Edited version of private advice

Authorisation Number: 1052196298707

Date of advice: 23 January 2024

Ruling

Subject: Small business restructure roll-over

Question

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

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

The trust runs a business. The trust is a discretionary trust.

The named beneficiaries (each of which are referred to as 'Designated Person' in the Trust Deed) of the Trust are individual A, B and C.

The beneficiaries of the Trust include the Designated Persons, their children and remoter lineal descendants and various other specifically defined relatives including spouses and related entities.

The trustee was at the time of establishment of the trust (and continue to be) company A (the trustee).

Individual A and B were the directors and shareholders of the trustee and the appointers of the trust at the time of the establishment of the trust. Individual A retired as a Director of the trustee and an appointer of the trust and individual C was appointed as a Director of the trustee and an appointer. Some time after, Individual B retired as a Director of the trustee and an appointer of the trust.

A family trust election (FTE) will be made in the 2023 income tax return which will specify individual C as the specified individual.

The trust owns assets which include:

•         stock

•         plant and equipment

•         land.

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

The trust is an Australian resident for the purposes of section 328-445.

Individual C is a resident of Australia.

Reasons for the restructure

It is no longer considered appropriate to have all of the trust income distributed to individual beneficiaries as individual C wishes to grow the business including via the re-investment of profits.

If the business was structured as a company, the profits after company tax would be available to be re-invested in the business.

Individual C intends to expand the operations, as and when opportunities arise, through the leasing and purchase of additional land.

Individual C, via related trusts, has purchased additional land in the 20XX and 20XX financial years. With the increased land holdings additional equipment had been purchased.

Under the current structure there is one entity that is the business entity and owns land and another that also owns lands. The restructure will result in entities in the group being either land owners or a business entity but not both.

New Trustee

A company will be incorporated in Australia (new trustee) in the 20XX financial year.

Once incorporated, the sole director of the new trustee will be individual C.

The sole shareholder of the new trustee will be individual C.

The sole role of the new trustee will be to be the trustee of a newly settled trust.

New Trust

A new discretionary trust (new trust) will be settled in the 20XX financial year. The trustee of the new trust will be the new trustee.

The beneficiaries of the new trust will include individual C, their children, remoter lineal descendants and various other specifically defined relatives (including spouses) and related entities.

A FTE will be made in the 20XX income tax return with individual C to be named as the specified individual.

The new trust will be an Australian resident.

The Company

A company will be incorporated in Australia in the 20XX financial year (the company).

Once incorporated, the sole director of the company will be individual C.

The sole shareholder of the company will be the new trustee as trustee of the new trust.

The company will be an Australian resident for the purposes of section 328-445 of the ITAA 1997.

The company will pay rent to the trust for use of the land owned by the trust. The rent is likely to be an arm's length/market value amount.

The company will have aggregated turnover of less than $XX million

The trust also owns land which is currently used by the trust and will be used by the company after the restructure.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 40-340

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 Subdivision 328-G

Income Tax Assessment Act 1997 section 328-110

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

Income Tax Assessment Act 1997 subsection 328-440

Income Tax Assessment Act 1997 section 328-445

Taxation Administration Act 1953 section 370-5 of Schedule 1

Income Tax Assessment Act 1936 Schedule 2F

Reasons for decision

Summary

The conditions in Subdivision 328-G of the ITAA 1997 have been satisfied and therefore the entities are entitled to apply the small business restructure roll-over.

Detailed reasoning

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.

Genuine restructure of an ongoing business

Law Companion Ruling LCR 2016/3 - Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters (LCR 2016/3) explains the meaning of the term 'genuine restructure of an ongoing business. Whether a transaction is or is part of a genuine restructure of an ongoing is a question of fact that is determined having regard to all of the circumstances surrounding the restructure.

Paragraph 7 of LCR 2016/3 states:

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

- facilitate growth, innovation and diversification

- adapt to changed conditions, or

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

•         It is authentically restructuring the way in which the business is conducted as opposed to a 'divestment' or 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. For example, there is:

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

- continuity of employment of key personnel, and

- continuity of production, supplies, sales or services.

•         It results in a structure likely to have been adopted had the small business owners obtained appropriate professional advice when setting up the business.

Application to your circumstances

In this case individual C, the director of the trustee and appointer of the trust, no longer considers it appropriate to have all of the trust income distributed to individual beneficiaries. This limits growth opportunities via the re-investment of profits. It is also maintained that the proposed transaction will simplify the structure meaning entities within the group are either landowners or operating a business but not both.

We accept that the proposed restructure will provide opportunities for growth and is not unduly tax drive. Further we do not consider there is any evidence that it is an attempt to wind down or extract wealth from the business. Therefore, we accept the proposed transaction is a genuine restructure of an ongoing business.

Small business entity

Paragraph 328-430(1)(b) 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.

Application to your circumstances

In this case the trust is a small business entity and therefore subparagraph 328-430(1)(b)(i) is satisfied.

As the new company will be a small business entity in the income year, subparagraph 328-430(1)(b)(i) is satisfied for the transferee of the assets.

Therefore, the small business entity test in paragraph 328-430(1)(b) will be satisfied for the transfer of the assets.

Ultimate economic ownership

Paragraph 328-430(1)(c) requires that 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

The term 'ultimate economic ownership' is not defined in the income tax provisions. Paragraph 1.29 and 1.30 of the Explanatory Memorandum to the Tax Laws Amendment (Small Business Restructure Roll-over) Act 2016 explains that the ultimate economic owners of an asset are individuals who, directly or indirectly, beneficially own an asset. As the ultimate economic owners can only be individuals, a look through approach applies where a company, partnership or trust owns the asset.

Under ordinary legal concepts, a beneficiary of a discretionary trust does not have any beneficial interest in any trust property prior to a distribution or appointment of income or capital. Instead, a beneficiary of a discretionary trust only has a right to require the trustee to consider whether or not to exercise their discretion (Gartside v. Inland Revenue Commissioner (1968) AC 553.

In relation to the application of the ultimate ownership test to discretionary trusts, the Commissioner's view provided in paragraph 107 of LCR 2016/3 is that a transfer of assets from or to a discretionary trust will generally not meet the requirements for ultimate economic ownership on their facts.

Alternative economic ownership test

Section 328-440 provides that for the purpose 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.

Application to your circumstances

In this case, just before the proposed transaction the assets were included in the property of the trust, a non-fixed trust that was a family trust. The trust has a family trust election in place with individual C named as the specified individual.

After the proposed transfer the assets will be held in a company and all of the shares will be owned by the new trust. The new trust will also have a FTE in place with individual C named as the specified individual. Therefore, every individual who, just after the transaction takes effect, has the ultimate economic ownership of the asset is a member of that family group.

The ultimate economic test in paragraph 328-430(1)(c) of the ITAA 1997 is satisfied because of the alternative test in section 328-440 of the ITAA 1997.

Active assets

Paragraph 328-430(1)(d) sets the requirement that the asset to be transferred 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; or

           (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

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

A CGT asset (whether a tangible or intangible 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 (whether alone or in partnership) by you, an affiliate of yours, or by another entity that is connected with you (subsection 152-40(1)).

Depreciating Assets

The Subdivision 328-G rollover does not directly apply to the transfer of depreciating assets.

The note to subsection 328-430(1) 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 that 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 Taxation Administration Act 1953 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.

Application to your circumstances

In this case, as a rollover would apply to the transfer of the depreciating assets if they were not in fact depreciating assets, the rollover relief in section 40-340 will be available.

Residency requirements

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 discretionary 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 will meet the residency requirements in in section 328-445 of the ITAA 1997 satisfying paragraph 328-430(1)(e) of the ITAA 1997.

All parties choose to apply the rollover

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, satisfying 328-430(1)(f) of the ITAA 1997.

Conclusion

As each of 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 of the ITAA 1997.