backpackers Co, of which she is the sole director and shareholder.

98. Di decides to reorganise the ownership interest in her business by interposing a non-fixed trust between herself and the company. On 1 August 2016, Di transfers all of her shares to the Trustee of a newly-settled discretionary trust, where she is one of the beneficiaries. The family trust election is made with herself as the primary individual.

99. Fair Dinkum Backpackers Co is a 'small business entity' for the 2017 income year. Di is not a small business entity but is connected with Fair Dinkum Backpackers Co.

Relevant considerations

100. Fair Dinkum Backpackers Co is not a party to the transfer. The shares are not active assets of a small business entity.

101. Di and the Trustee are parties to the transfer and connected with Fair Dinkum Backpackers Co. However, the transferred shares are not active assets used, or held ready for use, by Fair Dinkum Backpackers Co in the course of carrying on its business, nor are they inherently connected with that business.

Conclusion

102. Consequently, the SBRR is not available and Di would need to consider the capital gains tax position from the disposal of her shares.

Application to your circumstances

In this case, you intend to transfer the shares you hold in the company to a family trust. The company is not a party to the transfer and the shares are therefore not active assets of a small business entity.

You and the trustee of the family trust are parties to the transfer and connected with the company. Therefore subparagraph 328-430(1)(b)(ii) of the ITAA 1997 is satisfied. To meet the conditions of the restructure roll-over the shares must satisfy subsection 152-10(1A) of the ITAA 1997 in accordance with subparagraph 328-430(d)(ii) of the ITAA 1997.

In this case the transferred shares are not active assets used, or held ready for use, by the company in the course of carrying on its business. Further they are not inherently connected with that business. Therefore we do not consider the proposed transaction can satisfy subsection 152-10(1A) of the ITAA 1997 and consequently sub-paragraph 328-430(1)(d)(ii) of the ITAA 1997. Therefore, you are not entitled to apply the small business restructure rollover.

This conclusion is supported by example 11 from LCR 2016/3 set out above.

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