Edited version of private advice

Authorisation Number: 1051854202637

Date of advice: 18 June 2021

Ruling

Subject: Small business restructure roll-over relief

Question

Will the taxpayer be entitled to a deferral from a capital gains tax liability under the small business restructure roll-over relief in Subdivision 328-G of the Income Tax Assessment Act 1997 in respect of the proposed transaction?

Answer

Yes

Question 2

Will the income derived by the trust after the proposed transaction be classified as personal service income under section 84-5 of the Income Tax Assessment Act 1997 after the proposed transaction?

Answer

No.

This ruling applies for the following period periods:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The taxpayer runs a business of producing and uploading videos into a social media platform.

The taxpayer has an agreement with the social media platform to share advertising income for advertisements placed with the videos.

The taxpayer is a small business entity for the purpose of small business restructure rollover relief under subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997).

The taxpayer is planning to restructure the business, and the taxpayer stated that the main purpose of the proposed restructure is for asset protection.

The proposed transaction

A family trust will be established, and a corporate trustee will be appointed.

The family trust will be a small business entity for the purpose of small business restructure rollover under subdivision 328-G of the ITAA 1997.

The taxpayer will transfer the whole business into the family trust.

The taxpayer's business currently has nil liabilities.

The taxpayer will become an employee of the trust and receive a market rate wage. The trust will own the existing intellectual property and future intellectual property produced by the taxpayer as an employee of the trust.

The taxpayer stated that a family trust election will be completed once the trust is established nominating yourself as the primary individual.

Information provided

The taxpayer has provided a number of documents containing detailed information including:

a)    Private Binding Ruling ('PBR') Application,

b)    Additional information you provided.

We have referred to the relevant information within these documents in applying relevant tests to your circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 84-5

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Subdivision 328-G

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Section 328-430

Income Tax Assessment Act 1997 Section 328-435

Income Tax Assessment Act 1997 Section 328-445

Income Tax Assessment Act 1997 Section 328-450

Reasons for decision

Question 1

Summary

Yes. The proposed transfer of the business from the taxpayer to the family trust will be eligible for small business restructure roll-over relief as per subdivision 328G of the ITAA 1997.

Detailed reasoning

Subdivision 328-G of the ITAA 1997 was introduced from 30 June 2016 to facilitate flexibility for owners of small business entities to restructure the way their business assets are held while disregarding tax gains or losses that would otherwise arise.

Section 328-430 of the ITAA 1997 outlines the six conditions which must be satisfied to allow small business roll-over relief to be available to an entity:

First condition

Paragraph 328-430(1)(a) of the ITAA 1997 refers to the transaction being part of a genuine restructure of an ongoing business. Further, Law Companion Guide LCG 2016/3 Small Business Restructure Rollover: genuine restructure of an ongoing business (LCG 2016/3) explains the meaning of the term 'genuine restructure of an ongoing business' and also provides various examples of circumstances that would qualify as a genuine restructure. The first example given in LCG 2016/3 (outlined in paragraphs 17 - 23) refers to asset protection as being a suitable 'genuine reason of restructure.'

Examples - What is a 'genuine restructure of an ongoing business'

Example 1: Asset protection

Facts

17. Mark has been operating a small bookkeeping business and has branched out into financial planning after receiving his financial planning licence. Mark's business has grown significantly and his financial advice arm now generates much larger profits.

18. After being sued by a client for negligent financial advice, Mark has decided he is not prepared to conduct his business on his own account.

19. Mark transfers his active assets used to carry on his financial planning business into a discretionary family trust. He and his wife are the beneficiaries and Mark is the primary individual specified in the family trust election in force in respect of the trust. For asset protection purposes, a corporate trustee is appointed and the trust contracts with clients. Mark does not personally provide guarantees or indemnities. Mark has also caused the trustee to employ other staff to service the larger client base. The trustee pays Mark and the other employees a salary commensurate to the services they provide to the business.

20. Mark and the trustee of the discretionary family trust choose to apply the SBRR.

Relevant considerations

21. Mark is transferring assets from the original entity (himself) to quarantine his business from his personal assets. This is a benefit to Mark in terms of his ability to grow the riskier operations and enhance its profits.

22. The evidence available supports Mark's claim of asset protection. Mark's asset protection strategy and commitment to expand his business is comprehensive and effective.

Conclusion

23. Mark has achieved benefits to the ongoing efficient conduct of his small business. The restructure is a response to his business needs, facilitates further growth and is not unduly tax-driven. The economic ownership of the business is maintained. Accordingly the 'genuine restructure of an ongoing business' condition is satisfied.

The taxpayer is proposing to transfer his business into a discretionary family trust. For asset protection purposes, a corporate trustee will be appointed.

The reason for the proposed restructure is for asset protection. This first condition in paragraph 328-430(1)(a) of the ITAA 1997 would therefore be satisfied.

Second condition

Paragraph 328-430(1)(b) of the ITAA 1997 relevantly requires that each party to the transfer is a small business entity for the income year during which the transfer occurred.

Section 328-110(1) of the ITAA 1997 then explains the meaning of a small business entity as:

You are a small business entity for an income year (the current 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 taxpayer is a small business entity as defined in section 328-110 of the ITAA 1997.

The proposed trust will also be a small business entity as defined in section 328-110 of the ITAA 1997.

Third condition

Paragraph 328-430(1)(c) of the ITAA 1997 requires that the transaction does not materially change each individual's share of ultimate economic ownership in the assets.

A non-fixed (discretionary) trust may be able to meet the requirements for ultimate economic ownership, for example, where there is no practical change in which individuals economically benefit from the asset before the after the transfer.

Further, a family trust may meet an alternative economic ownership test where:

•         The trustee has made a family trust election, and

•         Every individual who had ultimate economic ownership of the transferred asset before the transfer, and every individual who has ultimate economic ownership after the transfer, must be members of the family group relating to the family trust.

The taxpayer stated that a family trust election will be made nominating the taxpayer as the primary individual.

The ultimate economic ownership in the assets will therefore remain the same, thus satisfying paragraph 328-430(1)(c) of the ITAA 1997.

Fourth condition

Paragraph 328-430(1)(d) of the ITAA 1997 relevantly requires that at the time the transfer takes effect, the asset is a CGT asset (other than a depreciating asset).

Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if, at that time 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 by you, your affiliate or another entity that is connected with you. In addition, intangible assets are active assets when you, your affiliate, or another entity connected with you own it and it is inherently connected with the business.

As the whole business is to be transferred to family trust through the proposed transaction, this condition is satisfied.

Fifth condition

Paragraph 328-430(1)(e) of the ITAA 1997 requires the transferor and all transferees to meet the residency requirement in section 328-445 of the ITAA 1997 for an entity. Section 328-445 provides that, for the purposes of paragraph 328-430(1)(e), the residency requirement for an entity is that, relevantly, if the entity is a company, the entity is an Australian resident, or if the entity is a trust, it is a resident trust for CGT purposes.

Both the transferor and transferee will therefore meet the residency requirements.

Sixth condition

Paragraph 328-430(1)(f) of the ITAA 1997 requires the transferor and all transferees involved to choose to apply a roll-over in relation to the asset(s) being transferred.

It is envisaged, if the proposed transaction proceeds, that all parties will have elected to apply the small business restructure roll-over relief under subdivision 328-G.

Conclusion

After application of the facts directly to the legislation (Subdivision 328-G ITAA 1997) we have concluded the taxpayer will be eligible to apply the small business restructure roll-over provisions upon the transfer of his business to the family trust.

Question 2

Summary

The income of the trust will not be considered to be personal services income of the taxpayer after the proposed transaction takes place.

Detailed reasoning

The Commissioner's view on what constitutes personal services income (PSI) is outlined in Taxation Ruling TR 2001/7 Income tax: the meaning of personal services income.

As per section 84-5 of the ITAA 1997 and paragraph 19 of TR 2001/7, PSI is income that is mainly a reward for an individual's personal efforts or skills (or would be mainly such a reward if it was the income of the individual who did the work). Paragraph 29 of TR 2001/7 states that the meaning of PSI does not include income that is mainly:

•         from an entity supplying goods or granting the right to use property;

•         generated by assets an entity holds, or

•         generated by the business structure.

The income the taxpayer earnt was a result of the contractual rights as the owner of the videos through their agreement with the social media platform. These agreements allowed for the placement of advertisements with your videos and the advertisement revenues to be shared with you. This income is therefore not directly in relation to your skills or personal efforts. The asset ownership generates income indirectly from the use of the assets, being the videos.

Following the restructure, all videos created prior to the restructure and intellectual property associated with them will be owned by the trust. All future videos will be owned by the family trust as they will be produced by the taxpayer as an employee of the family trust.

The income received by the trust in relation to advertising placed within the videos on social media platforms is not mainly a reward for the taxpayers' personal efforts or skills and so is not PSI under section 84-5 of the ITAA 1997.