Edited version of private advice

Authorisation Number: 1052126434211

Date of advice: 6 June 2023

Ruling

Subject: Small business restructure rollover

Question

Would the Commissioner be satisfied under Subdivision 328-G of the Income Tax Assessment Act 1997 to allow small business restructure rollover relief to apply to the transfer of assets from the taxapyer?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

1.         The taxpayer is the sole owner of some real properties and water assets.

2.         Those assets were used in a business, the business is conducted by a trading trust that is a connected entity of the taxpayer.

3.         The taxpayer is the specified individual of a family trust election for the trading trust.

4.         The aggregated turnover of the business in the previous income year was less than $XX million.

5.         The taxpayer proposed to transfer those assets into new discretionary trusts.

6.         The taxpayer stated the purpose of the transfer to is to reduce risk of holding assets in personal name as well as enable more flexibility with capital and debt structuring within the group.

7.         The new discretionary trusts will make Family Trust Elections nominating the taxpayer as 'test individuals' pursuant to section 272-95 of the ITAA 1936

8.         Both the transferees and transferors are Australian resident for tax purpose.

9.         Both the transferees and transferors choose to apply the small business restructure rollover.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 272-75

Income Tax Assessment Act 1936 section 272-90

Income Tax Assessment Act 1936 section 272-95

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1936 section 152-10(1A)

Income Tax Assessment Act 1936 section 152-10(1AA)

Income Tax Assessment Act 1936 section 152-40

Income Tax Assessment Act 1997 section 272-90

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-125

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

Income Tax Assessment Act 1997 section 328-440

Income Tax Assessment Act 1997 section 328-445

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Relevant legislative provisions

1.     Subsection 328-430(1) of the ITAA 1997 provides the requirements that must be satisfied for the small business restructure rollover (SBRR) to be available:

328-430(1)

A roll-over under this Subdivision is available in relation to an asset that, under a transaction, an entity (the transferor) transfers to one or more other entities (transferees) if:

(a) the transaction is, or is a part of, a genuine restructure of an ongoing *business; and

(b) each party to the transfer is an entity to which any one or more of the following applies:

(i) it is a *small business entity for the income year during which the transfer occurred;...

(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; and

(c) the transaction does not have the effect of materially changing:

(i) which individual has, or which individuals have, the ultimate economic ownership of the asset; and

(ii) if there is more than one such individual - each such individual's share of that ultimate economic ownership; and

(d) the asset is a *CGT asset (other than a *depreciating asset) that is, at the time the transfer takes effect:

(i) if subparagraph (b)(i) applies - an *active asset;

...(ii) if subparagraph (b)(ii) or (iii) applies - an active asset in relation to which subsection 152-10(1A) is satisfied in that income year, or would be satisfied in that income year if paragraph 152-10(1AA)(b) were disregarded; or

(iii) if subparagraph (b)(iv) applies - an active asset and an interest in an asset of the partnership referred to in that subparagraph; and

...

(e) the transferor and each transferee meet the residency requirement in section 328-445 for an entity; and

(f) the transferor and each transferee choose to apply a roll-over under this Subdivision in relation to the assets transferred under the transaction.

Small Business Entity

2.     Subsection 328-110(1) of the ITAA 1997 provides the following definition for 'small business entity':

General rule: based on aggregated turnover worked out as at the beginning of the current income year

328-110(1)

You are a small business entity for an income year (the current 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 and your aggregated turnover for the previous year was less than 10 million.

(ii) your aggregated turnover for the current year is likely to be less than $10 million.

...

Partners in a partnership

328-110(6)

A person who is a partner in a partnership in an income year is not, in his or her capacity as a partner, a small business entity for the income year

Connected with

3.     Section 328-125 of ITAA 1997 provides for when an entity is 'connected with' another entity:

328-125(1)

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.

...

Direct control of an entity other than a discretionary trust

328-125(2)

An entity (the first entity) controls another entity if the first entity, its *affiliates, or the first entity together with its affiliates:

(a) except if the other entity is a discretionary trust - own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of:

(i) any distribution of income by the other entity; or

(ii) if the other entity is a partnership - the net income of the partnership; or

(iii) any distribution of capital by the other entity; or

...

Direct control of a discretionary trust

328-125(3)

An entity (the first 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 the first entity, its *affiliates, or the first entity together with its affiliates.

328-125(4)

An entity (the first entity) controls a discretionary trust for an income year if, for any of the 4 income years before that year:

(a) the trustee of the trust paid to, or applied for the benefit of:

(i) the first entity; or

(ii) any of the first entity ' s *affiliates; or

(iii) the first entity and any of its affiliates;

any of the income or capital of the trust; and

(b) the percentage (the control percentage) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year.

Ultimate economic ownership - discretionary trusts

4.     Section 328-440 of ITAA 1997 provides the following alternative method for satisfying the 'ultimate economic ownership' condition by non-fixed (discretionary) trusts:

328-440 Ultimate economic ownership - discretionary trusts

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 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.

Family Trust

5.     Section 272-75 of ITAA 1936 defines a 'family trust' as follows:

272-75 FAMILY TRUST

A trust is a family trust at any time when a family trust election (see subsection 272-80 (1)) in respect of the trust is in force

6.     Section 272-90 of ITAA 1936 relevantly defines a 'family group' as follows:

272-90(2)

A member of the primary individual's family (see section 272-95) is a member of the primary individual's family group in relation to the conferral or distribution.

7.     Section 272-95 of ITAA 1936 defines 'family' as:

272-95(1)

The family of an individual (the test individual) consists of the test individual and all of the following (if applicable):

(a)         any parent, grandparent, brother or sister of the test individual or the test individual ' s spouse;

(b)         any nephew, niece or child of the test individual or the test individual ' s spouse; ...

CGT asset

8.     Section 108-5 defines CGT asset as follows:

108-5(1)

A CGT asset is:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

...

Note 1:

Examples of CGT assets are:

    land and buildings;...

Active asset

9.     Subsection 152-40(1) of the ITAA 1997 relevantly provides the following definition of active asset:

SECTION 152-40 Meaning of active asset

152-40(1)

A *CGT asset is an active asset at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) 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:

(i) you; or...

(iii) another entity that is *connected with you;

Passively held assets

10.  The small business CGT concessions may be obtained where an entity has a CGT asset but does not carry on a business (other than as a partner in a partnership) if the following conditions in subsection 152-10(1A) of the ITAA 1997 are met:

152-10(1A)

The conditions in this subsection are satisfied in relation to the *CGT asset in the income year if:

(a) your *affiliate, or an entity that is *connected with you, is a *CGT small business entity for the income year; and

(b) you do not carry on a *business in the income year (other than in partnership); and

(c) if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and

(d) in any case - the CGT small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b) ) in relation to the CGT asset.

Australian residency

11.  Section 328-445 of ITAA 1997 relevantly provides the following in relation to being considered as an Australian resident:

For the purposes of paragraph 328-430(1)(e), the residency requirement for an entity is that:

(a) if the entity is an individual or a company - the entity is an Australian resident; or

(b) if the entity is a trust - it is a *resident trust for CGT purposes;...

12.  According to subsection 995-1(1) of the ITAA 1997, a 'resident trust for CGT purposes' is defined as:

a trust is a resident trust for CGT purposes for an income year if, at any time during the income year:

(a) for a trust that is not a unit trust, a trustee is an Australian resident or the central management and control of the trust is in Australia; or...

Relevant ATO Guidance

Genuine restructure of an ongoing business

13.  The Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters (LCR 2016/3) sets out the following relevant guidance on the meaning of the term 'genuine restructure of an ongoing business' as used in paragraph 328-430(1)(a) of ITAA 1997:

6. 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...the SBRR is not available to small business owners who are restructuring in the course of winding down or realising their ownership interests.

7. The following features indicate that a transaction is, or is part of, a 'genuine restructure of an ongoing business':

•         It is a bona fide commercial arrangement undertaken in a real and honest sense to

o   facilitate growth, innovation and diversification

o   adapt to changed conditions, or

o   reduce administrative burdens, compliance costs and/or cash flow impediments.

...

•         The small business owners continue to operate the business through a different legal structure. For example, there is:

o   - continued use of the transferred assets as active assets of the business

o   - continuity of employment of key personnel, and

...

Ultimate economic ownership - non fixed trusts

14.  LCR 2016/3 also provides the following guidance on how ultimate economic ownership can be maintained by non-fixed trusts:

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.[11]

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[12], that is, a non-fixed trust for which there is a family trust election in force.

Application of facts to the law

15.  The applicant has demonstrated that all the conditions in subsection 328-430(1) of the ITAA 1997 have been satisfied, the small business restructure rollover is available in relation to the transfer of the business assets.