Edited version of private advice

Authorisation Number: 1051568065797

Date of advice: 26 August 2019

Ruling

Subject: Small business restructure roll-over

Question 1

Will the disposal of the assets of the business by the partners of the partnership to the New Discretionary Trust pursuant to the Proposed Transaction satisfy the conditions for roll-over under section 328-430 of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 2

Is the Proposed Transaction and Further Step a scheme to which Part IVA of the Income Tax Assessment Act 1936 applies?

Answer

No.

This ruling applies for the following period

1 July 2019 to 30 June 2021

The scheme commences on:

1 July 2019

Relevant facts and circumstances

Background

The Partners run a business via a partnership. The partnership holds most of the assets and liabilities of the business. The partners also have a related discretionary trust (DT) that holds some business assets. All the prior distributions of DT have been made to the partners.

The combined income derived by the partnership, the partners, and their related entities in the ordinary course of carrying on a business will be less than $10 million in the current income year.

The partners, the partnership and their related entities are all Australian residents for tax purposes.

Proposed Transaction

It is proposed that the partners will undertake the following restructure (Proposed Transaction):

1.    settle a new family discretionary trust (NDT), and

2.    transfer all of the business assets and liabilities to NDT.

The settlement of NDT will involve the following steps:

1.    A family trust election will be made with a Partner C being the specified individual in accordance with section 272-80 of Schedule 2F to the Income Tax Assessment Act (ITAA 1936).

2.    The specified beneficiaries will be the partners.

3.    A newly incorporated Australian resident private company will be appointed as trustee (NCT) of NDT.

4.    Each of the partners will be the shareholders of NCT, with one partner being the sole director.

The partners intend to transfer all the business assets and associated liabilities (at the time the Proposed Transaction is completed) of the business to NDT.

All of the business assets will be transferred to NDT such that equivalent tax cost bases are maintained to that immediately prior so no losses or otherwise artificial taxation outcomes arise.

The business will continue to be carried on by NDT after the Proposed Transaction.

All of the business assets and liabilities, individuals employed and business operations shall continue unaffected.

Within three years of the Proposed Transaction some items of equipment may be sold and new replacement equipment will be purchased. This may be necessary to upgrade existing equipment or where current equipment is broken or requires upgrading.

It is expected that the Proposed Transaction will take place in the current income year.

Further Step

Within 6 to 12 months after the implementation of the Proposed Transaction, a Further Step will be implemented.

Once the Proposed Transaction and Further Step are implemented, there are no further Proposed Transactions, transfers or restructures of the (current) business under contemplation. Other than the upgrading of business equipment, there is no intention to sell the business or to otherwise extract wealth from the business subsequent to the Proposed Transaction and the Further Step.

Reasons for the Proposed Transaction

Given the significance of the extensive business the partners have considered a range of matters regarding the current structure of running the business through a partnership of individuals. The current partnership structure does not meet the partners' business needs or facilitate the growth of the business and they have identified a number of commercial reasons for implementing the Proposed Transaction.

If the appropriate advice had been available at the time of the inception of the partnership, a more suitable structure would have been adopted.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 106-5

Income Tax Assessment Act 1997 Subdivision 122-A

Income Tax Assessment Act 1997 Paragraph 152-40(1)(a)

Income Tax Assessment Act 1997 Subparagraph 152-40(1)(a)(iii)

Income Tax Assessment Act 1997 Paragraph 152-40(1)(b)

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Paragraph 328-110(1)(a)

Income Tax Assessment Act 1997 Subsection 328-110(6)

Income Tax Assessment Act 1997 Section 328-115

Income Tax Assessment Act 1997 Subsection 328-115(1)

Income Tax Assessment Act 1997 Subsection 328-115(2)

Income Tax Assessment Act 1997 Subsection 328-115(3)

Income Tax Assessment Act 1997 Section 328-120

Income Tax Assessment Act 1997 Subsection 328-120(1)

Income Tax Assessment Act 1997 Subsection 328-120(5)

Income Tax Assessment Act 1997 Section 328-125

Income Tax Assessment Act 1997 Subsection 328-125(1)

Income Tax Assessment Act 1997 Subsection 328-125(2)

Income Tax Assessment Act 1997 Subparagraph 328-125(2)(a)(ii)

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

Income Tax Assessment Act 1997 Subsection 328-125(4)

Income Tax Assessment Act 1997 Section 328-130

Income Tax Assessment Act 1997 Subdivision 328-G

Income Tax Assessment Act 1997 Section 328-425

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)(b)(iv)

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)(iii)

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 328-445

Income Tax Assessment Act 1997 Paragraph 328-445(a)

Income Tax Assessment Act 1997 Paragraph 328-445(b)

Income Tax Assessment Act 1997 Section 328-450

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Section 272-80 of Schedule 2F

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

Reasons for decision

Question 1

Summary

The disposal of the assets of the business by the partners, pursuant to the Proposed Transaction will satisfy the conditions for roll-over under section 328-430 of the ITAA 1997.

Detailed reasoning

Section 328-425 of the ITAA 1997 provides that the object of Subdivision 328-G of the ITAA 1997 is to provide 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.

Roll-over is available under Subdivision 328-G of the ITAA 1997 in relation to an asset that an entity (the transferor) transfers to one or more other entities (transferees) under a transaction if the following requirements in subsection 328-430(1) of the ITAA 1997 are satisfied:

(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.

Additionally, subsection 328-430(2) of the ITAA 1997 provides that roll-over is not available under Subdivision 328-G of the ITAA 1997 if the transferor or any transferee is either an exempt entity or a complying superannuation entity. As all the parties to the Proposed Transaction are not either of these types of entities, subsection 328-430(2) of the ITAA 1997 does not prevent roll-over being available in this situation.

Note: The roll-over of a depreciating asset transferred in the restructuring of a small business is addressed in item 8 of the table in subsection 40-340(1) of the ITAA 1997.

Section 106-5 of the ITAA 1997 states that any capital gain or capital loss made from a CGT event happening in relation to a partnership or one of its CGT assets is made by the partners individually. Each partner's gain or loss is calculated by reference to the partnership agreement, or partnership law if there is no agreement.

Accordingly, the partners will each be the transferors for the purposes of section 328-430 of the ITAA 1997 under the Proposed Transaction, and NDT will be the transferee under the Proposed Transaction.

Each of the requirements of subsection 328-430(1) of the ITAA 1997 will now be considered in detail.

Paragraph 328-430(1)(a) of the ITAA 1997 - genuine restructure

Paragraph 328-430(1)(a) of the ITAA 1997 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 on whether a transaction will be part of a 'genuine restructure of an ongoing business'.

LCR 2016/3 states 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 indicate 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 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. 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.

It is clear that the business will continue to be carried on after the Proposed Transaction has been implemented. This satisfies the 'ongoing business' requirement of paragraph 328-430(1)(a) of the ITAA 1997.

Therefore, the issue that remains is whether the proposed restructure is a genuine restructure of the business.

It has been stated that the main reason for implementing the Proposed Transaction is so that the business can be in the best structure to allow the business to grow and to continue for many years to come.

The current partnership structure does not meet partners' business needs or facilitate the growth of the business and they have identified a number of commercial reasons for implementing the Proposed Transaction.

Further, there are no further proposed transactions, transfers or restructures of the business under contemplation. Other than the upgrading of business equipment, there is no intention to sell any of assets of the business, the business itself, or to extract wealth from the business. Additionally, the arrangement will not give rise to any losses or artificial tax outcomes.

All of these factors in combination indicate that the proposed restructure is a genuine restructure of an ongoing business. Consequently the requirement in paragraph 328-430(1)(a) of the ITAA 1997 is satisfied.

Paragraph 328-430(1)(b) of the ITAA 1997 - small business or related entity

Paragraph 328-430(1)(b) of the ITAA 1997 requires both the transferor and the transferee to be one or more of the following entities in the income year the Proposed Transaction occurs:

            (i)        a small business entity

           (ii)        an affiliate of a small business entity

          (iii)        connected with a small business entity

         (iv)        a partner in a partnership that is a small business entity.

Transferor - partners in the partnership

The partners are not small business entities due to subsection 328-110(6) of the ITAA 1997 excluding partners in a partnership from being small business entities. Therefore paragraph 328-430(1)(b)(i) of the ITAA 1997 cannot be satisfied.

As the partners are partners in a partnership, they may satisfy subparagraph 328-430(1)(b)(iv) of the ITAA 1997 if the partnership is a small business entity in the income year the proposed restructure occurs.

Section 328-110 of the ITAA 1997 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 section 995-1 of the ITAA 1997 to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

As the partnership is carrying on the business, this satisfies the requirement of paragraph 328-110(1)(a) of the ITAA 1997.

Therefore it has to be determined if the aggregated turnover of the partnership is less than $10 million in the relevant income year. Aggregated turnover for an income year is defined in subsection 328-115(1) of the ITAA 1997 as the sum of the relevant turnovers in subsection 328-115(2) excluding any amounts covered by subsection 328-115(3).

The relevant turnovers are defined in subsection 328-115(2) of the ITAA 1997 as:

(a)  your *annual turnover for the income year; and

(b)  the annual turnover for the income year of any entity (a relevant entity) that is *connected with you at any time during the income year; and

(c)  the annual turnover for the income year of any entity (a relevant entity) that is an *affiliate of yours at any time during the income year.

The amounts excluded under subsection 328-115(3) of the ITAA 1997 are amounts derived from dealings between you and any entities that are connected with you or are your affiliates, or amounts derived from dealings between those entities.

Annual turnover for an income year is defined in subsection 328-120(1) of the ITAA 1997 as the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.

Section 328-120 of the ITAA 1997 provides that certain exclusions and special rules apply in calculating the annual turnover under subsection 328-120(1) of the ITAA 1997. These exclusions and special rules do not apply in this situation.

To calculate the aggregated turnover of the partnership pursuant to subsection 328-115(1) of the ITAA 1997, it first must be determined if any entities are connected with, or are affiliates of the partnership.

Entities connected with the partnership

·   The partners

Subsection 328-125(1) of the ITAA 1997 provides that an entity is connected with another entity if:

(a)  either entity controls the other entity in a way described in this section; or

(b)  both entities are controlled in a way described in this section by the same third entity.

There are different control tests in section 328-125 of the ITAA 1997 that apply depending on what type of entity is being tested. In this situation, the 'direct control test' in subsection 328-125(2) of the ITAA 1997 will apply to determine if the partners are connected with the partnership. Subsection 328-125(2) of the ITAA 1997 states:

An entity (the first entity) controls another entity if the first entity, its *affiliates, or the first entity together with its affiliates:

(a)   except if the other entity is a discretionary trust - own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of:

(i)    any distribution of income by the other entity; or

(ii)   if the other entity is a partnership - the net income of the partnership; or

(iii)  any distribution of capital by the other entity; or

(b)   if the other entity is a company - own, or have the right to acquire the ownership of, *equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage) that is at least 40% of the voting power in the company.

The partners are individually the first entity for the purposes of subsection 328-125(2) of the ITAA 1997. Individually they only hold the right to less than 40% of the net income of the partnership. Therefore, it must be determined if together with any of their affiliates they would have the right to receive more than 40% of the net income of the partnership.

Section 328-130 of the ITAA 1997 provides that an individual or a company is an affiliateof yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company. However, an individual or company is not your affiliate merely because of the nature of the business relationship you and the individual or company share.

An affiliate must carry on a business. The partners satisfy this requirement as they carry on a business via their interest in the partnership that carries on the business.

The Small business CGT concessions 2018 states that whether a person acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, is a question of fact dependent on all the circumstances of the particular case. Relevant factors include:

·   the existence of a close family relationship between the parties

·   the lack of any formal agreement or formal relationship between the parties dictating how the parties are to act in relation to each other

·   the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations

·   the actions of the parties.

There is an existence of a close family relationship between the partners. There is nothing that they have done in the past to suggest that their actions are inconsistent with their personal relationship. They have always decided matters together.

Accordingly, based on the information provided, it is expected that the partners would act in accordance with the directions of each other, or act in concert in relation to the business affairs of the partnership. Consequently the partners are affiliates of each other pursuant to section to 328-130 of the ITAA 1997.

As the partners together have the right to receive more than 40% of the net income of the partnership, the partners control the partnership under subparagraph 328-125(2)(a)(ii) if the ITAA 1997. As it has been established that each of the partners control the partnership, they are all connected with the partnership pursuant to paragraph 328-125(1)(a) of the ITAA 1997.

·   DT

Another entity that is associated with the family group is DT. As the partners are entitled to 100% of the net income of the partnership, DT cannot control the partnership pursuant to paragraph 328-125(2)(a) of the ITAA 1997.

However, as specified by paragraph 328-125(1)(b) of the ITAA 1997, it must also be considered whether DT is controlled by the same third entity as the partnership, namely the partners.

There are two alternative tests available to establish the direct control of a discretionary trust in subsection 328-125(3) of the ITAA 1997 or subsection 328-125(4) of the ITAA 1997.

Subsection 328-125(4) of the ITAA 1997 provides that an entity (the first entity) controls a discretionary trust for an income year if, for any of the preceding four income years, the discretionary trust distributed at least 40% of any income or capital to either the first entity, the first entity's affiliates, or to the first entity together with any of its affiliates.

All the prior distributions from DT have been made to the partners. As it has been established above that the partners are affiliates of each other, together they have received more than 40% of the distributions of DT in any of the previous four income years. This satisfies the control test in subsection 328-125(4) of the ITAA 1997 and consequently the partners are connected with DT.

As it has been established that the partners control both DT and the partnership, DT and the partnership are connected with each other pursuant to paragraph 328-125(1)(b) of the ITAA 1997.

·   NDT

It is noted that NDT is not yet in existence. Accordingly, the following discussion is based on the fact that NDT will be created by the time the Proposed Transaction takes effect, as outlined in the facts.

As mentioned above, one of the ways that an entity can be connected with another entity under section 328-125 of the ITAA 1997 is if both entities controlled by the same third entity. As it has been established that the partners all control the partnership, NDT will be connected with the partnership if they also control NDT.

As NDT is a discretionary trust, the tests in subsections 328-125(3) and 328-125(4) of the ITAA 1997 will apply to determine if any entities control NDT. As the test in subsection 328-125(4) of the ITAA 1997 relies on previous distributions made by the trustee, this test will not be satisfied as the NDT is a newly created trust that doesn't have a distribution history.

Subsection 328-125(3) of the ITAA 1997 states that an entity (the first entity) controls a discretionary trust if the 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.

The Small business CGT concessions guide provides the following guidance on how this test applies:

All the circumstances of the case need to be considered in determining whether you satisfy this test. For example, the mere presence in the trust deed of a requirement that the trustee should have no regard to such directions or wishes would not be sufficient.

The guide further explains that the following factors should be considered:

·   the way in which the trustee has acted in the past

·   the relationship between the trustee and the entity or its affiliates, and the relationship the trustee has with both the entity and its affiliates

·   the amount of any property or services transferred to the trust by the entity or its affiliates, or by both the entity and its affiliates

·   any arrangement or understanding between the entity and any person who has benefited under the trust in the past.

As the trustee of the NDT will be NCT, it has to be determined if NCT may reasonably be expected to act, in accordance with the directions or wishes of the any other entity, that entity's affiliates or a combination of both.

As NDT will be a newly created trust, the factors listed above provide limited guidance in this situation as there will be no history or past behaviours to consider. Therefore, the relationships the trustee has with any other entities is particularly relevant in this situation.

As a partner is the sole director of NCT, it could be concluded that he controls NCT as the trustee of NDT in accordance with subsection 328-125(3) of the ITAA 1997.

Consequently, as a partner controls both the partnership and NDT, the partnership and NDT will be connected with each other in accordance with paragraph 328-125(1)(b) of the ITAA 1997.

Conclusion

There are no other entities associated with the family group that could be considered to be connected with, or affiliates of the partnership.

As it has been established that the partners DT and NDT are connected with the partnership, the ordinary income of these entities earned in carrying on a business in any capacity will also be included in the aggregated turnover of the partnership.

As the total ordinary income of the partnership, the partners DT and NDT derived in carrying on a business will be less than $10 million in the income year that the Proposed Transaction is to occur, the aggregated turnover of the partnership will be less than $10 million in that income year.

Therefore the partnership is a small business entity as defined by section 328-110 of the ITAA 1997 in the income year the Proposed Transaction is expected to occur.

As the partners are partners in the partnership and the partnership is a small business entity, the requirements of paragraph 328-430(1)(b)(iv) of the ITAA 1997 will be satisfied in respect of the transferors.

Transferee - NDT

As NDT will be the transferee under the Proposed Transaction it will also need to be one of the entities listed in paragraph 328-430(1)(b) of the ITAA 1997. One of the entities listed in paragraph 328-430(1)(b) of the ITAA 1997 is an entity that is connected with a small business entity for that income year.

It has been established above that the partnership is a small business entity as defined by section 328-110 of the ITAA 1997 in the income year the Proposed Transaction is expected to occur. It has also been established that NDT will be connected with the partnership.

Consequently NDT as the transferee satisfies subparagraph 328-430(1)(b)(iii) of the ITAA 1997.

Paragraph 328-430(1)(c) of the ITAA 1997 - ultimate economic owner

Paragraph 328-430(1)(c) of the ITAA 1997 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.

Where ownership passes to or from a discretionary trust, this requirement would generally not be able to be met. 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.

However, section 328-440 of the ITAA 1997 contains an alternative ultimate economic ownership test for discretionary trusts. Section 328-440 of the ITAA 1997 states that 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 the requirements in that section are satisfied.

Section 328-440 of the ITAA 1997 is satisfied if the assets are included in the property of a family trust (as defined in Schedule 2F to the ITAA 1936) either just before or just after the transaction took effect. Additionally, every individual who had the ultimate economic ownership of the asset just before and just after the transfer must be members of the family group (as defined in by Schedule 2F to the ITAA 1936) relating to the family trust.

The phrase 'ultimate economic ownership' is not defined in the ITAA 1997. However, the Explanatory Memorandum to the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 (the EM) states at paragraph 1.29 and 1.30:

the ultimate economic owners of an asset at the individuals who, directly or indirectly, beneficially own an asset.

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.

In this situation, NDT will be a family trust, with a family trust election being made nominating a partner as the specified individual under section 272-80 of Schedule 2F to the ITAA 1936. As the assets will become property of NDT just after the Proposed Transaction takes effect, this will satisfy subparagraph 328-440(1)(a)(ii) of the ITAA 1997.

Just before the transaction takes effect, the individuals who will have the ultimate economic ownership of the assets will be the partners due to their interest in the partnership. Just after the Proposed Transaction takes effect the same individuals will also have the ultimate economic ownership of the assets as they will be the beneficiaries of NDT.

Therefore, as a partner will be the specified individual of NDT, all the individuals who have the ultimate economic ownership of the assets will be family members relating to the trust both before and after the transfer takes effect as required by subsections 328-440(b) and 328-440(c) of the ITAA 1997.

Consequently as the alternative ultimate economic ownership test under section 328-440 of the ITAA 1997 will be satisfied, this will satisfy the requirement of paragraph 328-430(1)(c).

Paragraph 328-430(1)(d) of the ITAA 1997 - active assets

Paragraph 328-430(1)(d) of the ITAA 1997 requires the asset being transferred is a CGT asset that is an active asset, other than a depreciating asset, at the time of the transfer. Additionally, where subparagraph 328-430(1)(b)(iv) of the ITAA 1997 is satisfied, subparagraph 328-430(1)(d)(iii) also requires the asset to be an active asset and an interest in an asset of the partnership.

As the partners are partners in the partnership that is a small business entity which satisfies subparagraph 328-430(1)(b)(iv) of the ITAA 1997, the CGT assets being transferred to NDT must be active assets and an interest in an asset of the partnership.

Paragraph 152-40(1)(a) of the ITAA 1997 provides that a tangible or intangible CGT asset is an active asset if you own the asset and it is used, or held ready for use, in a business carried on (whether alone or in partnership) by you, your affiliate or another entity that is connected with you.

Additionally, if the CGT asset is an intangible asset, paragraph 152-40(1)(b) of the ITAA 1997 provides that the asset will be an active asset if you own the asset and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate or another entity that is connected with you.

However, certain types of CGT assets are excluded from being active assets under subsection 152-40(4) of the ITAA 1997. The types of excluded assets that are relevant to this situation include certain financial instruments such as loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, and a right or option in respect of a share, security, loan or contract.

The assets being transferred by the partners are the assets that are used in carrying on the business by the partnership.

Therefore, any types of CGT assets that are being transferred under the Proposed Transaction that are specifically excluded from being active assets under subsection 152-40(4) of the ITAA 1997 will not be eligible to receive roll-over under Subdivision 328-G if the ITAA 1997. This will include any financial instruments such as any loans of the business.

As it has been established above that the partners are connected with the partnership, any CGT assets of the business that are not excluded under subsection 152-40(4) of the ITAA 1997 will satisfy the active asset test pursuant to subparagraph 152-40(1)(a)(iii) of the ITAA 1997.

Additionally, as the partners all hold an interest in the CGT assets that will be transferred under the Proposed Transaction the requirements of subparagraph 328-430(1)(d)(iii) of the ITAA 1997 are met.

Paragraph 328-430(1)(e) of the ITAA 1997 - residency

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

Section 328-445 of the ITAA 1997 contains different types of residency tests for different types of entities. If the entity is an individual, paragraph 328-445(a) of the ITAA 1997 requires the individual to be an Australian resident. As the partners are residents of Australia, this requirement is satisfied in respect of the transferors.

If the entity is a trust, paragraph 328-445(b) of the ITAA 1997 requires the trust to be a resident trust for CGT purposes. Section 995-1 of the ITAA 1997 contains the definition of a resident trust for CGT purposes. If the trust is not a unit trust, it will be a resident trust for CGT purposes if at any time during the income year, the trustee is an Australian resident or the central management and control of the trust is in Australia.

The trustee of NDT will be a company that is incorporated in Australia. A partner will be the director of the company and the partners will be the shareholders, who are all residents of Australia. NDT will therefore be an Australian resident trust for CGT purposes.

Consequently the requirements of paragraph 328-430(1)(e) of the ITAA 1997 will be satisfied.

Paragraph 328-430(1)(f) of the ITAA 1997 - roll-over choice

Paragraph 328-430(1)(f) of the ITAA 1997 requires both the transferor and the transferees choose to apply the roll-over under Subdivision 328-G of the ITAA 1997 in relation to the assets transferred under the transaction.

It has been stated that the partners as well as NDT will choose to apply the roll-over under Subdivision 328-G of the ITAA 1997, so this requirement is satisfied.

Consequences of the roll-over

Section 328-450 of the ITAA 1997 provides that if the transfer of an asset occurs under a transaction to which section 328-430 of the ITAA 1997 applies, the transfer of the asset has no direct consequences under the income tax law.

The roll-over remains available even where the business assets that were transferred to NDT under the Proposed Transaction subsequently are sold, transferred, upgraded or replaced. This is also the case where the assets are subsequently transferred by NDT to NCO under the Further Step.

There is no requirement in section 328-430 of the ITAA 1997 that the ultimate economic ownership of the asset must be held for a certain period of time. It is noted that the safe harbour rule in section 328-435 of the ITAA 1997 does specify a three year time period in which the ultimate economic ownership of the asset must not change. However, the safe harbour rule is an alternative test to that contained in paragraph 328-430(1)(a) of the ITAA 1997, and does not limit that paragraph.

This is confirmed in LCR 2016/3 at paragraphs 77-80, in particular paragraph 78 which states:

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).

Depreciating Assets

The note to subsection 328-430(1) of the ITAA 1997 states that the roll-over of a depreciating asset transferred in the restructuring of a small business is addressed in item 8 of the table in subsection 40-340(1) of the ITAA 1997

Section 40-340 of the ITAA 1997 outlines the circumstances in which roll-over relief is available where specified balancing adjustment events have occurred for a depreciating asset.

Roll-over relief is available under section 40-340 of the ITAA 1997 if there is a balancing adjustment event because an entity disposes of a depreciating asset to another entity, and the disposal involves a CGT event. Additionally, one of the conditions listed in the table in subsection 40-340 of the ITAA 1997 must be satisfied.

Item 8 of the table in subsection 40-340(1) of the ITAA 1997 outlines the consequences where there is a transfer of an asset under the small business restructure roll-over. In this situation, roll-over relief is available under section 40-340 if a roll-over under Subdivision 328-G would be available in relation to the asset if the asset were not a depreciating asset.

Note that the Commissioner has exercised his remedial power in section 370-5 of Schedule 1 to Taxation Administration Act 1953 to modify the operation of section 40-340 of the ITAA 1997. The effect of this modification is to ensure that where the restructure otherwise satisfies the conditions for roll-over under Subdivision 328-G, the transfer of depreciating assets will have no direct income tax consequences.

Consequently the transfer of any depreciating assets under the Proposed Transaction will also not have any direct consequences under the income tax law.

Question 2

Summary

The Proposed Transaction and the Further Step is not a scheme to which Part IVA of theITAA 1936applies.

Detailed Reasoning

For the general provisions of Part IVA of the ITAA 1936 to apply, there must be a 'scheme', a tax benefit and a sole or dominant purpose of entering into the scheme to obtain a tax benefit. The arrangement as described in the ruling will constitute a scheme.

Based on the information provided, and having regard to the matters set out in section 177D of the ITAA 1936, it would not be reasonable to conclude that in entering into or carrying out the scheme, the partners or any other relevant party demonstrate a dominant purpose of securing a tax benefit.