Edited version of your written advice

Authorisation Number: 1051498445234

Date of advice: 8 April 2019

Ruling

Subject: Small Business Restructure Roll-over

Question 1

Does the proposed Restructure Transaction materially change each relevant individual's share of the ultimate economic ownership of the Business Property and Business Assets for the purposes of section 328-430 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the proposed Restructure Transaction part of a genuine restructure of an ongoing business for the purposes of section 328-430 of the ITAA 1997 under the safe harbour rule in section 328-435 of the ITAA 1997?

Answer

Not ruled upon. See response to question 3.

Question 3

Is the proposed Restructure Transaction part of a genuine restructure of an ongoing business for the purposes of section 328-430 of the ITAA 1997?

Answer

Yes.

Question 4

Is each party to the proposed Restructure Transaction a Small Business Entity (SBE), an affiliate of a SBE, or connected with an entity that is a SBE for the income year in which the proposed Restructure Transaction occurs for the purposes of paragraph 328-430(1)(b) of the ITAA 1997?

Answer

Yes, each party to the proposed Restructure Transaction will be a SBE.

Question 5

Will the Business Property be an active asset for the purposes of subparagraph 328-430(1)(d)(i) of the ITAA 1997 at the time the transfer takes effect in the proposed Restructure Transaction?

Answer

Yes.

Question 6

Will each of the Business Assets be an active asset for the purposes of subparagraph 328-430(1)(d)(i) of the ITAA 1997 at the time the transfer takes effect in the proposed Restructure Transaction?

Answer

Yes.

Question 7

Does the X Trust and the New Trust A meet the residency requirements of section 328-445 for the purposes of paragraph 328-430(1)(e) of the ITAA 1997?

Answer

Yes.

Question 8

Is the Small Business Restructure Roll-over (SBRR) available in respect of the proposed Restructure Transaction in accordance to subsection 328-430(1) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods

Year ending 30 June 20XX

Year ended 30 June 20XX

The scheme commences on

Date from when proposed Restructure Transaction occurs.

Relevant facts and circumstances

The Trustees for the X Trust carry on a business. The X Trust also holds real property investments.

The X Trust is an Australian resident trust estate settled by Deed dated xx xxxx. A copy of the Trust Deed forms part of these facts.

X Trust

Trustees

B Pty Ltd and C Pty Ltd are the original and current trustees of the X Trust (collectively, the X Trustees).

B Pty Ltd is wholly owned by E and their spouse.

C Pty Ltd is wholly owned by F and their spouse.

Appointors

E and F are specified as the ‘Appointors of the X Trust’ (X Appointors), and are empowered under the terms of the X Trust Deed to remove the X Trustees and appoint a new trustee or trustees in their place (Power of Appointment).

Non-fixed trust

The X Trust is a non-fixed trust for the purposes of section 272-70 of Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936).

Beneficiaries of the X Trust

E and F jointly carry on the business through the X Trust. They are the ‘Primary Beneficiaries’ of the X Trust pursuant to the X Trust Deed. The General Beneficiaries are also outlined in the X Trust Deed.

Family Trust Election (FTE)

FTEs have or will be made with the transferor and transferee trust having an FTE in place with the same test individual, in accordance with the requirements in subsection 272-80(1) of Schedule 2F of the ITAA 1936, specifying E as the test individual.

X Trust Beneficiaries are members of E’s Family Group

All X Trust Beneficiaries are members of E’s Family Group.

Historical Distributions

The X Trust has only ever made distributions of income and advances of capital to members of E’s Family Group.

X Trust Fund

The X Trust Deed provides that the trust fund comprises the settled sum and any additional property, which is vested in the trustee subsequent to the X Trust’s establishment.

Power to Appropriate Capital

The X Trustees are empowered to appropriate and apply capital of the X Trust Fund for the benefit of any of the X Trust Beneficiaries.

Date of Vesting

The Vesting Date of the X Trust is 1 XX 20XX (X Trust Vesting Date).

Financial Position of the X Trust

Income of the X Trust

The X Trust’s total income in the year ended 30 June 20XX was under $10 million.

The X Trust’s assets

The X Trust owns the following assets (X Trust’s Assets):

(a) real property situated at G St,

(b) real property situated at H St, (collectively, Passive Property Investments);

(c) real property at J St, (including property at K St,) (Business Property); and

(d) a business (Business).

Business

A (non-exhaustive) list of the assets comprising the Business (Business Assets) includes:

(a) Business names;

(b) Goodwill (collectively called Intangible Business Assets); and

(c) Plant and equipment.

The Business Assets are used in the course of the X Trust carrying on the Business.

Business Premises

The Business Property, comprising land and buildings, is used as the premises on which the Business is carried on. The Business Property is currently contained in Certificates of Title.

Market Value

The Business and Business Property have a combined market value of (approximately) $X,XXX,000 (Market Value) as per the market valuation provided by Valuer as at 20XX.

(A copy of the Valuation Report was provided with the application and forms part of these facts).

Business Operations

E and F manage the investments of the X Trust as the directors of B Pty Ltd and C Pty Ltd respectively.

E and F are directors of the Trustees of the X Trust and jointly carry on, and always carried on, the Business. This includes oversight of the business operations as well as day to day management of the Business.

In carrying on the Business, E and F have joint responsibility for:

(a) Employment and management of staff;

(b) Provision of staff training;

(c) Rostering of staff;

(d) Engaging with parents and children;

(e) Ensuring compliance with relevant laws and regulations;

(f) Acquisition of plant and equipment for use in the Business;

(g) Collection of fees;

(h) Collection of government rebates, including completing necessary paperwork and associated compliance; and

(i) Long-term strategic business planning.

There is a number of staff presently employed in the Business, including some directors.

Rationale for Restructure

As currently structured, the X Trustees believe that the Passive Property Investments are exposed to the liabilities and trading risk of the Business. They believe that the trading risk of a business (i.e. the Business and Business Property) should be separated from the non-business assets (i.e. the Passive Property Investments).

If appropriately advised at the time the X Trust was established, E and F would have established separate discretionary trusts for:

(a) the Business and Business Property; and

(b) the Passive Investment Properties which are unrelated to, and not used in the course of carrying on the Business.

The X Trustees are responsible for managing the investments of the X Trust and carrying on the Business.

E and F consider that appropriately separating the X Trust’s business (comprising the Business and Business Property) from the Passive Property Investments will significantly enhance business efficiency and asset protection. In order to achieve these desirable commercial outcomes it is necessary to appoint a new special purpose trustee company with respect to the Business Property, Business Assets and the Business such that a trustee manages the Passive Property Investments and a different trustee carries on the Business and owns the Business Property.

Establishment of New Discretionary Trust

A new discretionary trust will be established and settled by Deed (hereafter, the New Trust A).

The New Trust A will be similar in terms to the X Trust Deed, (noting the differences of the settlor, original trustees and vesting date). Specifically:

(a) E and F will be Primary Beneficiaries;

(b) The class of eligible beneficiaries will be identical to the X Trust Beneficiaries (as fully set out above).

A new company will be incorporated in Australia and appointed as the trustee of the New Trust A (New Trustee). The directors of the New Trustee will be E and F.

The Vesting Day of the New Trust A will be one day before the X Trust’s Vesting Date) due to the prohibition against distributions to later vesting trusts.

The New Trust A will also make a FTE specifying E as the test individual. Thus, the X Trust and the New Trust A will have the same test individual and family group.

Transfer of the Business Property and Business

Once established, the New Trust A will be a beneficiary of the X Trust pursuant to the X Trust Deed.

The X Trustee will exercise the Power to Appropriate Capital of the X Trust to:

(a) transfer the Business Property to the New Trustee in its capacity as trustee of the New Trust A (Property Transfer); and

(b) transfer the Business to the New Trustee in its capacity as trustee of the New Trust A (Business Transfer) (collectively, Restructure Transaction).

Only Business Assets that are considered to be active assets in accordance with subsection 152-10(1A) of the ITAA 1997 will be transferred pursuant to the Business Transfer.

There will be no consideration paid by the relevant acquirer in respect of the Property Transfer or the Business Transfer.

Cost Base and Capital Proceeds

You note that at the time the proposed Restructure Transaction is effected, the cost base and market value of the Business Assets and Business Property may be different and thus precise figures have not been calculated and provided in this Ruling Application.

The X Trust did not acquire the Business Assets, Business Property or commence to carry on the Business before 20 September 1985.

Choice to apply Small Business Restructure Roll-over

Both the X Trust and the New Trust A will choose to apply the roll-over under subdivision 328-G in the deed of transfer which will effect the proposed Restructure Transaction.

No change to business operations

Following the proposed Restructure Transaction, the New Trustee, in its capacity as trustee of the New Trust A, will carry on the Business.

The Business will continue to be operated in broadly the same manner and from the same premises (the Business Property) following the Restructure Transaction.

In particular, E and F will continue to oversee the business operations (as directors of the New Trustee) and key personnel and management staff will continue to perform their respective roles following the Restructure Transaction.

Therefore, the same course of conduct presently performed by E, F and key management personnel in carrying on the Business will continue to be carried on by the same parties and from the same business premises. There is no intention of selling the Business Property or Business Assets within three years from the date of the Restructure Transaction. The Restructure Transaction will not be in the course of winding down this business or realising the ownership interests of this business.

Connected Entities and Affiliates and turnover

E and F control the X Trust and the New Trust A in accordance with subsection 328-125(3) of the ITAA 1997 as the trustees of the two trusts could reasonably be expected to act in accordance with their direction or wishes.

There are no other entities which act in accordance with the direction or wishes of the either of E or F.

The X Trust and the New Trust A will be connected with one another on the basis of common control. However, there are no other entities “connected with” either the X Trust or the New Trust A for the purposes of the Subdivision 328-G of the ITAA 1997 turnover test.

Both the X Trust and the New Trust A do not have any affiliates as defined in section 328-130 of the ITAA 1997.

The X Trust, together with all of its connected entities and affiliates had an aggregated turnover of less than $10,000,000 in the year ended 30 June 20XX.

Residency

All parties to the proposed Restructure are Australian resident entities for Australian income tax purposes. The New Trust A will be an Australian resident trust settled by Deed.

Relevant legislative provisions

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

Income Tax Assessment Act 1936 subsection 272-80(1) of Schedule 2F

Income Tax Assessment Act 1936 section 272-90 of Schedule 2F

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 152-10(1A)

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 Subdivision 328-G

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 subsection 328-110(1)

Income Tax Assessment Act 1997 subparagraph 328-110(1)(b)(i)

Income Tax Assessment Act 1997 subparagraph 328-110(1)(b)(ii)

Income Tax Assessment Act 1997 subparagraph 328-110(1)(b)(iii)

Income Tax Assessment Act 1997 subparagraph 328-110(1)(b)(iv)

Income Tax Assessment Act 1997 section 328-115

Income Tax Assessment Act 1997 section 328-120

Income Tax Assessment Act 1997 subsection 328-125(3)

Income Tax Assessment Act 1997 section 328-130

Income Tax Assessment Act 1997 section 328-430

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 subparagraph 328-430(1)(b)(i)

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 subparagraph 328-430(1)(d)(i)

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 328-440

Income Tax Assessment Act 1997 paragraph 328-440(a)

Income Tax Assessment Act 1997 subparagraph 328-440(a)(i)

Income Tax Assessment Act 1997 subparagraph 328-440(a)(ii)

Income Tax Assessment Act 1997 paragraph 328-440(b)

Income Tax Assessment Act 1997 paragraph 328-440(c)

Income Tax Assessment Act 1997 section 328-445

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Summary

The proposed Restructure Transaction will result in the ultimate economic ownership of the assets being maintained for the purposes of paragraph 328-430(1)(c) and section 328-440 of the ITAA  1997.

Detailed reasoning

Ultimate Economic Ownership

Subdivision 328-G of the ITAA 1997 provides tax-neutral consequences for a small business entity that restructures the ownership of the assets of the business, without changing the ultimate economic ownership of the assets.

Ultimate economic ownership – discretionary trusts

For the Small Business Restructure Roll-over (SBRR) under Subdivision 328-G to be available, there is a requirement that the restructure does not have the effect of materially changing which individual has, or which individuals have, the ultimate economic ownership of the business assets (paragraph 328-430(1)(c) of the ITAA 1997).

Section 328-440 of the ITAA 1997 contains an alternative ultimate economic ownership test for discretionary trusts. It states:

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; or

(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 above; 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.

(a) (i) Will the asset be included in the property of a non-fixed trust that was a family trust just before the proposed transaction takes place?

The X Trust is a non-fixed trust for the purposes of section 272-70 of Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936).The Business Property and Business Assets are, and will be owned by the trustees of the X Trust, a family trust, immediately before the proposed transaction takes place. Therefore, subparagraph 328-440(a)(i) of the ITAA 1997 is satisfied.

(a) (ii) Will the asset be included in the property of a non-fixed trust that was a family trust just after the proposed transaction takes place?

The asset will be included in the property of the New Trust A which will be a non-fixed family trust so as to satisfy subparagraph 328-440(a)(ii) of the ITAA 1997.

(b) Will every individual who, just before the proposed transfer takes effect, has the ultimate economic ownership of the asset be 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 above?

The alternative test is available when assets are included in the property of a non-fixed trust that is a family trust (i.e. a non-fixed trust for which there is a family trust election in force). In this case, the Primary Beneficiaries and General Beneficiaries of the X Trust are part of the family group within the meaning of Schedule 2F of the ITAA 1936. Paragraph 328-440(b) of the ITAA 1997 will be satisfied.

(c) Will every individual who, just after the transfer takes effect, has the ultimate economic ownership of the asset, be a member of that family group?

Yes, (the same class of beneficiaries are or will be included in both the X Trust and the New Discretionary Trust).

The X Trust and the New Trust A have already made, or will make, family trust elections specifying the same family group as per section 272-90 of Schedule 2F of the ITAA 1936, specifying E as the test individual in each election.

Therefore, following the transfer, every member that that will have the ultimate economic ownership of the assets after the transfer is a member of the same family group and satisfies paragraph 328-440(c) of the ITAA 1997.

As the ultimate economic ownership is maintained to satisfy section 328-440 of the ITAA 1997, paragraph 328-430(1)(c) of the ITAA 1997 will also be satisfied.

Question 2

Summary

Not ruled upon. See response to Question 3.

Question 3

The proposed Restructure Transaction is considered to be part of a genuine restructure of an ongoing business for the purposes of section 328-430 of the ITAA 1997.

Detailed reasoning

The meaning of Genuine Restructure of an on-going Business for the purposes of paragraph 328-430(1)(a) of the ITAA 1997 is explained at paragraphs 4-11 of Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters.

Paragraphs 4-11 of LCR 2016/3 provide the following as to what a Genuine Restructure is:

Genuine restructure

4. The SBRR can apply to transactions that are, or are part of, a 'genuine restructure of an ongoing business'.

5. 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.

6. 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. However, 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.

7. The following features indicate that a transaction is, or is part of, a 'genuine restructure of an ongoing business':

● It is a bona fide commercial arrangement undertaken in a real and honest sense to

● facilitate growth, innovation and diversification

● adapt to changed conditions, or

● reduce administrative burdens, compliance costs and/or cash flow impediments.

● It is authentically restructuring the way in which the business is conducted as opposed to a 'divestment' or 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. For example, there is:

● continued use of the transferred assets as active assets of the business

● continuity of employment of key personnel, and

● continuity of production, supplies, sales or services.

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

8. The Commissioner acknowledges that tax considerations are factors that can be taken into account under a genuine small business restructure. For example, a sole trader subject to the highest marginal rate moving to a company structure to access the lower corporate tax rate.

9. However, this is not without limits. There are concerns where the restructure is contrived or unduly tax driven in the sense that it achieves a tax outcome that does not reflect the economic reality or creates an outcome that would, but for the SBRR, ordinarily attract other integrity measures in the law. For example, a restructure directed at eliminating an impending or existing tax liability, would indicate that a restructure is not a 'genuine restructure of an ongoing business'.

10. Other factors which tend to indicate that a restructure is not a 'genuine restructure of an ongoing business' include:

● where the restructure is a preliminary step to facilitate the economic realisation of assets, or takes place in the course of a winding down to transfer wealth between generations

● where the restructure effects an extraction of wealth from the assets of the business (including accumulated profits) for personal investment or consumption or otherwise designed for use outside of the business

● where artificial losses are created or there is a bringing forward of their recognition

● the restructure effects a permanent non-recognition of gain or the creation of artificial timing advantages, and/or

● there are other tax outcomes that do not reflect economic reality.

11. The SBRR contemplates restructures to or from more than one entity. Accordingly, there may be circumstances where not all business assets that are necessary for the continued operation of an 'ongoing business' are transferred. For example, small business owners may decide to transfer plant and equipment to a new entity, but leave real property in the original entity. On its own, this is not a factor that is inconsistent with the conclusion that a restructure is a 'genuine restructure of an ongoing business'.

(i) Is the arrangement a bona fide commercial arrangement undertaken in a real and honest sense to facilitate growth, innovation and reduce administrative burdens?

You have stated that the proposed Restructure Transaction will be undertaken to facilitate growth, and reduce administrative burdens in carrying on the Business.

The assets owned by the trustees of the X Trust are tied up together which creates administrative and compliance burdens in managing the Business.

Separating the Business Assets and Business Property from the Passive Property Investments of the X Trust alleviates unnecessary financial reporting across all assets such as the following which can be required periodically:

● obtaining valuations for the Passive Property Investments;

● collating and maintaining financial information with respect to rental income derived and expenses incurred in respect of the Passive Property Investments; and

● disclosing such information.

This creates administrative burdens and additional costs for the X Trustees in conducting the Business with respect to:

● obtaining finance for the Business; and

● complying with regulatory requirements, imposed on businesses receiving government rebates.

The proposed Restructure Transaction will facilitate growth by easing the process for the Business to obtain finance and upscale activities, and reducing the time and cost currently involved with managing several distinct investment activities unrelated to carrying on a business.

Accordingly, the proposed restructure will be a bona fide commercial arrangement undertaken to facilitate growth and reduce administrative burdens.

(ii) is the arrangement authentically restructuring the way in which the business is conducted as opposed to a 'divestment' or preliminary step to facilitate the economic realisation of assets

The proposed Restructure Transaction will be undertaken primarily to create a more appropriate business structure to conduct the Business. You have also specified that the Business will continue to be operated in broadly the same manner and from the same premises following the proposed Restructure Transaction. Further it will be not be a preliminary step to facilitate the winding down or realising of ownership interests of the X Trust.

The restructure of the assets presently held in the X Trust will ensure the Business and Passive Property Investment activities are controlled and managed by their own respective trustees. This should facilitate better management of the Business as the trustee of the New Trust A will be able to focus solely on the Business and will be relieved of the other functions currently performed by the trustees of the X Trust in respect to the Passive Property Investment activities.

(iii) Is ultimate economic ownership maintained

Yes, see previous response to question 1 above.

(iv) Do the small business owners continue to operate the business through a different legal structure?

The Business will continue to be managed and operated by E and F in the same manner as the Business is presently operated. That is, it will have the same management and key staff performing the same tasks at the same business premises. The Business Assets and Business Property will be used in the same manner.

(v) is it reasonable to conclude that the proposed restructure will result in a structure likely to have been adopted had the small business owners obtained appropriate professional advice when setting up the business?

In the present structure, the Passive Property Investments are available to creditors of the Business in the event of any action against the trustees of the X Trust. You obtained professional advice which stated that property investments and other significant assets should not be owned by an entity which is also conducting a business and is exposed to risk. You have stated that if appropriately advised at the time the X Trust was established, E and F would have established separate discretionary trusts for the Business and the Passive Investment Properties.

It is reasonable to conclude based upon the facts available that the proposed Restructure Transaction will result in a structure likely to have been adopted if appropriate professional advice had been obtained at the time of setting up the X Trust and the Business.

Therefore, the Proposed Restructure is considered to be part of a genuine restructure of an ongoing business for the purposes of section 328-430 of the ITAA 1997.

Note: we have not considered your question regarding the satisfaction of the safe harbour rule to determine if the proposed restructure transaction is part of a genuine restructure under section 328-435 of the ITAA 1997. Responding to this request would necessitate making assumptions about future events. Regardless, subject to these limitations, if the conditions of the section were satisfied in the three years subsequent to the proposed transaction then the safe harbour rule under section 328-435 of the ITAA 1997 could have application to take the proposed transaction as part of the genuine restructure of an on-going business.

Question 4

Summary

It is considered that both the X Trust and the New Trust A will each be a Small Business Entity in the income year that the transfer will occur under subparagraph 328-430(1)(b)(i) of the ITAA 1997.

Detailed reasoning

Pursuant to paragraph 328-430(1)(b), each party to the transfer must be an entity in which one or more of the following applies:

(i) it is a small business entity for the income year during which the transfer occurred;

(i) it has an affiliate that is a small business entity for that income year;

(ii) it is connected with an entity that is a small business entity for that income year;

(iii) it is a partner in a partnership that is a small business entity for that income year.

Small Business Entity (SBE) requirement

An entity is a SBE provided the following conditions are met as per section 328-110 of ITAA 1997:

(a) The entity carries on business in the current year; and

(b) one or both of the following applies:

(i) The entity carried on a business in the income year (the previous year) before the current year and its aggregated turnover for the previous year was less than

(ii) $10 Million;

(iii) The entity’s aggregated turnover for the current year is likely to be less than

(iv) $10 million,

Pursuant to section 328-115 of the ITAA 1997, an entity’s aggregated turnover includes their annual turnover and the annual turnover of their affiliates and connected entities.

“Annual turnover” is defined in section 328-120 of the ITAA 1997 and means the total ordinary income derived in the course of carrying on a business.

X Trust

The X Trust is an SBE in the income year of the proposed Restructure Transaction (Restructure Year) as it carries on the Business and its aggregated turnover was less than $10 Million in the preceding year (based upon an assumption that the proposed transaction will occur in the 20XX financial year). If the assets are transferred in the 20XX income year, the 20IX income year will be the relevant year for the purposes of subparagraph 328-110(1)(b)(ii) of the ITAA 1997.

You have provided that the X Trust’s annual turnover as being under $10 million in the year ended XX June 20XX.

You have also stated that the X Trust has no other affiliates or connected entities which carry of a business in the previous year, being the year ended XX June 20XX. The X Trust will be connected with the New Trust A but will have no other connected entities or affiliates who carry on a business in the Restructure Year.

Therefore, for the purposes of the aggregated turnover test under subsection 328-110(1) of the ITAA 1997, only the income of the X Trust and the New Trust A derived in the course of carrying on a business in the Restructure Transaction year will be relevant. The aggregated turnover for both trusts is expected to be less than $10 million.

The X Trust will not be a partner in a partnership that is a small business entity for the Restructure Year.

The X Trust therefore satisfies the SBE requirement in the income year during which the transfer occurs under subparagraph 328-430(1)(b)(i) of the ITAA 1997.

The New Trust A

Once the business and business assets are transferred to the New Trust A it will carry on the Business previously carried on by the X Trust. As the New Trust A will be carrying on a business in the income year in which the proposed transfer takes place, subparagraph 328-110(1)(b)(i) of the ITAA 97 will apply. You have indicated it is anticipated to have an annual turnover of less than $10 million in the transfer year. If the assets are transferred in the 20XX income year, that will be the relevant year for the purposes of subparagraph 328-110(1)(b)(ii) of the ITAA 97. If the assets are transferred in the 20IX income year, that will be the relevant year for the purposes of subparagraph 328-110(1)(b)(ii) of the ITAA 1997.

The New Trust A will be connected with the X Trust but will have no other connected entities or affiliates who carry on a business in the Restructure Year.

The New Trust A will not be a partner in a partnership that is a small business entity for the Restructure Year.

Therefore, for the purposes of the aggregated turnover test under subsection 328-110(1) of

the ITAA 1997, only the income of the New Trust A and the X Trust derived in the course of carrying on a business in the Restructure Transaction year will be relevant. The aggregated turnover for both trusts is expected to be less than $10 million.

The New Trust A will, based upon the assumption that the New Trust A’s aggregated turnover will also be under $10 million in the Restructure Year, satisfy the SBE requirement for the income year during which the transfer occurs under subparagraph 328-430(1)(b)(i) of the ITAA 1997.

Question 5

Summary

It is considered that the Business Property will be an active asset under subparagraph 328-430(1)(d)(i) of the ITAA 1997 at the time the transfer takes effect in the proposed Restructure Transaction.

Detailed reasoning

Paragraph 328-430(1)(d) sets out the fourth requirement for the SBRR to be available. This is referred to as the Active Asset Test. Paragraph 328-430(1)(d) states:

(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 paragraph; and

As per our response to question 4 previously, as subparagraph 328-430(b)(i) will apply in respect of the transfer of the Business Property from the X Trust to the New Trust A, the relevant test is whether the Business Property is an active asset at the time the transfer takes effect.

Active Asset

Subsection 152-40(1) of the ITAA 1997 states:

(1) A *CGT asset is an active asset at a time if, at that time:

(a) You own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a *business that is carried on (whether alone or in partnership) by;

(i) you; or

(ii) your *affiliate; or

(iii) another entity that is *connected with you; or

(b) if the asset is an intangible asset – you own it and it is inherently connected with a business that is carried on (either alone or in partnership) by you, your affiliate, or another entity that is connected with you.

Business Property

CGT Assets

CGT assets are defined in section 108-5 of the ITAA 1997 as:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

The Business Property is a CGT asset in accordance with section 108-5 of the ITAA 1997. At the time of the proposed Restructure Transaction, the Business Property is owned by the Trustees for the X Trust and used by the Trustees in the course of carrying on the Business.

Immediately following the proposed Restructure Transaction the Business Property will be owned by the Trustee for the New Trust A and used by that Trustee in the course of carrying on the Business.

Therefore, at the time the proposed Restructure Transaction takes effect, the Business Property will be an active asset in accordance with subsection 152-40(1) of the ITAA 1997, and also satisfy sub paragraph 328-430(1)(d)(i) of the ITAA 1997.

Question 6

Summary

It is considered that the Business Assets will be active assets under subparagraph 328-430(1)(d)(i) of the ITAA 1997 at the time the transfer takes effect in the proposed Restructure Transaction.

Detailed reasoning

To meet the active asset test as outlined in our above response to Question 5, it is necessary to satisfy subparagraph 328-430(1)(d)(i) of the ITAA 1997 in respect of the proposed Business Transfer comprising the transfer of the Business Assets.

The Active Asset Test requires that the assets transferred are CGT assets.

The Business Assets are property (or legal or equitable rights that are not property) and are used in the course of the X Trust carrying on the Business. Immediately following the Restructure Transaction the Business Assets will be owned by the Trustee for the New Trust A and used by that Trustee in the course of carrying on the Business.

The intangible Business Assets, including the business name and attached goodwill, are inherently connected with the Business.

Therefore, at the time of the Restructure Transaction takes effect, the Business Assets (other than a depreciating asset) will be active assets in accordance with section 152-40 of the ITAA 1997 and therefore satisfy the fourth requirement as set out at subparagraph 328-430(1)(d)(i) of the ITAA 1997.

Question 7

Summary

It is considered that both the X Trust and the New Trust A are residents of Australia and meet the residency requirement under section 328-445 of the ITAA 1997. Accordingly, the residency requirement specified under paragraph 328-430(1)(e) of the ITAA 1997 is satisfied.

Detailed reasoning

Pursuant to paragraph 328-430(1)(e) of the ITAA 1997 both the transferor and transferee must meet the residency requirement in section 328-445 of the ITAA 1997 for an entity.

Section 328-445 states:

For the purposes of paragraph 328-430(1)(e), the residency requirement for an entity is that:

(a) if the entity is an individual or a company - the entity is an Australian resident; or

(b) if the entity is a trust - it is a *resident trust for CGT purposes; or

(c) if the entity is a partnership (other than a *corporate limited partnership) - at least one of the partners is an Australian resident; or

(d) if the entity is a corporate limited partnership - it is, under section 94T of the Income Tax Assessment Act 1936, a resident for the purposes of the *income tax law.

To meet the Residency requirement in section 328-445 of the ITAA 1997,both the X Trust and the New Trust A must be a resident trust for CGT purposes.

Section 995-1 of the ITAA 1997 relevantly states:

A trust is a resident for CGT purposes for an income year if, at any time during the income year:

(a) for a trust that is not a unit trust, a trustee is an Australian resident or the central management or control of the trust is in Australia; or....

As both the X Trust and the New Trust A are not unit trusts they will meet the residency requirement if the trustees of those trusts are an Australian resident. The facts as presented state the Trustees of the X Trust and the Trustee of the New Trust A are (or will be once incorporated) Australian residents.

Therefore, the X Trust and the New Trust A are (or will be once established) Australian residents and meet the requirement of paragraph 328-430(1)(e) of the ITAA 1997.

Question 8

Summary

It is considered that the SBRR is available in respect of the proposed Restructure Transaction under subsection 328-430(1) of the ITAA 1997.

Detailed reasoning

The SBRR is available when the circumstances set out in subsection 328-430(1) of the ITAA 1997 are satisfied:

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.

In summary, on the basis of our responses to questions 1,3, 4, 5,6 and 7, the requirements outlined in paragraphs 328-430(1)(a), 328-430(1)(b), 328-430(1)(c), 328-430(1)(d), 328-430(1)(e) of the ITAA 1997 will all be satisfied.

Choice to Apply for Roll-over

The final requirement for the SBRR to be available is provided in paragraph 328-430(1)(f) of the ITAA 1997 which requires both the transferor and transferee to choose to apply the roll-over under section 328-430 of the ITAA 1997.

This requirement will also be satisfied as both the X Trust and the New Trust A will choose to apply the roll-over under subdivision 328-G of the ITAA 1997 in the terms of the relevant transfer documentation which effects the proposed Restructure Transaction.