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Edited version of your written advice
Authorisation Number: 1051409463619
Date of advice: 6 August 2018
Ruling
Subject: Small business restructure rollover
Question
Will the condition in paragraph 328-430(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) be satisfied if you transferred your business assets to the New Trust?
Answer
Yes
This ruling applies for the following periods:
Year ending 30 June 2019
The scheme commences on:
1 July 2018
Relevant facts and circumstances
A, B, C and D are partners in a partnership (the partnership).
The partnership has operated a cattle stud business (the business) since 20AA.
A and B are spouses.
C is A and B’s child.
D is C’s spouse.
Each partner has an equal interest in the partnership.
The partnership’s aggregated turnover for the 20XX/YY financial year was less than $10,000,000.
The partnerships turnover for the 20XX/YY financial year was $XX.
C and D also operate a partnership whose annual turnover in the 20XX/YY financial year $XX.
All partners are Australian citizens.
The partners will establish a new trust (new trust).
The new trust will be a non-fixed trust within the meaning of Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936).
The new trust will be established with a newly established company incorporated in Australia as its trustee.
C and D will be:
● Both directors and equal shareholders of the corporate trustee;
● The primary beneficiaries of the new trust; and
● Given the joint power to appoint a new trustee.
The class of discretionary beneficiaries will be limited to the family group as defined in section 272-90 of schedule 2F of the ITAA 1936.
The new trust will make a family trust election (FTE) in accordance with section 272-80 of schedule 2F of the ITAA 1936.
The test individual will be C.
By making the FTE the new trust will be a family trust within the meaning of schedule 2F of the ITAA 1936.
A, B, C and D will all be part of C’s family group within the meaning of schedule 2F of the ITAA 1936.
The partnership is proposing to transfer all of the partnerships business assets to the new trust and operating the business through the new trust.
The first reason for the restructure is because the partners are looking to simplify the how the business is run. Operating the business through the proposed new trust will significantly reduce the time spent on administrative tasks.
The second reason for the restructure is to mitigate the risk the partners are exposed to in the operation of the business.
The estimated value of the assets being transferred is $XX. That is $XX in trading stock and $X in plant and equipment.
The day-to- day operations are currently run by all four partners. After the restructure the day-to-day operations of the business will continue to be run by all four partners.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 328-440
Income Tax Assessment Act 1997 Paragraph 328-430(1)(c)
Reasons for decision
One of the tests which must be met for the small business restructure rollover 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.
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 of the ITAA 1997. 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 of the ITAA 1997 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 trust with C 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) of the ITAA 1997 and subparagraph 328-440(a)(ii) of the ITAA 1997 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) of the ITAA 1997.