Edited version of private advice

Authorisation Number: 1051926227377

Date of advice: 24 November 2021

Ruling

Subject: Small business restructure roll-over

Question

Does the proposed transfer of the business from the Unit Trust to Newco qualify for roll-over relief under Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This private ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Unit Trust owns land upon which it conducts a business.

The Unit Trust is a resident trust for capital gains tax (CGT) purposes.

The Unit Trust has no connected entities or affiliates who generate income from carrying on business operations.

The Unit Trust's aggregated turnover for the 20XX income year was less than $X million.

The Proposed Transaction

The taxpayer proposes to transfer the business to a newly incorporated resident company (Newco). The transfer is proposed to be by way of a business sale for market value consideration. The goodwill, plant and equipment (to the extent it is not fixed to the land) and trading stock, will all be transferred.

The land, including significant plant and fixed equipment, will be retained by the Unit Trust and leased to Newco.

The unitholders in the Unit Trust will own shares in Newco in the exact proportions in which they own the units in the Unit Trust.

The aggregated turnover of Newco in the 20XX income year is likely to be less than $X million.

Following the transaction, for a period of at least three years:

•         there will be no change in ownership of the significant assets by Newco

•         those assets will be active assets, and

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

The proposed arrangement is being considered for the following reasons:

The taxpayer's asset ownership is considered sub-optimal in that the land and business are both held by the same legal entity such that the land is exposed to the business risks, including the potential risk of liability.

The taxpayer is desirous of maximising the asset protection of its land and business operations by separating them.

Had the taxpayer been appropriately advised when setting up the business it is likely it would have adopted separate ownership structures for holding the land and owning and operating the business.

The Unit Trust and Newco will choose to apply the roll-over in relation to the transfer of the business.

Relevant legislative provisions

Income Tax Assessment Act 1997 Paragraph 152-40(1)(a)

Income Tax Assessment Act 1997 Paragraph 152-40(1)(b)

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

Income Tax Assessment Act 1997 Paragraph 328-110(1)(a)

Income Tax Assessment Act 1997 Paragraph 328-110(1)(b)

Income Tax Assessment Act 1997 Subparagraph 328-110(1)(b)(i)

Income Tax Assessment Act 1997 Subsection 328-115(1)

Income Tax Assessment Act 1997 Subsection 328-115(2)

Income Tax Assessment Act 1997 Subsection 328-120(1)

Income Tax Assessment Act 1997 Subdivision 328-G

Income Tax Assessment Act 1997 Section 328-430

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 Subsection 328-430(2)

Income Tax Assessment Act 1997 Section 328-435

Income Tax Assessment Act 1997 Section 328-445

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

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.

Section 328-430 discusses when a roll-over is available. The following six basic conditions in subsection 328-430(1) must be satisfied for roll-over to be available:

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

(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.

Note: The roll-over of a depreciating asset transferred in the restructuring of a small business is addressed in item 8 of the table in subsection 40-340(1).

The transferor is the Unit Trust who will be transferring the business to the transferee, being Newco.

In addition, subsection 328-430(2) provides that roll-over is not available under Subdivision 328-G if the transferor or any transferee is either an exempt entity or a complying superannuation entity. As all the parties to the Proposed Transaction are not either of these types of entities, subsection 328-430(2) does not prevent roll-over being available in this situation.

Each requirement in subsection 328-430(1) will now be considered in detail.

Paragraph 328-430(1)(a) - genuine restructure

Paragraph 328-430(1)(a) 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 of 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 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. It can encompass a restructure of the way in which business assets are held where that structure is likely to have been adopted had the business owners obtained appropriate professional advice when setting up the business.

Paragraph 7 of LCR 2016/3 outlines the following features that indicate a transaction is, or is part of, a genuine restructure of an ongoing business:

•         it is a bona fide commercial arrangement undertaken to facilitate growth, innovation and diversification, to adapt to changed conditions, or to reduce administrative burdens and compliance costs

•         it is authentically restructuring the way the business is conducted, as opposed to a divestment or a preliminary step to facilitate the economic realisation of assets

•         the economic ownership of the business and its restructured assets is maintained

•         the small business owners continue to operate the business through a different legal structure, and

•         it results in a structure likely to have been adopted had the small business owners obtained appropriate professional advice when setting up the business.

However, the restructure of an ongoing business by a business owner is not genuine if it is done in the course of winding down to transfer wealth between generations or realising their ownership interests. A restructure is likely to not be a genuine restructure of an ongoing business if:

•         it is a preliminary step to facilitate the economic realisation of assets, or takes place in the course of winding down to transfer wealth between generations

•         it effects an extraction of wealth from the assets of the business for personal investment or consumption

•         it creates artificial losses or brings forward their recognition

•         it effects a permanent non-recognition of gain or creates artificial timing advantages, and/or

•         there are other tax outcomes that do not reflect economic reality.

The enterprise will continue to be carried on by Newco after the Proposed Transaction has been implemented. The economic ownership of the business remains, since the shareholders of Newco are the same entities and in the same proportions as the unitholders in the Unit Trust.

Additionally, you have stated that the resulting structure would originally have been adopted had appropriate professional advice been received when setting up the business.

You have stated that the main reason for implementing the Proposed Transaction is to achieve enhanced asset protection. This can be likened to example 1 in LCR 2016/3:

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.

Similar to the above example, the Unit Trust is looking to quarantine the business from its other assets, in this case, land. You have stated that the main reason for implementing the Proposed Transaction is to achieve enhanced asset protection.

It is accepted that the Proposed Transaction is a genuine restructure for the purposes of paragraph 328-430(1)(a).

Safe Harbour Rule

In any event, Subdivision 328-G contains a safe harbour rule that provides an alternative way to meet the 'genuine restructure of an ongoing business' condition.

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

(a)          those significant assets continue to be *active assets; and

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

Paragraph 78 of LCR 2016/3 states:

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).

You have stated that following the transaction, for a period of at least three years:

•         there will be no change in ownership of the significant assets by Newco

•         those significant assets will be active assets, and

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

Based on your statements, the safe harbour rule in section 328-435 will be satisfied. Therefore, for the purposes of paragraph 328-430(1)(a), the Proposed Transaction will be treated as a genuine restructure of an ongoing business.

Paragraph 328-430(1)(b) - small business or related entity

Paragraph 328-430(1)(b) requires both the transferor and the transferee to be one or more of the following entities in the income year the Proposed Transaction occurs:

(i)            a small business entity

(ii)           an affiliate of a small business entity

(iii)          connected with a small business entity

(iv)          a partner in a partnership that is a small business entity.

Small business entity

Subsection 328-110(1) provides that you are a small business entity for an income 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 term 'business' is defined in subsection 995-1(1) to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

The Unit Trust

The Unit Trust is currently conducting the business and would therefore satisfy the requirement in paragraph 328-110(1)(a).

The next requirement is to determine if the aggregated turnover of the taxpayer is less than $10 million in the relevant income year. 'Aggregated turnover' for an income year is defined in subsection 328-115(1) as the sum of the relevant annual turnovers excluding any amounts covered by subsection (3).

The 'relevant annual turnovers' are defined in subsection 328-115(2) as:

(a)          your *annual turnover for the income year; and

(b)          the annual turnover for the income year of any entity (a relevant entity) that is *connected with you at any time during the income year; and

(c)           the annual turnover for the income year of any entity (a relevant entity) that is an *affiliate of yours at any time during the income year.

The amounts excluded under subsection 328-115(3) are amounts derived from dealings between you and any entities that are connected with you or are your affiliates, or amounts derived from dealings between those entities.

Subsection 328-120(1) states:

An entity's annual turnover for an income year is the total *ordinary income that the entity *derives in the income year in the ordinary course of carrying on a *business.

You advised that there are no entities connected or affiliated with the Unit Trust that generate income from business operations.

The 2021 turnover is stated as being below $10 million. Consequently, the requirement in subparagraph 328-110(1)(b)(i) will be satisfied.

Since paragraphs 328-110(1)(a) and (b) will both be satisfied, the Unit Trust is a small business entity in accordance with subsection 328-110(1).

Newco

As a result of the Proposed Transaction Newco will carry on the business from the time immediately after the transfer takes place. Newco would therefore satisfy the requirement in paragraph 328-110(1)(a).

You have stated that the aggregated turnover of Newco in the current income year (20XX) is likely to be less than $X million. Consequently, the requirement in subparagraph 328-110(1)(b)(i) will be satisfied.

Since paragraphs 328-110(1)(a) and (b) will both be satisfied, Newco is a small business entity in accordance with subsection 328-110(1).

Both the Unit Trust and Newco are small business entities in accordance with subsection 328-110(1). Thus, the requirement in paragraph 328-430(1)(b) will be satisfied.

Paragraph 328-430(1)(c) - ultimate economic owner

Paragraph 328-430(1)(c) requires the transaction to not have the effect of materially changing which individual has, or which individuals have, the ultimate economic ownership of the assets. Additionally, where more than one individual holds the ultimate economic ownership of the asset, each individual's share of that ownership must not materially change.

The unitholders in the Unit Trust will own all of the shares in Newco in exactly the same proportions as they currently hold their units in the Unit Trust. It follows that ultimate economic ownership of the asset will not materially change. Consequently, the requirement in paragraph 328-430(1)(c) will be satisfied.

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

Paragraph 328-430(1)(d) requires the CGT asset 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

In this case, subparagraph 328-430(1)(b)(i) applies. Therefore, the assets being transferred, being the goodwill, and the plant and equipment (to the extent it is not fixed to the land), must be active assets.

Active assets

Paragraph 152-40(1)(a) provides that a tangible or intangible CGT asset is an active asset if you own the asset and it is used, or held ready for use, in a business carried on (whether alone or in partnership) by you, your affiliate or another entity that is connected with you.

The plant and equipment that is fixed to the land are tangible assets that are used by the Unit Trust in carrying on the business. They are active assets of the Unit Trust.

Paragraph 152-40(1)(b) provides that an intangible CGT asset is an active asset if you own the asset 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 goodwill of the Unit Trust is an intangible asset and is inherently connected with carrying on the business. It is an active asset of the Unit Trust.

The goodwill, and the plant and equipment (to the extent it is not fixed to the land) are active assets. Therefore, the requirement in subparagraph 328-430(1)(d)(i) will be satisfied.

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

Paragraph 328-430(1)(e) requires both the transferor and the transferee to meet the residency requirements outlined in section 328-445. As the Unit Trust and Newco are both Australian residents for tax purposes, the requirement in paragraph 328-430(1)(e) will be satisfied.

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

Paragraph 328-430(1)(f) requires both the transferor and the transferee to choose to apply the roll-over under Subdivision 328-G in relation to the assets transferred under the transaction.

You have stated that both the Unit Trust and Newco will choose to apply the roll-over in relation to the transfer of the business. Therefore, the requirement in paragraph 328-430(1)(f) will be satisfied.

Conclusion

As each of the requirements in subsection 328-430(1) have been met, the Unit Trust is eligible to choose roll-over relief under Subdivision 328-G in relation to the Proposed Transaction.