Edited version of private advice

Authorisation Number: 1051793556358

Date of advice: 24 December 2020

Ruling

Subject: Small business restructure roll-over

Question

Will the proposed transfer of assets from Company A to Company B qualify for roll-over relief under Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

30 June 20XX

Relevant facts and circumstances

Company A:

•         was incorporated in 20XX;

•         is an Australian resident for tax purposes;

•         holds an Australian Financial Services License (AFSL); and

•         is a small business entity for the 2021 income year pursuant to subsection 328-110(1) of the ITAA 1997.

Mr A is the sole director and sole shareholder of Company A.

Company A has been carrying on a business since 20XX. Until such time as Mr A suffered from ill-health in late 20XX, Company A offered:

•         financial planning services to retail clients, including:

-       the formulation of investment strategy and portfolio management services; and

-       the provision of personal financial investment insurance and superannuation advice to individual clients; and

•         consultancy and related administration services, including the provision of:

-       consultancy and compliance services and general advice to small and medium size businesses relating to the administration of their corporate superannuation;

-       consultancy and general advice to wholesale clients and third-party professional advisers such as accountants and solicitors;

-       consultancy administration and compliance services to trustees of self-managed superannuation funds (SMSFs); and

-       real estate services to individuals and trustees of SMSFs, assisting them in the negotiation process of acquiring or disposing of a property asset.

Following Mr A's health complications in late 20XX, Company A's business model needed to be restructured and streamlined in order to take into account Mr A's compromised state of health and his consequent impacted ability to continue to efficiently run the business in its then current size. As a result, a decision was taken to cease the financial planning arm of the business, which required more resources and a higher level of commitment on Mr A's part, both from a duty of care perspective to the individual clients and from a legislative compliance perspective.

In accordance with the decision to cease the financial planning arm of the business, in 20XX Company A sold a right to service its clients to whom/which it was providing financial planning services, and the right to manage their investments, to a financial planning firm operating under its own AFSL. In doing so, Company A was able to relinquish its ongoing fiduciary responsibilities and duty of care owed to these clients under its AFSL licensing regulations, and have such responsibilities transferred to the acquiring licensee, hence releasing Company A from the onerous compliance requirements involved, and substantially reducing Mr A's personal work commitments.

Whilst Company A retained its AFSL following the divestment of the financial planning arm of its business, it did not require the AFSL to undertake the balance of services it continued to offer subsequent to that divestment.

Since 20XX Company A has continued to offer the following consultancy and administration services:

•         consultancy and compliance services in relation to corporate superannuation to SMEs;

•         consultancy services and general advice to wholesale clients and third-party professional advisers;

•         consultancy administration and compliance services to trustees of SMSFs and their advisers; and

•         consultancy negotiation and general advice to individuals and trustees of SMSFs in the area of real estate.

In order to reduce the relevant compliance obligations and costs involved in maintaining an AFSL, Company A proposes to sell its AFSL to an unrelated entity. In order for the AFSL (issued in the name of Company A) to be divested, Mr A is required to resign as a director of Company A and the new owner(s) of the AFSL will appoint one or more new directors of Company A.

During the 20XX income year, Company A is also proposing to transfer, for nil consideration, its active assets which include cash (of approximately $XXX) and office furniture and IT equipment (valued at approximately $XX) to Company B (the proposed transfer). These assets are used and/or are inherently connected with the consultancy and administration services arm of the business offered by Company A since 20XX.

Company Bx was incorporated in 20XX and is an Australian resident for tax purposes. Mr A is the sole director and sole shareholder of Company B, and will continue to be following the proposed transfer.

Company B will continue to run the same consultancy and administration business undertaken by Company A since 20XX following the proposed transfer.

The proposed transfer is not proposed in the course of winding down the business or realising Mr A's ownership interest in the business.

Mr A expects that, in the three year period after the proposed transfer:

(a)  there will be no change in ultimate economic ownership of any of the assets of the business that were transferred under the proposed transfer;

(b)  those assets will continue to be active assets of Company B; and

(c)   there will be no significant or material use of those assets for private purposes.

Assumptions

1.    In the three year period after the proposed transfer:

(a)  there will be no change in ultimate economic ownership of any of the assets of the business that were transferred under the proposed transfer;

(b)  those assets will continue to be active assets of Company B; and

(c)   there will be no significant or material use of those assets for private purposes.

2.    Company B will be a small business entity for the 20XX income year pursuant to section 328-110 of the ITAA 1997.

3.    Company A and Company B will choose to apply a roll-over under Subdivision 328-G in relation to the assets transferred under the proposed transfer.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 108-5(1)

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

Income Tax Assessment Act 1997 section 328-110

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

Income Tax Assessment Act 1997 Subdivision 328-G

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 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 section 328-435

Reasons for decision

Summary

The proposed transfer will meet the requirements under Subdivision 328-G of the ITAA 1997 and qualify for roll-over relief.

All legislative references are to the ITAA 1997.

Detailed reasoning

Subdivision 328-G allows 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.

Subsection 328-430(1) discusses when a roll-over is available. It provides as follows:

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 would be satisfied in that income year if paragraph 152-10(1AA)(b) were disregarded; 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.

Paragraph 328-430(1)(a) - Genuine restructure of an ongoing business

Law Companion RulingLCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters (LCR 2016/3) provides guidance on the meaning of the term 'genuine restructure of an ongoing business.'

Whether a transaction is, or is a 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 (paragraph 5 of LCR 2016/3).

Subdivision 328-G contains a safe harbour rule at section 328-435 that provides an alternative way to meet the 'genuine restructure of an ongoing business' condition.

Paragraph 78 of LCR 2016/3 states that 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).

Section 328-435 states:

For the purposes of paragraph 328-430(1)(a) (but without limiting that paragraph), a transaction is, or is a part of, a genuine restructure of an ongoing business if, in the 3 year period after the transaction takes effect:

(a)  there is no change in ultimate economic ownership of any of the significant assets of the business (other than trading stock) that were transferred under the transaction; and

(b)  those significant assets continue to be active assets; and

(c)   there is no significant or material use of those significant assets for private purposes.

Mr A expects, and it is assumed for the purposes of this ruling, that in the three year period after the proposed transfer:

•         there will be no change in ultimate economic ownership of any of the assets of the business that were transferred under the proposed transfer;

•         those assets will continue to be active assets of Company B; and

•         there will be no significant or material use of those assets for private purposes.

On that basis, the safe harbour rule in section 328-435 will be satisfied and, for the purposes of paragraph 328-430(1)(a), the proposed transfer will be treated as a genuine restructure of an ongoing business.

Paragraph 328-430(1)(b) - Small business entity

As:

•         Company A is a small business entity for the 20XX income year pursuant to subsection 328-110(1); and

•         it is assumed for the purposes of this ruling that Company B will be a small business entity for the 20XX income year pursuant to section 328-110,

both entities (as transferor and transferee respectively) are an entity to which subparagraph 328-430(1)(b)(i) applies, thereby satisfying the requirement under paragraph 328-430(1)(b).

Paragraph 328-430(1)(c) - Ultimate economic ownership

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 states:

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.

Ultimate economic ownership of the assets transferred under the proposed transfer will remain with Mr A who owns all shares in both Company A and Company B (and will continue to be the sole shareholder in Company B at the time of the proposed transfer), thereby satisfying the requirement under paragraph 328-430(1)(c).

Paragraph 328-430(1)(d) - Active assets

As Company A and Company B are entities to which subparagraph 328-430(1)(b)(i) applies, the requirement under subparagraph 328-430(1)(d)(i) must be satisfied. To satisfy this condition, the assets subject to the proposed transfer must be a CGT asset (other than a depreciating asset) that is, at the time the transfer takes effect, an active asset.

A CGT asset is defined in subsection 108-5(1) as any kind of property, or a legal or equitable right that is not property.

Subsection 152-40(1) provides the meaning of an active asset:

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 View history reference

(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.

The assets subject to the proposed transfer are CGT assets (other than a depreciating asset) that will, at the time the transfer takes effect, be active assets on the basis that they will be owned and used by Company A in the course of carrying on its business, or owned and inherently connected with the business carried on by Company A, as applicable, thereby satisfying the requirement under paragraph 328-430(1)(d).

Paragraph 328-430(1)(e) - Residency

As both Company A and Company B are Australian residents for tax purposes, the requirement under paragraph 328-430(1)(e) will be satisfied.

Paragraph 328-430(1)(f) - roll-over choice

As it is assumed for the purposes of this ruling that both Company A and Company B will choose to apply the roll-over under Subdivision 328-G in relation to the assets transferred under the proposed transfer, the requirement under paragraph 328-430(1)(f) will be satisfied.

Conclusion

As each of the requirements under subsection 328-430(1) will be satisfied, Company A will be eligible to choose roll-over relief under Subdivision 328-G in relation to the proposed transfer.