Edited version of private advice

Authorisation Number: 1051945081926

Date of advice: 30 June 2022

Ruling

Subject: CGT - small business restructure rollover

Question

Is a roll-over available under section 328-430 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the proposed transfer of X rights and business operations from the company to the trust?

Answer

Yes.

This private ruling applies for the following period:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The company has a number of individual shareholders.

The company's business address is in Australia and the shareholders are Australian residents.

The company owns an asset and has been operating the business since 19XX.

For the years ended 30 June 20XX and 30 June 20XX, the revenue for the company turnover was less than $X million

It is intended that the company transfer the assets to the Trust.

In relation to the Trust, the eldest of the shareholders is to be the primary individual specified in the family trust election and the primary beneficiary as specified according to the schedule of the draft deed of the trust.

The Trust's primary individual will also be the test individual.

Assumptions

There will be no change in the ultimate economic ownership of any of the significant assets (that are transferred under the rollover) for a 3-year period after the transaction takes place.

The company will be considered a small business entity in the 20XX and 20XX financial years as it is expected that it continued operation in a similar manner compare to the 20XX and 20XX financial years, therefore have an aggregated turnover of less than $X million.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 328-G

Income Tax Assessment Act 1997 Subsection 328-430(1)

Income Tax Assessment Act 1997 Subsection 40-340(1)

Income Tax Assessment Act 1997 Section 328-435

Income Tax Assessment Act 1997 Paragraph 328-430(1)(a)

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Section 328-440

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

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

Income Tax Assessment Act 1997 Paragraph 328-430(1)(c)

Income Tax Assessment Act 1936 Schedule 2F

Income Tax Assessment Act 1936 Section 272-75

Reasons for decision

Summary

The transfer of the assets from the company to the discretionary trust will qualify for relief under subdivision 328-G of the ITAA 1997 provided all the requirements of section 328-435 of the ITAA 1997 continue to be met for the three-years following the restructure.

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.

Subsection 328-430(1) provides that roll-over relief is available if the following conditions are met:

•         the transfer of the asset is, or is part of, a genuine restructure of an ongoing business;

•         each party to the transfer is either a small business entity (or affiliate of, or connected with a small business entity) or a partner in a partnership that is a small business entity;

•         there is no material change in the ultimate economic ownership of the transferred asset;

•         the asset being transferred is a CGT asset (other than a depreciating asset) that is an active asset, and for a partnership, is also an interest in an asset of the partnership;

•         both the transferor and each transferee are residents of Australia; and

•         both the transferor and each transferee choose to apply the roll-over.

Genuine restructure

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.

The requirements for the small business restructure rollover also include a safe harbour rule. This is an alternative way to satisfy the 'genuine restructure of an ongoing business' condition. A small business will be taken to satisfy the condition where, among other things, there is no change to the ultimate economic ownership of any of the significant assets of the business for three years following the rollover.

Section 328-435 provides a safe harbour rule whereby, a transaction will be, or will be part of, a genuine restructure if, for a period of three years after the transaction occurs:

•         There is no change in ultimate economic ownership of any of the significant assets of the business that were transferred under the transaction; and

•         Those significant assets continue to be active assets; and

•         There is no significant or material use of those significant assets for private purposes.

Paragraph 78 of Law Companion Ruling 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).

Application to your circumstances

In this case, after the transfer of the assets they will continue to be used in the business operated by the Trust for the three year period. Therefore we have not considered whether the arrangement would otherwise be a genuine restructure of an ongoing business under paragraph 328-430(1)(a) of the ITAA 1997.

Small business entities, affiliates or connected entities

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.

Subsection 328-125(1) of the ITAA 1997 provides that an entity is connected with another entity if:

(a) either entity controls the other entity in a way described in this section; or

(b) both entities are controlled in a way described in this section by the same third entity.

An entity controls a discretionary trust if the trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the entity, its affiliates, or the first entity together with its affiliates (subsection 328-125(3) of the ITAA 1997).

Subsection 328-130(1) of the ITAA 1997 provides that an individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company.

However, an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share (subsection 328-130(2) of the ITAA 1997).

Application to your circumstances

The company is a small business entity. The discretionary trust is connected with the company as both are controlled by an individual and their siblings.

Ultimate economic ownership

Ordinarily, a discretionary trust will not satisfy the ultimate economic ownership test because the economic interests that the objects of such a trust have in the trust's assets are not fixed in proportion, and depend on the exercise of the trustee's discretion.

However, section 328-440 provides an alternative ultimate economic ownership test for discretionary trusts. Section 328-440 will be satisfied if every individual who had ultimate economic ownership of the transferred asset before the transfer, and every individual who has ultimate economic ownership of the transferred asset after the transfer must be members of the same family group (within the meaning of Schedule 2F of the ITAA 1936) relating to the family trust (as defined section 272-75 of Schedule 2F of the ITAA 1936).

Application to your circumstances

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

•         just after the transaction, the assets will be included in the property of the trust which will be a non-fixed family trust; and

•         every individual who had the ultimate economic ownership of the assets before the transfer is a member of the family group (within the meaning of Schedule 2F to the ITAA 1936) relating to the family trusts; 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

A CGT asset (whether a tangible or intangible asset) is an active asset at a time if, at that time, you own the asset 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 you, an affiliate of yours, or by another entity that is connected with you (subsection 152-40(1) of the ITAA 1997).

While a depreciating asset is excluded from being an eligible asset, roll-over relief is effectively provided, with a balancing adjustment for such assets transferred under a small business restructure, under item 8 of the table in subsection 40-340(1).

Application to your circumstances

The assets satisfy the active asset test as they are used in the course of carrying on a business by the company and after the transfer, will be used in the business carried on by the trust.

Therefore the transfer of the assets from the company to the discretionary trust will qualify for relief under subdivision 328-G of the ITAA 1997 provided all the requirements of section 328-435 of the ITAA 1997 continue to be met for the three years following the restructure.