Edited version of private advice

Authorisation Number: 1052301310567

Date of advice: 10 September 2024

Ruling

Subject: Subdivision 328-G transfer of land - rollover relief

Question

Does the proposed transfer of land from the Applicant to 2 new discretionary trusts qualify for rollover relief under Subdivision 328-G of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer

Yes

This ruling applies for the following period:

DD MM YYYY to DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

Background information

The Applicant in this application is a discretionary trust.

A family trust election was made by the Applicant, nominating Individual A as the test individual.

All distributions of income of the Applicant for at least the past 5 years have been made solely (i.e. 100%) to Individual A.

The Applicant has an interposed entity election in place with the Trading Trust.

The Applicant own land located in XXX under various titles; details are provided.

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

The business was carried on by a Partnership which the Trading Trust has 50% interest. Individual A and Individual A's spouse each has a 25% interest.

The applicant submitted that Individual A's spouse acts in accordance with Individual A's discretion, wishes and in concert with Individual A in relation to the affairs of the business.

Individual and Individual A's spouse receive 50% of the net income of the Partnership.

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

Proposed restructure

The land owned by the Applicant will be transferred to 2 new discretionary trusts (transferees) with corporate trustees.

Under the transaction, the Applicant is disposing of land it owns.

The discretionary trusts established to hold the land will have a family trust election in place with individual A named as the test individual.

Individual A will be the appointor of the new discretionary trusts. Individual A and Individual A's family will be beneficiaries of the new discretionary trusts.

Individual A will also be both director and shareholder of the trustee companies of the new discretionary trusts.

The Applicant provided detailed information regarding to the reasons for the proposed restructure.

All entities to the restructure are Australian residents for tax purposes.

The land will continue to be used by the Partnership in the carrying on of its business activities.

Both the transferor and transferee will choose to apply the roll-over in relation to the assets transferred under the transactions.

Information provided

You have provided a number of documents containing detailed information in relation to the taxpayers' private ruling application, including:

•                     Private Binding Ruling ('PBR') Application, dated DD MM YYYY

We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 328-G

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 328-430

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)(c)

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

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 328-435(a)

Income Tax Assessment Act 1997 section 328-440

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

Reasons for decision

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

SUMMARY

The proposed transfer of land from the Applicant to the new discretionary trusts will qualify for rollover relief under Subdivision 328-G as the facts of the case meet all the conditions as detailed in Subdivision 328-G.

Detailed reasoning

EXPLANATION OF THE LEGISLATION

Restructures of small businesses

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.

Section 328-430 explains the conditions that must be satisfied when, under a transaction, an entity (the 'transferor'), transfers an asset to one or more other entities (the 'transferees'), for a rollover to be available.

Subsection 328-430(1) provides that:

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.

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 Transactions are not either of these types of entities, subsection 328-430(2) does not apply.

Paragraph 328-430(1)(a) - genuine restructure of an ongoing business

Paragraph 328-430(1)(a) 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 provides guidance of the Commissioner's view on whether a transaction will be part of a 'genuine restructure of an ongoing business'.

The Commissioner's view in LCR 2016/3 is 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.

Paragraph 7 of LCR 2016/3 outlines the following features that the Commissioner accepts will indicate that 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.

However, the Commissioner's view is that 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. In the Commissioner's view, 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.

Section 328-435 - genuine restructure - safe harbour rule

Section 328-435 provides a safe harbour rule which is an alternative way to satisfy the 'genuine restructure of an ongoing business' condition. A transaction will be taken to be a genuine restructure of an ongoing business for the purposes of paragraph 328-430(1)(a) where the conditions in section 328-435 have been satisfied.

Paragraph 78 of LCR 2016/3 states that:

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).

Section 328-435 provides that, for the purposes of paragraph 328-430(1)(a), a transaction is, or is part of, a genuine restructure of an ongoing business if, for a period of 3 years after the transaction occurs:

(a)        there is no change in the ultimate economic ownership of any of the significant assets of the business (other than trading stock) that were transferred under the transaction; and

(b)        those significant assets continue to be active assets; and

(c)        there is no significant or material use of those significant assets for private purposes.

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

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 transaction occurs:

•                     a small business entity

•                     an affiliate of a small business entity

•                     connected with a small business entity, and

•                     a partner in a partnership that is a small business entity.

Subsection 328-110(1) 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.

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.

Paragraph 328-125(1)(a) states that an entity is 'connected with' another entity if either entity 'controls the other' in a way described in section 328-125.

Relevantly, subparagraph 328-125(2)(a)(ii) states that an entity (except a discretionary trust) controls a partnership if the entity, its affiliates, or the entity together with its affiliates, own interests in the partnership that carry between them the right to receive a percentage that is at least 40% of the net income of the partnership.

An entity is 'connected with' another entity pursuant to paragraph 328-125(1)(b) if both entities are controlled in a way described in section 328-125 by the same third entity. Therefore, a discretionary trust to which the Land will be transferred will be connected with the partnership if, like the partnership, the discretionary trust is controlled in a way described in section 328-125 by the same entity that controls the partnership.

Relevantly, subsection 328-125(3) states that an entity controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the direction or wishes of the entity, its affiliates, or the entity together with its affiliates.

Affiliate is defined in subsection 328-130(1) as an individual or company that acts, or could reasonably be expected to act, in accordance with the entity's directions or wishes, or in concert with the entity, in relation to the affairs of the business of that individual or company.

Further, subsection 328-125(4) states that an entity controls a discretionary trust for an income year if, for any of the 4 income years before that year:

(a)           the trustee of the trust paid, 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 ... 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.

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

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.

The phrase 'ultimate economic ownership' is not defined in the ITAA 1997. Guidance on the meaning of the term can be found in the Explanatory Memorandum (the EM) to the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016, which introduced the provisions. The EM states:

1.29 The ultimate economic owners of an asset are 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 EM further provides that for the purposes of subparagraph 328-430(1)(c)(ii), an individual's share of the ultimate economic ownership of an asset being 'materially unchanged' means that they have the same proportion of ultimate economic ownership before and after the transaction. In other words, that an individual's share of ultimate economic ownership of an asset is ascertainable. Paragraph 1.31 states:

1.31 If there is more than one individual who is an ultimate economic owner of an asset, there is an additional requirement that each of those individuals' shares of that ultimate economic ownership be materially unchanged, maintaining the same proportionate ownership in the asset. (Schedule 1, item 1, subparagraph 328-430(1)(c)(ii))

Under ordinary legal concepts, the proportion of share to a beneficiary of a discretionary trust is impossible to specify.

Ultimate economic ownership - discretionary trusts

The requirement under paragraph 328-430(1)(c) would generally not be able to be satisfied by discretionary trusts. However, section 328-440 contains an alternative ultimate economic ownership test for discretionary trusts.

Section 328-440 provides that:

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;

(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.

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

Paragraph 328-430(1)(d) requires the CGT asset 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.

Section 328-430(1)(d)(ii) of the ITAA is met if the CGT asset at the time the transfer takes effect is an active asset in relation to which subsection 152-10(1A) is satisfied in that income year.

Section 152-10(1A) is 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 the 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.

Paragraph 328-430(1)(e) - Australian residents

Paragraph 328-430(1)(e) of the ITAA 1997 requires both the transferor and the transferee to meet the residency requirements outlined in section 328-445 of the ITAA 1997.

Where the entity is a trust, it must be a resident trust for CGT purposes. A family trust is a resident trust for CGT purposes for an income year if at any time during that income year, the trustee is an Australian resident, or the central management and control of the trust is in Australia.

Where the entity is a company, the entity must be an Australian resident. A company is a resident of Australia if it is incorporated in Australia, or it carries on business in Australia and has either its central management in Australia, or its voting power is controlled by shareholders who are residents of Australia.

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

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.

APPLICATION TO YOUR CIRCUMSTANCES

Genuine restructure of an ongoing business - paragraph 328-430(1)(a)

The transaction relevant to the taxpayers under the proposed arrangement in relation to its eligibility for rollover in Subdivision 328-G is the transfer of the farming land from the taxpayers to the new discretionary trusts with a corporate trustee.

The Applicant provided information regarding to the reasons for the proposed restructures.

By considering the Applicant's submission, it is considered that paragraph 328-430(1)(a) is satisfied.

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

The Partnership's aggregated turn over for the current financial year is less than 10 million. Accordingly, The Partnership is a small business entity for the purpose of section 328-110.

Individual A controls the Applicant.

Individual A's spouse acts in accordance with Individual A's discretion, wishes and in concert with him in relation to the affairs of the business. Therefore, Individual A's spouse is an affiliate of Individual A.

Individual A and Individual A's spouse who is Individual A's affiliate receives 50% of the net income of the Partnership. Accordingly, Individual A controls the Partnership.

As Individual A controls both the Applicant and the Partnership, the Applicant is connected with Partnership.

Although trustee companies will be appointed as the trustee of the respective transferee trusts, the following will apply:

•                     Individual A will be the shareholder and director of the trustee companies

•                     the beneficiaries of each of the new trusts will be family members of Individual A

•                     Individual A will be the appointor of each new discretionary trusts; and

•                     at least 40% of any distribution of income or capital will be made to Individual A and where there is no income or capital to distribute, a nomination in writing will be made pursuant to section 152-78.

As such, the 2 new discretionary trusts are controlled by Individual A. Further, the 2 discretionary trusts are connected with the Partnership as they are all controlled by Individual A.

It is considered that 328-430(1)(b)(iii) is satisfied, as the transferor and transferee are each connected with the Partnership.

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

Under the proposed arrangement, the Assets of the Applicant will be transferred to 2 new discretionary trusts.

As explained above, under ordinary legal concepts, the proportion of share to a beneficiary of a discretionary trust is impossible to specify. Therefore, it is not possible to attribute specific proportions to each individual within those discretionary trusts.

For the reason outlined above, the proposal does not meet the normal ultimate economic ownership test in paragraph 328-430(1)(c).

Therefore, the proposed restructure would need to meet the alternative ultimate economic ownership test provided by section 328-440 in order for the restructure to be available.

The Applicant is family trust with Individual A as the test individual, just before the proposed transaction takes effect, the land is the property of the Applicant.

Family trust elections will be in place for the 2 new discretionary trusts with Individual A named as the test individual. Therefore, just after the transaction takes effect, the land will be included in the property of the new discretionary trusts that are family trusts.

In this case, every individual who, just before and after the transfer takes effect, has the ultimate economic ownership of the asset is a member of that family group. Therefore, subsections 328-440(b) and 328-440(c) are satisfied.

As such, the proposed transaction meets the alternative ultimate economic ownership test provided by section 328-440. This means that paragraph 328-430(1)(c) is satisfied as the transfers does not have the effect of changing the ultimate economic ownership of an asset, or any individual's share of that ultimate economic ownership.

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

As noted above, if subparagraph 328-430(1)(b)(iii) applies, paragraph 328-430(1)(d)(ii) of the ITAA will be satisfied if the CGT asset at the time the transfer takes effect is an active asset in relation to which subsection 152-10(1A) is satisfied in that income year.

In this matter, the Applicant is connected to the Partnership which is a small business entity for the income year. The Applicant does not carry on a business. The entity referred to in paragraph 152-10(1A)(a) is the entity that, at the time in the income year, carries on the business. Consequently, the CGT asset at the time the transfer takes effect is an active asset in relation to which subsection 152-10(1A) is satisfied. Subparagraph 328-430(1)(d)(ii) is therefore satisfied.

Paragraph 328-430(1)(e) - Australian residents

Subparagraph 328-430(1)(e) requires that each party to the transfer meets a residency requirement in section 328-445 for an entity.

In this matter, the Applicant and the trusts are both Australian residents for tax purposes, therefore this condition is satisfied.

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

The Applicant and the 2 new discretionary trusts will each choose to apply the roll-over in relation to the proposed transaction, therefore, paragraph 328-430(1)(f) is satisfied.

CONCLUSION

The proposed transfer of land from the Applicant to the 2 new discretionary trust will qualify for rollover relief under Subdivision 328-G as the facts of the case meet all the conditions as detailed in Subdivision 328-G.

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