Edited version of private advice

Authorisation Number: 1051949888654

Date of advice: 23 March 2022

Ruling

Subject: CGT small business restructure rollover

Question

Will the transfer of farmland to a New Land Trust satisfy the requirements of the small business restructure rollover in accordance with Subdivision 328-430 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

You operate a primary production business as a sole trader. You are a small business entity with a turnover of less than $X million.

Your business is conducted on farming land. You acquired the land approximately XX years ago and have used it in your business since.

You propose to transfer the farmland to ABC trust (ABC Trust).

The ABC Trust will make a family trust election (FTE) with you as the specified individual.

You and K will be the trustee's and primary beneficiaries of the ABC Trust

The ABC Trust is to assist with Asset Protection of your enterprise.

You intend to change your entity structure from sole trader to partnership, allowing K to join in the business.

You expect the partnership to operate for more than X years.

Relevant legislative provisions

Income Tax Assessment Act section 152-40

Income Tax Assessment Act section 328-130

Income Tax Assessment Act section 328-430

Income Tax Assessment Act section 328-440

Income Tax Assessment Act section 328-445

Income Tax Assessment Act section 328-450

Reasons for decision

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 of an ongoing business

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.

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).

Ultimate Economic Ownership - discretionary trust

For the purposes of paragraph 328-430(1)(c) of the ITAA 1997, 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.

Active Asset

Section 152-35 of the ITAA 1997 states that a CGT asset satisfies the active asset test if 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 by you, your affiliate or another entity that is connected with you if:

•         you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period owned; or

•         you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7.5 years.

Section 152-40 of the ITAA 1997 explains the meaning of an active asset. A CGT 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 by you, your affiliate or another entity that is connected with you or if the asset is intangible asset, you own it and it is inherently connected with a business that is carried on by you, your affiliate, or another entity that is connected with you.

Application to your circumstances

In this case, the Commissioner accepts that the proposed transfer is a genuine restructure of an ongoing business. You are a small business entity and the New Land Trust is a discretionary trust connected with you. The ultimate economic ownership test in section 328-440 of the ITAA is satisfied therefore paragraph 328-430(1)(c) of the ITAA 1997 is also satisfied. The farmland satisfies the active asset test as it has been used in the course of carrying on a business for the entire ownership period. Following the proposed transfer they will be used in the same business activity carried on by you and your spouse.

Therefore, the transfer of the farmland to the trust satisfies the requirements of the small business restructure rollover in subdivision 328-G of the ITAA 1997.