Edited version of private advice

Authorisation Number: 1052077111745

Date of advice: 13 January 2023

Ruling

Subject: Small business restructure rollover

Question

Are you eligible to apply the small business restructure rollover to the proposed transfer of the business assets to the company?

Answer

No.

This ruling applies for the following period:

Year ending 20 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You operate a business as a sole trader.

The business assets include vans, equipment and a trademark logo.

The business had an aggregated turnover of less than $250,000 in the 20XX financial year.

You intend to restructure the business into a company.

You intend to have a non-fixed trust, the Family Trust, as the sole shareholder of the new company.

You will be the primary beneficiary of the Family Trust.

A Family Trust Election will be completed with you as the specified individual.

You will be the director and shareholder of the trustee company of the new Family Trust.

The main reason you are looking to restructure is to enhance the commercial image of the business to customers and for asset protection purposes.

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 paragraph 328-430(1)(c)

Income Tax Assessment Act 1997 section 328-440

Reasons for decision

Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997) allows for tax-neutral consequences for a small business that restructures the ownership of the assets of the business without changing their ultimate economic ownership.

Subsection 328-430(1) of the ITAA 1997 outlines the conditions to be met for the roll-over relief to be available:

(a)  The transfer of the asset is, or is part of, a genuine restructure of an ongoing business; and

(b)  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; and

(c)   There is no material change in the ultimate economic ownership of the transferred asset; and

(d)  The asset being transferred is an active asset of the relevant small business entity at the time of the transfer; and

(e)  Both the transferor and each transferee are residents of Australia; and

(f)    Both the transferor and each transferee choose to apply the roll-over.

All conditions need to be met for the roll-over to be applied.

Ultimate economic ownership - discretionary trusts (section 328-440 of the ITAA 1997)

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 2Fto 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.

Law Companion Ruling LCR 2016/3 - Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters provides several examples. Example 12 considers the application of the alternative ultimate economic ownership test:

103. Victoria and Elizabeth are two unrelated individuals operating a business in partnership.

104. Each of Victoria and Elizabeth is a beneficiary of a different discretionary trust. The trustees of these unrelated trusts have been making income and capital distributions to various other beneficiaries for many years.

105. The partners wish to dissolve the partnership and transfer all of the relevant business assets to a newly-incorporated company Newco. The shares in Newco are held by the trustees of the discretionary trusts.

Relevant considerations

106. The SBRR is restricted to circumstances where there has not been a material change in the ultimate economic ownership of assets as a result of the transfer of the assets.

107. A transfer of assets from or to a discretionary trust will generally not meet the requirements for ultimate economic ownership on their facts. Where it is not possible to demonstrate that ultimate economic ownership of the assets has been maintained, an alternative ultimate economic ownership test is available.

108. The alternative ultimate economic ownership test provides additional flexibility to small family businesses carried on through non-fixed trusts by allowing them to meet the requirement to maintain proportionate ultimate economic ownership of the transferred assets if the ultimate economic ownership of those assets remains within the family.

109. The alternative test is only available when assets are included in the property of a non-fixed trust that is a family trust, that is, a non-fixed trust for which there is a family trust election in force.

110. The transfer of business assets to Newco does not result in the inclusion of assets in the property of either trust. The assets of Newco are not affected by any obligation of either Trustee and these assets are not trust property.

Conclusion

111. The alternative test is not available in respect of the transaction and the SBRR is not available for Victoria and Elizabeth to restructure in this way.

Application to your circumstances

In this case you intend to transfer the business assets to a company. The sole shareholder of the company will be a Family Trust and you will be the specified individual of the Trust. As discussed above, one of the restructure roll-over conditions requires there to be no material change to the ultimate economic ownership of the assets.

Your circumstances are similar to example 12 set out in LCR 2016/3. The transfer of the business assets to the company does not result in the inclusion of the assets in the property of the trust. This means the alternative test in section 328-440 of the ITAA 1997 is not available. As you cannot satisfy the ultimate economic ownership requirement the small business restructure roll-over is not available.

Note that all the conditions in Subdivision 328-G of the ITAA 1997 need to be met in order to access the roll-over. As you are unable to satisfy the ultimate economic ownership test we have not considered the other requirements.