| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private advice
Authorisation Number: 1051519509957
Date of advice: 28 May 2019
Ruling
Subject: Ultimate Economic Ownership
Question
Does the proposed restructure 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 Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 2019
Year ended 30 June 2020
Year ended 30 June 2021
The scheme commences on:
Not yet commenced
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
Company A Pty Ltd
1. Company A Pty Ltd (Coy A) is an Australian proprietary company with one shareholder.
2. The shares in Coy A are non-beneficially held by Company B Pty Ltd.
3. Coy A is an Australian tax resident and small business entity (SBE).
4. Coy A runs two businesses, Business 1 and Business 2.
5. The assets of Business 1 on the balance sheet of Coy A include bank accounts, rent deposits, inventory and fixed assets including some leasehold improvements.
Family Trust
6. The Family Trust was established on xx /xx/xxxx.
7. Company B Pty Ltd is the trustee of the Family Trust as detailed in schedule 1 of the Family Trust deed.
8. Schedule 2 of the Family Trust deed currently names X and Y as the principal income beneficiaries but contains a fairly broad extension of other potential beneficiaries.
9. The Family Trust deed will be amended so that the beneficiaries are narrowed to include only members of X's family group and a Family Trust Election (FTE) will be made effective from 2016 naming X as the specified individual.
Proposed Restructure
10. The proposed transaction involves the transfer of Business 1 assets carried on by Coy A to a new non-fixed trust (a family trust). Coy A will retain Business 2.
11. The beneficiaries of the new non-fixed trust, yet to be established, will be limited to members of X's family group.
12. The proposed transaction includes both the Family Trust and the new non-fixed trust both electing to be family trusts with X as the specified individual.
13. Just after the transaction takes effect, Business 1 assets of Coy A will be held by the new non-fixed trust.
14. Before the transfer, individuals holding ultimate economic ownership of the assets include X and the beneficiaries of the Family Trust, which will only include the members of X family group. There will be no beneficiaries outside the family group capable of holding the ultimate economic ownership of the assets.
15. The beneficiaries of the new non-fixed trust will be limited to members of X family group within the meaning of Schedule 2F of the Income Tax Assessment Act 1936.
16. The intention of the restructure is to separate the business for the following reasons:
a. to protect the assets of each business against the other business;
b. to avoid the administrative and financial burden of the Business 1 being audited in conjunction with Business 2 due to them currently being in the same entity; and
c. to enable management to track the businesses performance easily.
17. The proposed restructure plans to result in the ultimate economic ownership of the assets being maintained for the purpose of paragraph 328-430(1)(c) and section 328-440 of the ITAA 1997.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subdivision 328-G
Income Tax Assessment Act 1997 Subsection 328-430(c)
Income Tax Assessment Act 1997 Section 328-440
Reasons for decision
Summary
1. The proposed restructure 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
2. 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
3. For the restructure roll-over provided for by 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.[1]
4. Where ownership passes to or from a discretionary trust, this requirement would generally not be able to be met.
5. However, 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 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.
6. Just after the transaction takes effect, the assets will be included in the property of the new non-fixed trust that is a family trust. Paragraph 328-440(a) of the ITAA 1997 is an 'either or both' test, therefore it is enough that the taxpayer satisfies subparagraph 328-440(a)(ii) of the ITAA 1997.
7. Before the transfer, all individuals holding ultimate economic ownership of the assets subject to the transfer, are members of the Family Trust with X the specified individual. There are no beneficiaries outside this group capable of holding the ultimate economic ownership of the assets. Therefore, paragraph 328-440(b) of the ITAA 97 is satisfied.
8. Paragraph 328-440(c) of the ITAA 97 is also satisfied as the ultimate economic ownership of the assets remain with those individuals within X family group. The Explanatory Memorandum (EM) of the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 provides:
1.29 To be eligible for the roll-over the transaction must not have the effect of changing the ultimate economic ownership of transferred assets in a material way. 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.
9. In this case, even though the assets will be transferred to the new non-fixed trust, we look through to the natural persons who will ultimately benefit economically from the assets. These natural persons remain X and the individual members of his family group.
Conclusion
10. Based on the facts, both entities will meet the requirements of paragraph 328-430(1)(c) and section 328-440 of the ITAA 1997 in relation to the proposed transfer of Business 1 assets. The ultimate economic ownership of the assets will be maintained after the transfer.
>
[1] Paragraph 328-430(1)(c) of the ITAA 1997.