Edited version of private advice

Authorisation Number: 1052050343210

Date of advice: 21 March 2023

Ruling

Subject: CGT - small business restructure rollover

Question 1

Will the restructure qualify for roll-over relief under Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, the restructure will qualify for roll-over relief under Subdivision 328-G of the ITAA 1997 because all the requirements of section 328-430 of the ITAA 1997 will be met.

Question 2

Is Wine Equalisation Tax (WET) payable on the transfer of stock from the Trust to the Company?

Answer

No, WET is not payable on the transfer of stock from the Trust to the Company.

Question 3

Can the Trust claim the producer rebate on the stock transferred to the Company?

Answer

No, the Trust cannot claim the producer rebate on the stock transferred to the Company.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Trust (Transferor)

The Trust runs a vineyard business, including grape growing, wine manufacturing, and wine wholesale and retail operations.

The Trust is a discretionary trading trust.

A family trust election (FTE) has been made with Person A named as the specified individual

The Trust owns vineyard operational assets which include

•         Stock on hand (wine)

•         Goodwill

•         Plant and equipment (being depreciating assets that are not being considered in respect of the provisions within Subdivision 328-G of the ITAA 1997)

•         Cash at bank (noting that cash at bank will not be transferred as part of the restructure).

The Trust has an aggregated turnover of less than $XX million.

The trustee is Trustee Pty Ltd.

The directors of the trustee are Persons A and B.

The beneficiaries are Persons A and B.

The Company (Transferee)

The Company has completed an interposed entity election, including it in the family trust election of the Trust.

Persons A and B are directors of the Company.

The Company has an aggregated turnover of less than $XX million

The sole shareholders of the Company are Persons A and B as trustees for the Second Family Trust.

Second Family Trust

The Second Family Trust is a discretionary trust.

A family trust election has been made with Person A named as the specified individual.

The trustees of the Second Family Trust are Persons A and B.

The restructure

The Trust will transfer all the vineyard operation assets to the Company.

The Trust will retain some assets such as a building, and lease them to the Company.

The transfer will be a going concern sale, undertaken in one transaction.

Post-transfer, the Company will be the trading entity and will take over business operations.

The restructure will facilitate growth of the business by allowing the profits to be retained and reinvested in the business.

The restructure will simplify the business structure and reduce administrative burdens and compliance costs of maintaining Division 7A loans.

To fund the acquisition, the Trust will distribute a portion of its 20XX profits to the Company, which will use these funds to acquire the assets from the Trust at cost.

The Trust has 2020 and 2021 UPEs to the Company, which were put into Division 7A complying loans; these will be cleared by partially funding the acquisition.

The Company, being a shell company pre-restructure, is not able to obtain finance on its own.

The Trust is an Australian resident for the purposes of section 328-445 of the ITAA 1997.

The Trust will choose to apply the roll-over under Subdivision 328-G of the ITAA 1997.

The Company is an Australian resident for the purposes of section 328-445 of the ITAA 1997.

The Company will choose to apply the roll-over under Subdivision 328-G of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 328-G

Income Tax Assessment Act 1936 Schedule 2F

A New Tax System (Goods and Services Tax) Act 1999 Division 38

A New Tax System (Goods and Services Tax) Act 1999 section 38-325

A New Tax System (Wine Equalisation Tax) Act 1999 section 5-5

A New Tax System (Wine Equalisation Tax) Act 1999 Division 7

A New Tax System (Wine Equalisation Tax) Act 1999 section 7-5

A New Tax System (Wine Equalisation Tax) Act 1999 subsection 19-5(1)

A New Tax System (Wine Equalisation Tax) Act 1999 subparagraph 19-5(1)(b)(i)

A New Tax System (Wine Equalisation Tax) Act 1999 subparagraph 19-5(1)(b)(ii)

Taxation Administration Act 1953 Schedule 1

Reasons for decision

Question 1

Subsection 328-430(1) of the ITAA 1997 provides that a roll-over 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 capital gains tax (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

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

Genuine restructure of an ongoing business

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'.

Paragraph 6 of LCR 2016/3, in part, explains 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.

In this case, the ongoing business is the running of a vineyard. The reasons for the restructure are:

•         to facilitate growth of the business by allowing the profits from the vineyard operations to be retained and reinvested in the business

•         to simplify the business structure where the business operates under a separate legal entity

•         to reduce administrative burdens and compliance costs of maintaining Division 7A loans

Initially, a trust structure was considered appropriate for the business due to its small size at the time; each year all beneficiary profits were reinvested into the business. The Trust's business has grown considerably over the past XX years and having to distribute all profits is no longer considered appropriate or economical. Moving the business operations to the Company will allow the business greater control over its cash flow - the Company will be able to reinvest profits and pay dividends only when the directors choose to do so, without the need for loans from beneficiaries.

There will be no change in the ownership or management of the business. Succession planning is not considered to be a factor in the restructure.

Consistent with the commentary and examples provided in LCR 2016/3, this is considered to be a genuine restructure.

Small business entity

To satisfy paragraph 328-430(1)(b), both the transferor and the transferee must be one or more of the following:

(i) a small business entity for the income year during which the transfer occurred

(ii) an entity which has an affiliate that is a small business entity for the year in which the transfer occurred

(iii) an entity which is connected with an entity that is a small business entity for the year in which the transfer occurred, or

(iv) be a partner in a partnership that is a small business entity for the year in which the transfer occurred.

Subsection 328-110(1) of the ITAA 1997 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 $XX million;

(ii) your aggregated turnover for the current year is likely to be less than $XX million.

Connected with

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.

Subsection 328-125(2) provides that an entity controls another entity (other than a discretionary trust) if it, or its affiliate, or both:

(a)  owns, or has the right to acquire, interests in that other entity that give the right to receive at least 40% of any distribution of income or capital by the other entity; or

(b)  if the other entity is a company, owns or has the right to acquire equity interests in the company that give at least 40% of the voting power of the company

Subsections 328-125(3) and (4) provide two tests for when an entity controls a discretionary trust.

Firstly, an entity controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of that entity, its affiliates, or both.

Secondly, an entity controls a discretionary trust for an income year if for any of the four income years before that year:

(a)  the trustee paid to, or applied for the benefit of, the beneficiary or their affiliates, or both the beneficiary and any of its affiliates, any of the income or capital of the trust, and

(b)  the amounts paid or applied were at least 40% (the control percentage) of the total amount of income or capital paid or applied for that income year (subject to the Commissioner's discretion where the control percentage is between 40% and 50%)

The Trust is controlled by Persons A and B because its trustee is Trustee Pty Ltd; the directors of the trustee are Persons A and B; and Trustee Pty Ltd could reasonably be expected to act in accordance with their wishes.

The Company is controlled by Persons A and B because they, as trustees for the Second Family Trust, own 100% of the shares in the Company.

Therefore, the Company is an entity connected with a small business entity because the Trust is a small business entity, and both entities are controlled by the same third entity, being Persons A and B as directors and trustees.

Transferor - The Trust

The Trust is a small business entity in the year of the proposed transfer, as it will be carrying on the vineyard business up until the proposed transfer of the operating assets. The grape growing, wine manufacturing, and wine wholesale/retail operations activities carried on by the Trust constitute the carrying on of a business. In addition, the aggregated turnover of the Trust is less than $XX million.

Transferee - The Company

The Company is also a small business entity in the year of the proposed transfer, as it will become the trading entity after the proposed transfer of the operating assets, and it will resume the business activities of the vineyard. In addition, the company also has an aggregated turnover of less than $XX million.

Therefore paragraph 328-430(1)(b) of the ITAA 1997 is satisfied, because both the Trust and the Company are small business entities in the year of the proposed transfer.

No change in economic ownership

Paragraph 328-430(1)(c) of the ITAA 1997 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.

Beneficiaries of a discretionary trust cannot have ultimate economic ownership of the assets of the trust. Under ordinary legal concepts, a beneficiary of a discretionary trust is not entitled to income or capital of the trust until the trustee exercises their discretion to distribute income or to make an appointment of capital.

As a beneficiary of a discretionary trust does not hold an interest in any asset of the trust, it cannot be said that any beneficiary of a discretionary trust will have ultimate economic ownership for the purpose of paragraph 328-430(1)(c) of the ITAA 1997.

Alternative ultimate economic ownership test

Section 328-440 of the ITAA 1997 contains an alternative ultimate economic ownership test for discretionary trusts. Section 328-440 provides that, 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 takes effect, the asset is included in the property of a non-fixed trust that is 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 (ITAA 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.

Just before the proposed transaction, the assets will be property of the Trust, which is a non-fixed trust with an FTE in place.

"Family group" is defined in section 272-90 of the ITAA 1936 with reference to the individual specified in a family trust election.

In this case, the Trust specifies Person A as the test individual. This means that the individuals who had the ultimate economic ownership of the assets just before the transfer takes effect will be members of the same family group.

The Company having an interposed entity election in place does not affect this conclusion, because those who benefit from the Company are the beneficiaries of the Second Family Trust, which is the sole shareholder of the Company. The Second Family Trust has completed an FTE nominating Person A as the specified individual. Therefore, the individuals who benefit from the interposed entity election are members of the family group.

After the transfer occurs, the ultimate economic ownership of the assets will lie with the shareholders of the Company. The only shareholder of the Company is the Second Family Trust. The Second Family Trust is a discretionary trust with an FTE in place also specifying Person A as the test individual. Therefore, the ultimate economic ownership of the assets remains with individuals within the same family group after the transfer takes effect.

Active Asset

Subparagraph 328-430(1)(d)(i) of the ITAA 1997 provides that where a party to the transfer is a small business entity under subparagraph 328-430(1)(b)(i), the asset being transferred must be a CGT asset that is an active asset, other than a depreciating asset, at the time of the transfer.

Section 152-40 of the ITAA 1997 provides that a tangible or intangible CGT asset is an active asset if the taxpayer owns the asset and it is used, or held ready for use, in a business carried on by the taxpayer, their affiliate or an entity connected with them.

The Trust is a small business entity carrying on a business, and the Company will be a small business entity, and connected with a small business entity carrying on a business. This business uses the following assets which will be transferred to the Company as part of the restructure:

•         Stock on hand (wine)

•         Goodwill

•         Plant and equipment.

Plant and equipment are depreciating assets and are not considered here. Trading stock and goodwill are CGT assets. Therefore, the trading stock and the goodwill used in the Trust's vineyard business are active assets in accordance with subparagraphs 328-430(1)(d)(i) and 328-430(1)(d)(ii) of the ITAA 1997.

Depreciating assets

Section 40-30 of the ITAA 1997 provides that a depreciating asset is an asset that has limited effective life and can reasonably be expected to decline in value over the time it is used. The exceptions to this definition are land, trading stock, and intangible assets.

The note to subsection 328-430(1) of the ITAA 1997 states that 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). Section 40-340 outlines the circumstances in which roll-over relief is available where specified balancing adjustment events have occurred for a depreciating asset.

Roll-over relief is available under section 40-340 if there is a balancing adjustment event because an entity disposes of a depreciating asset to another entity, and the disposal involves a CGT event. Additionally, one of the conditions listed in the table in subsection 40-340(1) must be satisfied.

Item 8 of the table in subsection 40-340(1) outlines the consequences where there is a transfer of an asset under the small business restructure roll-over. In this situation, roll-over relief is available under section 40-340 if a roll-over under Subdivision 328-G would be available in relation to the asset if the asset were not a depreciating asset.

Note that the Commissioner has exercised his remedial power in section 370-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to modify the operation of section 40-340. The effect of this modification is to ensure that where the restructure otherwise satisfies the conditions for roll-over under Subdivision 328-G, the transfer of depreciating assets will have no direct income tax consequences.

Consequently, the transfer of any depreciating assets under the restructure will also not have any direct consequences under the income tax law.

Australian residents

Paragraph 328-430(1)(e) of the ITAA 1997 requires both the transferor and the transferee to meet the residency requirements outlined in section 328-445 of the ITAA 1997.

Where the entity is a trust, it must be a resident trust for CGT purposes. A family trust is a resident trust for CGT purposes for an income year if at any time during that income year, the trustee is an Australian resident, or the central management and control of the trust is in Australia.

Where the entity is a company, the entity must be an Australian resident. A company is a resident of Australia if it is incorporated in Australia, or it carries on business in Australia and has either its central management in Australia, or its voting power is controlled by shareholders who are residents of Australia

In this case, both the Trust and the Company are Australian residents for the purposes of paragraph 328-430(1)(e) of the ITAA 1997.

Choice

Paragraph 328-430(1)(f) of the ITAA 1997 requires that both the transferor and the transferee choose to apply the roll-over under Subdivision 328-G of the ITAA 1997 in relation to the assets transferred under the transaction.

In this case, both the Trust and the Company will make the choice to apply the roll-over under Subdivision 328-G of the ITAA 1997 in relation to the assets transferred under the transaction.

Because the requirements of section 328-430 of the ITAA 1997 will be met, the restructure will qualify for roll-over relief under Subdivision 328-G.

Question 2

WET is a once-off tax, designed to be paid on the last wholesale sale, which is applied to both locally produced, and imported, wine. Situations which give rise to a WET liability are called 'assessable dealings' and are provided for in section 5-5 of the A New Tax System (Wine Equalisation Tax) Act 1999 (WET Act).

Division 7 of the WET Act covers when a dealing with wine is exempt from WET, with section 7-5 of the WET Act providing that an assessable dealing is not taxable if the dealing is a supply that is GST-free (other than child care).

Division 38 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides details of supplies that are considered GST-free, with section 38-325 of the GST Act providing that supplies of a going concern will be GST-Free where certain conditions are met.

The Trust will transfer its wine stock to the Company as a part of a sale of a going concern. This transfer of stock will be a GST-Free supply, and therefore not subject to WET.

Question 3

Producer rebate eligibility

Subsection 19-5(1) of the WET Act outlines the eligibility criteria for the WET producer rebate. Broadly, to be eligible to claim the producer rebate, an entity must:

•         be the producer of the wine;

•         be liable for WET or would have been liable had the purchaser not quoted;

•         own the source product for at least 85% of the wine; and

•         package the wine in a container of 5L or less which is branded with a trade mark owned by them (or an associated entity).

Liability for WET

Subparagraph 19-5(1)(b)(i) of the WET Act requires that an entity be "...liable to wine tax for an assessable dealing in the wine during the financial year".

As wine will be transferred from the Trust to the Company as a part of a sale of a going concern, this transfer will be a GST-Free supply. As discussed above, there is no liability to WET on this transaction and therefore subparagraph 19-5(1)(b)(i) is not satisfied.

Subparagraph 19-5(1)(b)(ii) of the WET Act requires that "...you would have been liable to wine tax for an assessable dealing in the wine during the financial year had the purchaser not quoted for the sale at or before the time of the sale...".

Quoting is a mechanism to defer, or exempt, a transaction from WET that applies in certain circumstances.

As there is no WET being charged on the sale, the Company would not quote to the Trust to defer or exempt the transaction from WET; nor would the Trust have a liability to WET even if the Company did provide a quotation. Given this, subparagraph 19-5(1)(b)(ii) will not be satisfied.

Because the Trust is not liable for WET on this dealing, nor would the Trust have been liable if the Company had quoted, this element of the eligibility criteria will not be satisfied.

Other producer rebate eligibility criteria

For the purposes of this ruling, it has been assumed that the Trust meets all of the other eligibility criteria - being that the Trust is the producer of the wine, meets the source product ownership requirement, and meets the packaging requirements.

However, as the Trust has not satisfied all of the eligibility criteria outlined in subsection 19-5(1) of the WET Act, the Trust is not entitled to the WET producer rebate on the wine which will be transferred from it to the Company.