Edited version of private advice

Authorisation Number: 1051914800051

Date of advice: 1 November 2021

Ruling

Subject: Small business restructure rollover

Question

Would the proposed transfer of farmland qualify for the Small Business Restructure Rollover under Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The individual owns farmland in their own name. Part of this land was inherited from their spouse upon their death.

The farmland was previously farmed in a partnership however since 1 July 20XX it has been used by the Trading Trust.

The trust's turnover is less than $XM.

The trustee of the trust is a company. Family members of the individual are the directors and shareholders of the trustee company and the joint Appointer and Guardians of the trust.

Due to the Trading Trust making tax losses there has not been any distributions of income or capital for the 20XX, 20XX and 20XX financial years.

The trustee of the trust will make an election that nominates the individual and their family members as controllers of the trust for the 20XX, 20XX, 20XX and 20XX financial years.

It is proposed the individual will transfer the farmland to the Landholding Trust.

The trustee of this trust is also a company. Family members are the joint Appointer and Guardian of the trust.

The Landholding Trust has not made any distributions of income or capital for the 20XX, 20XX, 20XX financial years.

The trustee of the trust will make an election that nominates the individual and their family members as controllers of the trust of the 20XX, 20XX, 20XX and 20XX financial years.

When the 20XX income tax return is prepared a Family Trust Election will be prepared effective from 1 July 20XX with the individual as the test individual.

The farmland owned solely by the individual is willed to a family member who has worked on the farm for many years.

It is anticipated that another family member may expect to receive a share of the farm even though they have not contributed to the farm for many years.

For this reason the individual would like to transfer the land to the Landholding Trust to eliminate the risk of the estate being contested.

The individual as the owner of the land had to sign a guarantee for the debt in the Trading Trust. This is because most of the value is in the underlying land and as such the financiers insist on utilising the land as security.

If the restructure of the land can be completed, then the land will be held in the Landholding Trust and the trustees of that trust will be required to sign the guarantee.

The transfer of the farmland to the Landholding Trust will give the individual an added level of asset protection.

Relevant legislative provisions

Section 328-110 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

Paragraph 152-10(1AA)(b) of the Income Tax Assessment Act 1997

Subsection 152-10(1A) 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 272-70 of Schedule 2F of the Income Tax Assessment Act 1936

Section 272-72 of Schedule 2F of the Income Tax Assessment Act 1936

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

Reasons for decision

Summary

The transfer of the land from the individual to the Trading Trust qualifies for relief under subdivision 328-G of the ITAA 1997 as the relevant requirements will be satisfied for the proposed transaction.

Detailed reasoning

The rollover under Subdivision 328-G of the ITAA 1997 is designed to facilitate flexibility for owners of small business entities to restructure their business, and the way their business assets are held, while disregarding the tax gains and losses that would otherwise arise.

To be eligible for the rollover several conditions under section 328-430 of the ITAA 1997 must be satisfied.

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.

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

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 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 (LCR 2016/3) 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.

Application to your circumstances

The Commissioner considers that the proposed transaction is an authentic restructure of the small business that will improve asset protection. As the transfer is part of a genuine restructure of an ongoing business, paragraph 328-430(1)(a) of the ITAA 1997 is satisfied.

Small business entities, affiliates or connected entities - 328-430(1)(b) of the ITAA 1997

Subparagraph 328-430(1)(b) of the ITAA 1997 requires that each party to the transfer is an entity to which 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.

An entity can control a discretionary trust in several ways. Where the trustee of a discretionary trust did not make a distribution because the trust had a tax loss or no taxable income, the trustee can nominate up to four beneficiaries as controllers of the trust for that income year.

Application to your circumstances

It is accepted that the individual will control the Trading Trust as the trustee has nominated the individual and family members as controllers for the relevant years.

As the individual and the Landholding Trust will be connected to a small business entity, the Trading Trust, in the income year of the proposed transaction, subparagraph 328-430(1)(b)(iii) of the ITAA 1997 will be satisfied.

Ultimate economic ownership - 328-430(1)(c) of the ITAA 1997

Paragraph 328-430(1)(c) of the ITAA 1997 requires that the transaction does not materially change the ultimate economic ownership of the asset. The proposal does not meet this ultimate economic ownership test as the current ultimate economic ownership will not be maintained after the transfer to the holding trust.

An alternative economic test is available for discretionary trusts with family trust elections in place under section 328-440 of the ITAA 1997:

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.

Application to your circumstances

Section 328-440 is satisfied by the proposed transactions as:

•                    just after the transaction, the land will be included in the property of the Landholding Trust which is a family trust; and

•                    the individual, who had the ultimate economic ownership of the land just before the transfer is a member of the family group (within the meaning of Schedule 2F to the ITAA 1936) relating to the family trust; and

•                    every individual who, just after the transfer takes effect, will have the ultimate economic ownership of the land will be a member of the same family group.

As section 328-440 of the ITAA 1997 is satisfied, paragraph 328-430(1)(c) of the ITAA 1997 is also satisfied under the proposed arrangement.

Active asset - 328-430(1)(d) of the ITAA 1997

As subparagraph 328-430(1)(b)(iii) of the ITAA 1997 applies, the assets will need to be CGT assets (other than a depreciating asset) and 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.

Paragraph 152-10(1AA)(b) of the ITAA 1997 serves to disregard the reduction in the turnover threshold to $2 million for the purposes of the small business restructure test requirements. For the purpose of this test the aggregated turnover threshold will be $10 million for the income year.

Subsection 152-10(1A) of the ITAA 1997 allows access to the small business conditions where passively held assets are held by taxpayers who are connected to a small business entity. The provision is set out as follows:

The conditions in this subsection are satisfied in relation to the CGT asset in the income year if:

(a) your affiliate, or an entity that is connected with you, is a CGT small business entity for the income year; and

(b) you do not carry on a *business in the income year (other than in partnership); and

(c) if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and

(d) in any case - the CGT small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b) ) in relation to the CGT asset.

Application to your circumstances

For the proposed transactions section 152-10(1A) of the ITAA 1997 will be satisfied in relation to the land, as, in the income year in which the transaction will occur:

•                    an entity connected with you (the Trading Trust) will be a small business entity for the income year; and

•                    you do not carry on a business in the income year and

•                    the land is not an interest in an asset of a Partnership business; and

•                    the Trading Trust will carry on the business in relation to the land.

As subsection 152-10(1A) of the ITAA 1997 is satisfied, therefore for the purposes of the rollover requirements, subparagraph 328-430(1)(b)(ii) of the ITAA 1997 is satisfied.