Edited version of private advice

Authorisation Number: 1051759354296

Date of advice: 25 September 2020

Ruling

Subject: Small business restructure rollover

Question 1

Will stage 1 of option 1, or option 2, of the proposed restructure meet the requirements for eligibility for rollover relief under Subdivision 328-G of the ITAA 1997?

Answer

No

Question 2

Will the proposed restructure result in the ultimate economic ownership of the assets being maintained for the purposes of paragraph 328-440 of ITAA 1997?

Answer

Withdrawn by client. The answer to this question is provided in our answer to question 1.

Question 3

Will stage 2 of option 1 of the proposed restructure meet the requirements for eligibility for rollover relief under Subdivision 122-A of ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on

20 May 20XX

Relevant facts and circumstances

X (you) is an Australian resident company, incorporated in 19XX. Your directors are A and B.

Previously, A and B transferred 100% of your issued Ordinary shares to Y as trustee for Z, your current sole shareholder. These shares confer 100% of the voting, dividend and capital rights to Y as trustee for Z.

Schedule 2 of the trust deed for Z, names A and B as income beneficiaries and corpus beneficiaries of the trust and other beneficiaries of the trust.

Z is a 'family trust' as Y made a family trust election (FTE) in respect of Z in accordance with section 272-80 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936). The FTE specifies A as the individual whose family group is to be taken into account in relation to the FTE.

You carried on a business in the year ending 30 June 20XX and had aggregated turnover of less than $XXX for the year.

The proposed restructure

You are proposing to transfer assets (the proposed restructure) using one of two methods as follows:

Option 1

Option 1 involves two stages. Under stage 1, you will transfer goodwill, plant and equipment to a new discretionary trust (NT).

Stage 2 would happen directly after stage 1. Under stage 2, NT will transfer the goodwill, plant and equipment to a new company (NC) in exchange for 100% of the Ordinary (non-redeemable) shares of NC.

Option 2

Under option 2, you will transfer the commercial property to NT.

The trustee of NT will be Y. Y will make a FTE in accordance with section 272-80 of Schedule 2F to the ITAA 1936 in respect of NT, so NT will be a 'family trust' for income tax purposes. The FTE in respect of NT will specify A as the individual whose family group is to be taken into account in relation to the FTE.

NT is not yet established, however, you have provided a copy of the trust deed template you propose to use to create the trust deed for NT.

You propose that A and B will be the 'Named Beneficiaries' listed in Schedule 2 of the trust deed for NT based on the trust deed template. Schedule 2 of the proposed trust deed template provides other beneficiaries of NT.

You carry on business manufacturing and retailing. The manufacturing component of the business is carried out on the commercial property (subject of option 2 of the proposed restructure) and involves the use of large machines (subject of option 1 of the proposed restructure).

In the appendix to your private ruling application, you advised that the purpose of the proposed restructure is to protect the significant value of the business premise from any potential creditors. You did not provide any information about past incidents of creditor claims.

In respect of other business risks, you are liable for any product defects because you manufacture your own products, and although there have been no workplace incidents from machinery use to date, you are aware of the possibility of such an incident for which you would be liable. Your tax agent indicated that the proposal is to separate the commercial property from the inherent business risks.

Your tax agent advised that the proposed restructure will allow the business to grow and diversify by allowing management and directors to consider additional product offerings or try new business practices without having to worry about how failure may put the accumulated business wealth (represented by the commercial property) at risk.

Your tax agent also advised that you believe that the trading entity and the property owner will benefit from the following business efficiencies:

The property owner

·         gains the ability to leverage the property and investment assets without regard to the effect on the ongoing business

·         creates a passive income stream with regular income from rent received from the business

·         will be able to focus on a diversification strategy for its assets without needing to consider the actions and consequences to the business

The trading entity

·         removes any potential liability for any debts associated with the property or additional investment assets so this will no longer need to be factored into the decision-making process

·         provides a known cash outflow (rent) which allow the company/business to plan and focus its surplus cash on new business opportunities

·         removes the cost of capital upkeep of the property and the cashflow impost this may cause.

Your tax agent advised that diversification has been discussed with a view to doing something to make more use of the property asset value, but you have no current plan in place.

Your tax agent advised that whilst there is no guarantee regarding future favourable trading conditions, the entities will have access to funding if required and intend to continue to operate the business into the foreseeable future, and that you believe the risk of business closure in the next 3 years is unlikely.

In relation to previous advice regarding your business structure, your tax agent advised:

·         they are not aware of any advice you may have received when the business commenced or when the land was acquired.

·         when the shares were transferred, they provided advice that did not consider restructure of the business,

·         you have long been aware of the issues pertaining to having the business premise owned by the operating entity rather than by a related party, however, the tax liability of any restructure would have been cost prohibitive.

In relation to why you were not considering transferring your assets to Z to separate the assets, your tax agent advised that it was their understanding that there is no rollover relief available if CGT assets are simply transferred to a shareholder.

Relevant legislative provisions

Income Tax Assessment Act 1997

section 40-340

subsection 40-340(1)

Subdivision 122-A

section 122-15

section 122-20

subsection 122-20(1)

subsection 122-20(2)

subsection 122-20(3)

section 122-25

subsection 122-25(1)

subsection 122-25(2)

subsection 122-25(3)

subsection 122-25(4)

subsection 122-25(5)

subsection 122-25(6)

subsection 122-25(7)

subsection 152-40(1)

paragraph 152-40(1)(a)

paragraph 152-40(1)(b)

Subdivision 328-G

section 328-110

section 328-125

subsection 328-125(1)

subsection 328-125(2)

subsection 328-125(3)

subsection 328-125(7)

Subsection 328-430(1)

paragraph 328-430(1)(a)

paragraph 328-430(1)(b)

paragraph 328-430(1)(c)

paragraph 328-430(1)(d)

paragraph 328-430(1)(e)

paragraph 328-430(1)(f)

subsection 328-430(2)

section 328-440

paragraph 328-440(a)

paragraph 328-440(b)

paragraph 328-440(c)

Reasons for Decision

Question 1

Summary

Having regard to all of the facts and circumstances surrounding the proposed restructure and the factors that would indicate that a transaction is, or is part of, a 'genuine restructure of an ongoing business', it is considered that the proposed restructure is not a 'genuine restructure of an ongoing business' as contemplated by the legislation.

As such, it is considered that neither stage 1 of option 1 nor option 2 of the proposed restructure will meet the requirements in Subdivision 328-G of the ITAA 1997.

Note: given this decision, a rollover would not be available under subsection 40-340(1) of the ITAA 1997 in respect of the depreciating assets.

Detailed reasoning

The small business restructure rollover (SBRR) - Subdivision 328-G

The SBRR, in Subdivision 328-G of the ITAA 1997, is available in relation to an asset that an entity (the transferor) transfers to one or more other entities (transferees) if:

·         the requirements in subsection 328-430(1) of the ITAA 1997 are satisfied, and

·         no transferor or transferee is an exempt entity or a complying superannuation entity (subsection 328-430(2)).

The requirements in subsection 328-430(1) are applied to the facts of your proposed restructure below.

Paragraph 328-430(1)(a) - Transaction is, or is part of, a genuine restructure of an ongoing business

The Explanatory Memorandum to the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 (the EM) explains that the object of the SBRR is to make it easier for small business owners to change the legal structure of their business (paragraphs 1.1 and 1.2). It discusses that the most appropriate structure for a small business may change over time, or the initial structure adopted may later be found to be inappropriate, and that restructuring may help a business to:

·         continue to develop and grow

·         avoid unnecessary compliance costs

·         enhance business efficiency

·         move to a more efficient structure for tax purposes, or

·         adapt to changing conditions (paragraph 1.6).

The first requirement for the SBRR, in paragraph 328-430(1)(a) of the ITAA 1997, is that the transfer of the asset is, or is a part of, a genuine restructure of an ongoing business.

The phrase 'genuine restructure of an ongoing business' is not defined in the legislation, however, the EM assists with interpreting what is meant by the term for the purpose of paragraph 328-430(1)(a) of the ITAA 1997. Further, the Commissioner's view regarding the meaning of the term is provided in Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters (LCR 2016/3).

Whether a restructure is or is part of a 'genuine restructure of an ongoing business', as contemplated by the legislation, is a question of fact that is determined having regard to all of the facts and circumstances surrounding the restructure (paragraph 5 of LCR 2016/3).

As discussed in paragraph 7 of LCR 2016/3 and paragraph 1.22 of the EM, the following features would indicate that a transaction is, or is part of, a 'genuine restructure of an ongoing business':

(a)  The restructure is a bona fide commercial arrangement undertaken to enhance business efficiency, to:

•  facilitate growth, innovation or diversification,

•  enable the business to adapt to changed conditions, or

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

(b)  It is authentically restructuring the way in which the business is conducted and is not a 'divestment' or preliminary step to facilitate the economic realisation of assets.

(c)   The business continues to operate following the transfer through a different entity structure.

(d)  The economic ownership of the business and its restructured assets is maintained, and the transferred assets continue to be used as active assets in the business.

(e)  The restructure results in a structure likely to have been adopted had the owners obtained appropriate professional advice when setting up the business.

(f)    The restructure is not artificial or unduly tax driven.

Although, tax considerations are factors that can be taken into account under a genuine restructure, this is not without limits (LCR 2016/3 paragraphs 8 and 9). A 'genuine restructure' is not 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 that is significantly directed at eliminating tax liability, would indicate the restructure was not a 'genuine restructure of an ongoing business'.

Commercial arrangement to enhance business efficiency

The business currently carried on by X (you) is manufacturing and retailing (the ongoing business). Under the proposed restructure, the ongoing business will no longer be carried on by the owner of the commercial property.

In your private ruling application, you advised that the proposed restructure was being undertaken to separate the commercial property from the inherent risks of the ongoing business operation, protecting the property from potential future legal liabilities associated with the ongoing business (asset protection). You later added your contention that separating the property from the ongoing business will:

(a)  allow the ongoing business to grow and diversify by allowing management to consider additional product offerings or try new business practices without having to worry about how failure may put the accumulated business wealth (represented by the commercial property) at risk,

(b)  remove potential liability from the ongoing business owner for any debts of the property owner associated with the property or additional investment assets, which will not need to be factored into the decision-making process of the business owner,

(c)   removing the cashflow impost of upkeep of the property, and

(d)  providing a fixed, 'known' rent outflow, which would facilitate improved planning, decision-making and application of surplus cash for new opportunities.

Separating the property asset from the ongoing business does not minimise the inherent risks of the ongoing business from creditors, product failure, or machine use. It is considered that reduced net asset values in the ongoing business increases the threat to business continuity posed by an incident or event that results in legal liability from these risks. Were such an event to occur, it is likely that continuity of the ongoing business would continue to rely on the backing of the property asset, albeit through the property owner.

Both (a) and (b) above suggest the decision-making process of the ongoing business owner will be simplified - (a) in respect of any future diversification of the ongoing business, and (b) in respect of any future liabilities of the property owner, for which the ongoing business owner would not be liable. However, as the same individuals make decisions for all the group entities it is unclear how the proposed restructure will simplify the decision-making process of the ongoing business owner as suggested.

It is considered that any new product diversification proposals or plans for the ongoing business would require the involvement and support of the property owner - providing capital and/or inter-group finance; or supplying the property as collateral and providing guarantees or indemnities for external financing. As such, when considering new diversification proposals, it is likely decision-makers will need to factor in the risks to business continuity and profitability for both the ongoing business and the property owner. Where the property owner enters into new investments, the risks of these investments in relation to the support provided to the ongoing business will need to be factored in. As such, the decision-making process is unlikely to be simplified by the proposed restructure.

Although as suggested, there is some benefit is to be gained from having a fixed quantum of 'rent', as opposed to variable property ownership and upkeep costs, it is considered likely that the rent paid for use of the commercial property will equal or exceed the costs of ownership to the ongoing business.

In the absence of other reasons, "asset protection" is not considered to deliver benefits in respect of, or to enhance, efficiency of the ongoing business. In the absence of specific diversification proposals or plans the ongoing business has in place, the proposed restructure does not demonstrate the contended efficiency benefits will arise.

It is considered that any benefits the proposed restructure may provide to the ongoing business can be seen to be outweighed by the additional costs and administrative complexities introduced by adding more entities into the group structure.

As such, it is considered that the proposed restructure is not being undertaken to enhance the efficiency of the ongoing business.

Authentically restructuring the way business is conducted

The proposed restructure will not change the type of entity in which the ongoing business is conducted and, other than changes to financing discussed above, will not involve any changes to the way the ongoing business is conducted.

There is no evidence to suggest that the proposed restructure is a preliminary step to facilitate economic realisation of the assets, or utilise the assets for personal use, by the ultimate owners.

In respect of divestment, removing the value of the property asset from the ongoing business may represent a divestment from the ongoing business if the property value is used for investments or diversification that are not for activities or diversification of the ongoing business.

Business continuity, economic ownership and asset use

It is proposed that you (or the new company) will continue operating the ongoing business into the foreseeable future and you believe the risk of business closure in the next 3 years in unlikely.

It is accepted that the proposed restructure will not change the economic ownership of the ongoing business (discussed further below) or the transferred assets, and that the active assets will continue to be used in the ongoing business following the restructure.

Professional advice at establishment or on purchase of the property

Although you have not provided information regarding previous advice you received about structuring your business, it is accepted that it is likely that another group entity may have purchased the commercial property if you had been aware of this type of asset protection strategy when the property was purchased.

However, the facts provided show little additional benefit to be gained by the creation of the new trust and new company other than to gain access to the SBRR, which would not otherwise be available. As such, it is considered unlikely that the structure resulting after the proposed restructure would have been recommended or entered into at that time.

Tax considerations

The facts show that you have been aware of the risks to the commercial property from business operation for some time and have not previously acted to separate the property from the business as the tax liability was cost prohibitive.

It is considered that your decision about which restructure option will be undertaken is significantly influenced by tax considerations. As discussed above, there appears to be little commercial advantage gained by the use of the new trust as a conduit for transferring the assets and subsequent owner of the new company shares in option 1, or as purchaser in option 2, other than to enable the alternative ultimate ownership test to be used and the requirements of the SBRR to be satisfied.

Conclusion on 'genuine restructure of an ongoing business'

Having regard to all of the facts and circumstances surrounding the proposed restructure and the factors that would indicate that a transaction is, or is part of, a 'genuine restructure of an ongoing business', it is considered that the proposed restructure is not a 'genuine restructure of an ongoing business' as contemplated by the legislation.

Although this decision is sufficient to determine that the requirements in Subdivision 328-G of the ITAA are not satisfied, and that you are not entitled to the SBRR in respect of either option 1 or 2 of the proposed restructure, the remaining requirements are considered for completeness.

Paragraph 328-430(1)(b) - small business entities, affiliates or connected entities

Paragraph 328-430(1)(b) of the ITAA 1997 requires that 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.

As you had an aggregated turnover of less than $10 million for the year ending 30 June 2020, applying the previous year test in section 328-110 of the ITAA 1997, you will be a small business entity for the year ending 30 June 2021 and will satisfy subparagraph 328-430(1)(b)(i).

Is NT connected with X?

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

(a)  either entity controls the other entity in a way described in section 328-125; or

(b)  both entities are controlled by the same third entity in a way described in this section 328-125.

A and B indirectly control X (as described in subsection 328-125(7) of the ITAA 1997) as:

·         X is controlled by Z because Z beneficially owns 100% of the shares in X and has the rights to income and capital of X and voting in X (as described in subsection 328-125(2)), and

·         Z is controlled by A and B because the trustee of Z acts in accordance with the directions or wishes of A and B (as described in subsection 328-125(3)).

A and B will also control NT as it can reasonably be expected that the trustee of NT will act in accordance with the directions or wishes of A and B in respect of NT (refer subsection 328-125(3) of the ITAA 1997).

Therefore, NT will be connected with X under subsection 328-125(1) of the ITAA 1997 as both entities are controlled by the same third parties, A and B, and subparagraph 328-430(1)(b)(iii) is satisfied in respect of NT.

As each party to the proposed restructure is an entity to which one or more of the subparagraphs in paragraph 328-430(1)(b) applies this requirement is satisfied.

Paragraph 328-430(1)(c) - ultimate economic ownership is maintained

Paragraph 328-430(1)(c) of the ITAA 1997 requires that the transfer 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 (paragraph 328-430(c) of the ITAA 1997)

"Ultimate economic ownership" is not defined for the purpose of the ITAA 1997, however, the provides:

1.29 ... 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.

Where ownership passes to or from a discretionary trust, this requirement would generally not be able to be met. In discussing ultimate economic ownership and discretionary trusts, the EM goes on to say:

1.34 In some cases, non-fixed (discretionary) trusts may be able to meet the requirements for ultimate economic ownership on their facts. For example, a trust may be non-fixed for the purposes of the income tax law but, because there is no practical change in which individuals economically benefit from the assets before and after the roll-over, there will not have been a change in ultimate economic ownership on the facts.

1.35 However in other cases the nature of a non-fixed trust may mean that it is not possible to determine proportionate ultimate economic ownership of the assets of the trust. Therefore if a non-fixed trust seeking to use the roll-over (either as transferor or transferee) is a family trust, they may instead meet an alternative ultimate economic ownership test. This is intended to provide additional flexibility to small family businesses carried on through non-fixed trusts by allowing them to meet the requirement to maintain proportionate ultimate economic ownership of the assets if the ultimate economic ownership of those assets remains within the family.

The alternative ultimate economic ownership test for discretionary trusts is set out in section 328-440 of the ITAA 1997, which states:

328-440 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;

(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.

In relation to the proposed transaction, as NT is a discretionary trust and will have made a family trust election (FTE), paragraph 328-440(a) of the ITAA 1997 will be satisfied because just after the transaction will take place the assets will be included in the property of a non-fixed trust that is a family trust.

X is 100% owned by the trustee for Z. As such, it is necessary to consider the ultimate owners of Z to determine the ultimate owners of X. As Z has made a FTE specifying A as the individual whose family group is taken into account in respect of the FTE. This means that just before the transfer takes place, individuals holding ultimate economic ownership of the assets will only include the beneficiaries of Z, which will only include the members of A's family group. There are no beneficiaries outside A's family group capable of holding the ultimate economic ownership of the assets of Z, and X, at that time.

Just after the transfer takes effect, the trustee of NT will make an FTE specifying A as the individual whose family group is taken into account in respect of the FTE. As such, at that time, individuals holding ultimate economic ownership of NTs assets will only include the beneficiaries of NT, which will only include the members of A's family group. There are no beneficiaries outside A's family group capable of holding the ultimate economic ownership of the assets of NT.

Therefore, paragraphs 328-440(b) and (c) of the ITAA 1997 are satisfied, as just before the transfer and just after the transfer, every individual who had the ultimate economic ownership of the assets is a member of the family group relating to NT (the trust referred to in paragraph 328-440(a)).

The requirement in paragraph 328-430(c) of the ITAA 1997 is satisfied in respect of the proposed restructure.

Paragraph 328-430(1)(d) - the asset is an active asset

Where the vendor is a small business entity, at the time the transfer takes effect transferred assets must be capital gains tax (CGT) assets (other than depreciating assets) and must be active assets of the entity (paragraph 328-430(1)(d) of the ITAA 1997).

A CGT asset is an active asset if:

(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 you; your affiliate; or 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 (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you (subsection 152-40(1) of the ITAA 1997).

Although depreciating assets are specifically excluded from the SBRR, section 40-340 of the ITAA 1997 provides rollover relief for depreciating assets where:

(a)  there is a balancing adjustment event because an entity (the transferor) disposes of a depreciating asset in an income year to another entity (the transferee); and

(b)  the disposal involves a CGT event; and

(c)   a SBRR would be available in relation to the asset if it were not a depreciating asset (subsection 40-340(1)).

Under the options being considered for the proposed restructure, you will transfer goodwill and plant and equipment; or commercial property to NT.

Is the commercial property an active asset?

As you own the commercial property and it is used in the course of your business, the commercial property is an active asset and paragraph 328-430(1)(d) is satisfied in relation to the commercial property.

Is the goodwill an active asset?

The goodwill is an intangible CGT asset and is owned by you. The notes to subsection 152-40(1) explain that an intangible asset need satisfy only paragraph (a) or paragraph (b) of the subsection and specifically refers to goodwill as an example. As the goodwill is inherently connected with your business it is an active asset under subsection 152-40(1)(b) of the ITAA 1997. Paragraph 328-430(1)(d) is satisfied in relation to the goodwill.

Are the plant and equipment assets active assets?

As the plant and equipment assets are owned by you and used in the course of your business, the plant and equipment assets are 'active assets'. However, as the plant and equipment assets are depreciating assets they are specifically excluded from the SBRR and paragraph 328-430(1)(d) of the ITAA 1997 is not satisfied in relation to the plant and equipment assets.

For the purpose of the rollover in section 40-340 of the ITAA 1997, if the plant and equipment assets were not depreciating assets, paragraph 328-430(1)(d) of the ITAA 1997 would be satisfied for the assets. Therefore, a rollover would be available under subsection 40-340(1) of the ITAA 1997 in respect of the depreciating assets if the other requirements for the SBRR were satisfied.

Paragraph 328-430(1)(e) - each party meets the residency requirements

For the purposes of paragraph 328-430(1)(e) of the ITAA 1997, the transferor and each transferee:

·         if the entity is an individual or a company - must be an Australian resident (paragraph 328-445(a)), or

·         if the entity is a trust - must be a resident trust for CGT purposes (paragraph 328-445(b)).

Based on the facts, X and NT will satisfy these requirements.

Paragraph 328-430(1)(f) - each party chooses to apply the rollover

Paragraph 328-430(1)(f) of the ITAA 1997 will be satisfied if the transferor and each transferee choose to apply a roll-over under this Subdivision in relation to the assets transferred under the transaction.

Under the proposed restructure, the transferor and transferee propose to choose the rollover.

Subsection 328-430(2) - no transferor or transferee is an exempt entity or a complying superannuation entity

Subsection 328-430(2) of the ITAA 1997 provides that a small business restructure roll-over under Subdivision 328-G of the ITAA 1997 is not available if the transferor, or any transferee, is either an exempt entity or a complying superannuation entity.

Based on the facts, no transferor or transferee in respect of the proposed transfer is, or will be, either an exempt entity or a complying superannuation entity. As such, subsection 328-430(2) of the ITAA 1997 will not prevent a roll-over under Subdivision 328-G being available in respect of the proposed transfer of assets.

Conclusion

Having regard to all of the facts and circumstances surrounding the proposed restructure and the factors that would indicate that a transaction is, or is part of, a 'genuine restructure of an ongoing business', it is considered that the proposed restructure is not a 'genuine restructure of an ongoing business' as contemplated by the legislation and does not satisfy the requirement in paragraph 328-430(1)(a) of the ITAA 1997.

As such, it is considered that neither stage 1 of option 1 nor option 2 of the proposed restructure will meet the requirements in Subdivision 328-G of the ITAA 1997.

Note: given this decision, a rollover would not be available under subsection 40-340(1) of the ITAA 1997 in respect of the depreciating assets.

Question 2

Withdrawn. The answer is provided in question 1.

Question 3

Summary

Based on the facts, stage 2 of option 1 of the proposed restructure will meet the requirements for eligibility for rollover relief under Subdivision 122-A of the ITAA 1997 for the new trust (NT) created by your ultimate owners as part of the proposed restructure of your business.

Detailed reasoning

Although it is considered that you are not entitled to the SBRR for stage 1 of option 1 of the proposed restructure and although you have advised that choosing option 1 is dependent on the SBRR being available, for completeness, question 3 is considered below in relation to stage 2 of option 1.

The rollover provided in Subdivision 122-A of the ITAA 1997, is available for a trustee in respect of a trust if the trust disposes of a CGT asset, or assets, to a company (section 122-15), and the circumstances in sections 122-20 and 122-25 are satisfied. In general terms, the circumstances to be satisfied are:

·         the consideration for the trigger event must be non-redeemable shares in the company or, where an asset or assets are disposed of, non-redeemable shares together with the company undertaking to discharge liabilities in respect of the asset or assets (subsections 122-20(1) and (2)),

·         the market value of the shares received must equal the market value of the asset or assets disposed of (less any liabilities the company undertakes to discharge) or the market value of any asset or assets created in the company (subsection 122-20(3)),

·         The trust must own all the shares in the company just after the trigger event happens (subsection 122-25(1))

·         the transferred asset or assets must not be excluded by subsections 122-25(2) and (3),

·         if a transferred asset is a right, option or convertible note, the asset acquired by the company on the exercise or conversion of the right, etc, must not become trading stock of the company just after acquisition (subsection 122-25(4))

·         the company acquiring the asset or assets cannot be an exempt entity (subsection 122-25(5)), and

·         if one of the parties to the transaction is not an Australian resident, the roll-over is confined to those assets that have the necessary connection with Australia (subsections 122-25(6) and (7)).

For stage 2 of option 1 of the proposed restructure,

·         Y as proposed trustee for NT will transfer all of the assets of the business, being goodwill and plant and equipment, to a new company (NC). This will be a disposal of the assets and CGT event A1 will happen in respect of the assets.

·         In consideration for the assets to be transferred, NT will receive 100% of the issued NC shares, which will be non-redeemable shares, and the market value of the shares will be equal to the market value of the assets transferred to NC.

·         Just before the transfer, the assets to be transferred will be owned by Y as trustee for NT, and just after the transfer, Y as trustee for NT will own all the shares in NC.

·         As discussed above, at the time of the transfer, all of the business assets of NT will transfer to NC. This means item 2 of the table in subsection 122-25(2) of the ITAA 1997 is relevant and subsection (3) does not apply. The assets to be transferred are not excluded assets under item 2 of the table in subsections 122-25(2).

·         None of the assets to be transferred are a right, option or convertible note.

·         NC will not be an exempt entity, and

·         NT will be a resident trust for CGT purposes and NC will be an Australian resident company.

Based on the facts, stage 2 of option 1 of the proposed restructure will meet the requirements for eligibility for rollover relief under Subdivision 122-A of the ITAA 1997.