Edited version of your written advice

Authorisation Number: 1051386604629

Date of advice: 18 June 2018

Ruling

Subject: Small Business Restructure Rollover

Question 1

Does the proposed transfer of land from an individual taxpayer to a new discretionary trusts qualify for relief under subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA1997)?

Answer

Yes.

Question 2

Does the land retain its pre CGT status post transfer under subdivision 328-G ITAA 1997?

Answer

Yes.

This ruling applies for the following periods

Year ending 30 June 20xx

Year ending 30 June 20xx

The scheme commences on

1 July 20xx

Relevant facts and circumstances

You do not carry on a business.

You own land under several titles (collectively referred to as the land);

The land was purchased prior to 20 September 1985.

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

Initially the business structure was a partnership between yourself and your spouse. In 20XX the structure changed to a discretionary trust (trading trust) which operates the business activities.

You are the trustee of the trading trust along with your spouse and child.

The appointors of the trading trust are you and your spouse.

You, your spouse and your child are the beneficiaries of the trading trust.

You are the primary individual specified in the family trust election for the trading trust.

The aggregated turnover for the trading trust is expected to be under $XX million.

The aggregated turnover for all income years prior to 30 June 20xx was also under $X million.

You propose to transfer the land to new discretionary trusts with corporate trustees.

Each discretionary trust will have a family trust election in place.

You and your family will be beneficiaries of the new discretionary trusts.

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

The land will continue to be used by the trading in the carrying out of it business activities.

You advised the purpose of the restructure is to:

● Provide further asset protection by separating the ownership of assets from the taxpayer who is integral to the trading trust; and

● Enable’s additional options with financiers to be negotiated over longer terms

to assist in growth of the operations.

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

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 328-125

Income Tax Assessment Act 1997 Section 108-5(1)

Income Tax Assessment Act 1997 Section 152-40

Reasons for decision

Summary

The proposed transfer of land from an individual taxpayer to a new discretionary trusts does qualify for relief under subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997) as the facts of the case meet all conditions as detailed in section 328-G.

Question 1

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 discusses when a roll-over is available. There are six basic conditions which must be met for the application of the rollover concessions for the 'Restructures of small businesses' which are contained in subsection 328-430(1). This subsection states 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

(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

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.

The Law Companion guideline 2016/3 provides further guidance on whether a transaction will be part of a “genuine restructure of an ongoing business”,

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 going forward. It is a composite phrase emphasising that the SBRR is not available to small business owners who are restructuring in the course of winding down or realising their ownership interests.

You advised the purpose of the restructure is to:

● Provide further asset protection by separating the ownership of assets from the taxpayer who is integral to the trading trust; and

● Enable’s additional options with financiers to be negotiated over longer terms

to assist in growth of the operations.

The Commissioner has found that the transfer of the land to the shareholders is not restructuring in the course of winding down or realising its ownership interests. It is also evident that the restructure is not an artificial or inappropriately tax-driven scheme. In this case, we have consider that the proposed restructure meets the definition of a 'genuine restructure of an ongoing business' under paragraph 328-430(1)(a) of the ITAA 1997.

Small Business entity

Section 328-125 Meaning of connected with an entity, provides guidance for direct control of a discretionary trust. 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 directions or wishes of the first entity, its *affiliates, or the first entity together with its affiliates.

In this case you are connected to the trading trust as you and your affiliates control the trading trust as the trustee either acts, or might reasonably be expected to act, in accordance with the directions or wishes of you. You also own the land to which the trading trust uses in carry out its primary production business.

Subparagraph 328-430(1)(b)(iii) is met as the transferor and transferee will be connected with an entity that is a small business entity for that income year and all entities are controlled by the taxpayer and their affiliates.

Ultimate economic ownership

One of the other tests which must be met is the ultimate economic ownership test paragraph 328-430(1)(c) of the ITAA 1997.

The transfer must not have the effect of “materially changing” the ultimate economic ownership of the transferred assets. Where there is more than one ultimate economic owner, each individual share of the share of that ultimate economic ownership must not be materially changed. A transfer of assets from or to a discretionary trust will generally not meet the requirements for ultimate economic ownership.

It is the Commissioner’s view that a purely discretionary trust could not satisfy the ultimate economic ownership test without relying on the special rule in section 320-440. This is because the economic interests that the objects of such a trust have in an asset are not fixed in proportion, and would depend on the trustee exercising their discretion.

For section 328-440 to apply the assets must be included in the property of a family trust either just before the transaction or just after it. In addition to this 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 and every individual who, just after the transfer takes effect, has the ultimate economic ownership of the asset is a member of that family group.

In this case a family trust election will be in place just after for the respective trusts with you as the specified primary individual. Therefore just after the transaction takes effect, the asset will be included in the property of a non-fixed trust that is a family trust. As such paragraph 328-440(b) and (c) and subparagraph 328-440(a)(ii) will be met, the restructure roll-over will be available with respect to the proposed restructure and be deemed to satisfy paragraph 328-430(1)(c).

Eligible Assets

Subparagraph 328-430(1)(d)(ii) 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.

Subsection 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.

In this case you are connected to the trading trust which is a small business entity for the income year so (a) is satisfied. You do not carry on a business or carry on a business in partnership, so (b) and (c) are satisfied. With regards to (d), this is also satisfied as 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. Subparagraph 328-430(1)(d)(ii) is therefore met.

Subparagraph 328-430(1)(e) requires that each party to the transfer meets a residency requirement, in this case as you and the trusts are both Australian residents for tax purposes this conditions has been satisfied.

Paragraph 328-430(1)(f) requires the transferor and each transferee to choose to apply a rollover under this Subdivision in relation to the assets transferred under the transaction. This condition will be met as you and the trusts choose to apply the roll over. Subsection 328-430(2) is also satisfied as no party to the transfer is an exempt entity or complying superannuation entity.

In your case the Commissioner has found that the transfer of the land to the trusts is not restructuring in the course of winding down or realising its ownership interests. It is also evident that the restructure is not an artificial or inappropriately tax-driven scheme. It is considered that the proposed restructure meets the requirements of section 328-430 of the ITAA 1997.

Question 2

Section 328-460 outline the effect of small business restructures on acquisition times of pre-CGT assets. For the purposes of applying subsection 328-455(1) to the asset as a * CGT asset (other than a* revenue asset) that is a * pre-CGT asset, a transferee is taken to have * acquired the asset before 20 September 1985.

In this case the assets were acquired by you before 20 September 1985 and as such will maintain their pre-CGT status in the transferees.