Edited version of private advice

Authorisation Number: 1051845750575

Date of advice: O

Ruling

Subject: Income tax - CGT - small business restructure rollover

Question

Does the proposed transfer of farming land from individual to the new discretionary trusts qualify for relief under subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. The transfer of the farming land from the individual taxpayer to the new discretionary trusts qualifies for relief under subdivision 328-G of the ITAA 1997 as the relevant requirements will be satisfied for the proposed transactions. It is considered that the transaction is a genuine restructure of the business.

This ruling applies for the following period periods:

Income year ending 30 June 2021

Income year ending 30 June 2022

The scheme commences on:

1 July 2020

Relevant facts and circumstances

You own several farming properties.

The properties have been, and will continue to be, used in business by you for farming operations.

The properties were leased to related entities.

You intend to transfer the farming land to several new discretionary trusts.

Each of the trusts will enter into formal lease agreements to continue to make the properties available for farming business operations.

You will control the new discretionary trusts.

The beneficiaries of each new discretionary trust will be named and will be in your family group.

The appointors of each new discretionary trust will be yourself and your spouse or your survivors.

The properties subject to the transfer will continue to be active assets.

The trustees of the new discretionary trusts will make family trust elections in which the specified test individual will be yourself.

The aggregated turnover of each new discretionary trust is less than $10 million for the 20XX financial year.

All of the entities are or will be Australian residents for tax purposes.

You and each new trusts will choose to apply the small business restructure roll-over relief.

You would like to undertake the transfer for the following reasons:

-       It enables legal segregation of separate business activities and assets, reducing the contagion risk of litigation against one farming property to the others. The various properties which have been acquired by you are geographically diverse and have differing farming profiles and risks. A predominant reason for the proposed restructure is to ensure that should there be a claim against any one of the businesses conducted on various land holdings arising from their infrastructure or lease activities, the exposure of assets to any such claim is limited.

-       The activities carried on in respect of the properties pose significant fire risk spreading to neighbouring properties and towns. Isolating the distinct business activities and land parcels will limit the potential loss associated with any claim.

-       It enables more flexibility with capital and debt structuring. You are looking for opportunities to expand the business assets, which will be funded by additional debt. In your experience where a borrowing entity has substantial assets, as in this case, then financiers are reluctant to ring-fence security and will generally seek access to all of the entity's assets as security. Having separate asset ownership of discrete asset piles, as in the proposed restructure, creates a natural segregation of security.

-       It enables operational segregation and management. The current scale of your operations are such that the various business units should run independently of each other. Confining these assets to be used by each business provides operational and financial independence required in order to invoke separate management.

Relevant legislative provisions

Section 152-10 of the Income Tax Assessment Act 1997

Section 152-40 of the Income Tax Assessment Act 1997

Section 152-78 of the Income Tax Assessment Act 1997

Section 328-110 of the Income Tax Assessment Act 1997

Subdivision 328-G of the Income Tax Assessment Act 1997

Section 328-125 of the Income Tax Assessment Act 1997

Section 328-130 of the Income Tax Assessment Act 1997

Section 328-430 of the Income Tax Assessment Act 1997

Section 328-440 of the Income Tax Assessment Act 1997

Section 328-460 of the Income Tax Assessment Act 1997

Section 995-1 of the Income Tax Assessment Act 1997

Schedule 2F of the Income Tax Assessment Act 1936

Section 272-75 of Schedule 2F of the Income Tax Assessment Act 1936