Edited version of private advice

Authorisation Number: 1052085490528

Date of advice: 9 February 2023

Ruling

Subject: Small business restructure roll-over

Question

Will the transfer of the assets from the original company to the newly formed companies satisfy the requirements of the small business restructure roll-over in Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This private ruling applies for the following period:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The original company has been trading since 20XX.

The shares in the company are owned by:

•         Individual A - 50%

•         Individual B - 50%.

The business has continued to grow and a decision was made to restructure to help with business, systems and also with succession planning.

The main reason for the restructure was to separate the different business divisions into separate entities to simplify reporting and business systems.

Three new companies were set up and the shares in all 3 companies are owned by the Family Trust.

The appointers and primary beneficiaries are Individual A and B.

The trustee of the trust is Individual B.

The trust has a family trust election in place and the test individual is Individual A.

The family trust was put in place for asset protection purposes.

On 1 July 20XX it was decided that all assets used by the one location would be transferred from the original company to one of the newly formed companies.

On 1 July 20XX it was then decided the assets used by the other 2 locations would be transferred the original company to the other newly formed companies.

The assets consist of mainly plant and equipment but also include goodwill, intellectual property and everything required to run each business separately from each location.

The original company has a turnover of less than $XX million.

All entities involved in the transactions are Australian residents.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 328-G

Reasons for decision

Subdivision 328-G of the 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:

1. The transfer of the asset is, or is part of, a genuine restructure of an ongoing business; and
2. 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
3. There is no material change in the ultimate economic ownership of the transferred asset; and
4. The asset being transferred is an active asset of the relevant small business entity at the time of the transfer; and
5. Both the transferor and each transferee are residents of Australia; and
6. 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 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.

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 the original company has transferred various assets to 3 newly formed companies. The sole shareholder of each new company is the Family 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.

The circumstances are similar to example 12 set out in LCR 2016/3. The transfer of the assets from the original company to the newly formed companies does not result in the inclusion of the assets in the property of the Family Trust. This means the alternative test in section 328-440 of the ITAA 1997 is not available. As the transactions do not 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 the transactions do not satisfy the ultimate economic ownership test we have not considered the other requirements.