Edited version of private advice

Authorisation Number: 1052215199909

Date of advice: 29 January 2024

Ruling

Subject: Small business restructure rollover

Question

Will the transfer of the interests of Coy A, Coy B and Coy C in the B Land to the proposed family trust satisfy the requirements of the small business restructure rollover in accordance with Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer and other family members conduct a primary production business through The Partnership, the partners in which are:

(a) Taxpayer; and

(b) Coy D as Trustee for the XX Trust.

Taxpayer is presently:

(a) A Director (together with another family member) and the sole shareholder of Coy D; and

(b) One of the Appointers of the XX Trust.

The Partnership is a small business entity with a turnover of less than $10 million. The Taxpayer is an Australian resident for income tax purposes.

The interests in The Partnership are held between the Taxpayer and XX Trust. Prior to this, The Partnership was held between the Taxpayer and other family members.

The controllers of XX Trust are Taxpayer and another family member:

•         Directors of the Trustee company, Coy D are the Taxpayer and a family member (deceased).

•         Shareholders of Coy D are the Taxpayer and a family member (deceased June 20XX - estate still being administered; shares are left to the Taxpayer in the Will)

•         Current Appointors are the Taxpayer and other family members.

•         There has been no distribution from the XX Trust in the last 4 years (Income or Capital).

The business of The Partnership is conducted on farm land, including a parcel of approximately X acres know as B Land. B Land is owned as tenants in common in equal shares by:

a) Coy A

b) Coy B

c) Coy C

(Current Landowners).

In each of Current Landowners, the Taxpayer is:

a) A Director (together with another family member); and

b) The sole shareholder.

The Land was acquired by the Current Landowners in 19XX and has been used in the course of carrying on a primary production business for the entire ownership period.

Background on restructure

The current structure of Coy A, Coy B and Coy C came about from family members, an entity farming together and the purchasing of farming land.

Each family member and their respective spouses controlled a company each and land was bought between the companies from June 19XX.

From 19XX to the early 19XX's, land was purchased on multiple occasions jointly by the companies.

On 30 June 19XX, the family members separated, and shares of the companies of Coy A, Coy B and Coy C were transferred to other family members.

Other sections of the farm which the family members farmed were transferred to them respectively. In 20XX, the shares in Coy A, Coy B and Coy C were transferred from family members to the Taxpayer.

This structure is complex and difficult for the farming family, banks, and other advisers to understand as the land is all owned by each company.

For many years the Taxpayer has wanted to unwind what was established to reflect the family's interest. Currently, there is no need to have land held in separate entities and be effectively in partnership together.

Proposed restructure

It is proposed to transfer The Land to a new discretionary trust (The Z Trust), which will have the following attributes:

a) The Z Trust will have a corporate trustee, with the Taxpayer as the sole director and shareholder; and

b) The Trust Deed for The Z Trust will name the Taxpayer as the primary beneficiary and sole appointor; and

c) The Z Trust will make a Family Trust Election with the Taxpayer as the specified individual.

The intended structure:

a. Trustee - Company (name yet to be confirmed)

i. Shareholder - Taxpayer

ii. Director - Taxpayer

iii.Secretary - Taxpayer

b. Trust - The Z Trust

i. Trust - Company as above

ii. Appointor - Taxpayer

iii. Alternate Appointor - another family member

iv. The trust will make a Family Trust Election nominating the Taxpayer as the test individual.

Transferring The Land to The Z Trust will assist with simplification of the farming enterprise structure and improve overall asset protection.

The ability to restructure the land ownership provides the following benefits:

a) One entity owns the land.

b) Only requires one corporate entity (as Trustee), reducing requirements to attend to three ASIC compliance matters yearly.

c) Reduced compliance costs and preparation of individual tax returns for the companies and partnership.

d) Reduction of Banking compliance.

e) Long term Asset protection is available for ongoing farming business operators, since Current Landowner shares will not be an asset that is handled in the Will of the Taxpayer, rather Alternate Appointor are documented in the Deed so as to nominate future direction.

f) Had the land been acquired since the split in 19XX, it would have been recommended that the properties be acquired in a Trust structure controlled with a corporate trustee, not in multiple separate companies.

g) The existing owners (shareholders) of the companies will continue to be the controller of the entities Appointor, Director and shareholder of Trustee company and Family Trust Election specified individual all being the existing shareholder.

Succession planning is not the reason for the transfer from the companies to a single trust. There is no intention to pass any ownership or ultimate control whilst the Taxpayer is alive. All succession matters are addressed currently in the Taxpayer's Will by leaving the existing company shares to specific beneficiaries. It is anticipated that The Partnership will continue trading indefinitely.

If the transfer goes ahead, both transferee and transferor will elect to use the rollover in subdivision 328-G.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 328-G

Income Tax Assessment Act 1997 Subdivision 328-425

Income Tax Assessment Act 1997 section 328-440

Income Tax Assessment Act 1997 section 328-445

Income Tax Assessment Act 1997 section 328-110(1)

Income Tax Assessment Act 1997 subsection 328-125(1)

Income Tax Assessment Act 1997 subsection 328-125(2)

Income Tax Assessment Act 1997 subsection 328-125(3)

Income Tax Assessment Act 1997 subsection 328-125(4)

Income Tax Assessment Act 1997 paragraph 328-430(1)(a)(b)(c)(d)(e)(f)

Income Tax Assessment Act 1997 subsection 152-10(1A)

Income Tax Assessment Act 1997 paragraph 152-10(1AA)(b)

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 paragraph 152-40(1)(b)

Income Tax Assessment Act 1997 subparagraph 152-40(1)(a)(ii)(iii)

Income Tax Assessment Act 1997 subparagraph 328-430(1)(b)(ii)(iii)

Income Tax Assessment Act 1997 subparagraph 328-430(1)(d)(b)(i)(ii)(iii)(iv)

Reasons for decision

Summary

Question 1

The transfer of the interests of Coy A, Coy B and Coy C in the B Land to the proposed family trust satisfies the requirements of the small business restructure rollover in accordance with Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

All legislative references are to the Income Tax Assessment Act 1997 (ITAA) unless otherwise stated.

Subdivision 328-G provides tax neutral consequences for small business entities that restructure the ownership of the assets of their business, without changing the ultimate economic ownership of the assets.

Section 328-425 provides that the purpose of Subdivision 328-G is to:

.........facilitate flexibility for owners of small business entities to restructure their business, and the way their business assets are held, while disregarding tax gains and losses that would otherwise arise.

To be eligible to disregard the tax gains or losses (rollover), several conditions under section 328-430 must be satisfied in relation to an asset that an entity transfers to one or more other entities.

First condition

The first condition in paragraph 328-430(1)(a) 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 of 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'. LCR 2016/3 states 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.

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 in a real and honest sense to -

•         to facilitate growth, innovation, and diversification

•         adapt to changed conditions, or

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

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. 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.

A restructure is likely to not be a genuine restructure of an ongoing business, as stated in paragraph 10 of LCR 2016/3, 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.

Proposed new entity

The Taxpayer is proposing to transfer the land to a new discretionary trust, The Z Trust, with the following attributes:

(a) The Z Trust will have a corporate trustee, with the Taxpayer as the sole director and shareholder; and

(b) The Trust Deed for The Z Trust will name the Taxpayer as the primary beneficiary and sole appointor; and

(c) The Z Trust will make a Family Trust Election with the Taxpayer as the specified individual.

The restructure is one that could reasonably be expected to deliver benefits to the owners in respect of their efficient conduct of the business as:

a) The business will continue indefinitely with the same ownership; and

b) There is a reduction in the administrative burden and compliance costs; and

c) There is no change to the operations of the business; and

d) The land will continue to be used in the farming business; and

e) The business is not winding down and there is no intention to dispose of the asset; and

f) The new structure is what would have been recommended had the business sought advice when the family members split up their enterprise.

The first condition in paragraph 328-430(1)(a) of the ITAA 1997 would therefore be satisfied.

Second condition

The second condition contained in paragraph 328-430(1)(b) requires that each party to the transfer is a small business entity, or an affiliate of, or connected with a small business entity for the income year during which the transfer occurred.

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.

Section 328-110(1) explains the meaning of a small business entity as:

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 year 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."

Subsection 328-125(1) 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 Current Landowners are not Small Business Entities, they are not carrying on a business, they passively hold an asset. The proposed Z Trust will also not carry on a business and so will not be a small business entity.

The Partnership has an aggregated turnover of less than $10 million and is a small business entity as defined in section 328-110(1).

The Partnership is controlled by the Taxpayer. The Current Landowners is also controlled by the Taxpayer.

Therefore, The Farm Partnership and the Current Landowners are connected entities in accordance with paragraph 328-125(b) as they are controlled by the same third entity.

The proposed Z Trust will also be controlled by the Taxpayer. As the Taxpayer also controls The Partnership, the XX Trust and The Partnership will be connected entities in accordance with paragraph 328-125(b) as they are controlled by the same third entity.

As the Current Landowners and XX Trust are both connected with a small business entity in the year of the transaction, subparagraph 328-430(1)(b)(iii) is satisfied. The second condition will be satisfied.

Third condition

Paragraph 328-430(1)(c) requires that the transaction does not materially change each individual's share of ultimate economic ownership in the assets.The definition of 'ultimate economic ownership' under section 328-440 provides an alternative test for discretionary trusts and is considered under paragraph 328-430(1)(c).

A non-fixed (discretionary) trust may be able to meet the requirements for ultimate economic ownership, for example, where there is no practical change in which individuals economically benefit from the asset before and after the transfer.

Further, a family trust may meet an alternative economic ownership test where:

•         The trustee has made a family trust election, and

•         Every individual who had ultimate economic ownership of the transferred asset before the transfer, and every individual who has ultimate economic ownership after the transfer, must be members of the family group relating to the family trust.

The Taxpayer is the ultimate economic owner of the farm land prior to the transaction taking effect. The land is held in the partnership of Coy A, Coy B and Coy C, the Taxpayer is the sole shareholder for all of three companies and hence is the only individual with ultimate economic ownership of the farm land.

The proposed Z Trust will be a non-fixed family trust with a family trust election and so satisfies paragraph 328-440(a)(ii) as the farm land will be the property of the trust after the transaction takes effect. In addition, the Taxpayer was a member of the family group that relates to the proposed Z Trust as they are the specified individual, both before and after the transaction takes effect, they have ultimate economic ownership of the farm land, so satisfies subsections 328-440(b) and (c).

The third condition in paragraph 328-430(1)(c) of the ITAA 1997 would therefore be satisfied.

Fourth condition

Paragraph 328-430(1)(d) requires that 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; 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 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.

Subsection 152-40(1) provides that a CGT asset is an active asset at a time if, at that time 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 by you, your affiliate or another entity that is connected with you.

As subparagraph 328-430(1)(b)(iii) applies, the assets will need to be CGT assets (other than a depreciating asset) and 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.

Paragraph 152-10(1AA)(b) serves to disregard the reduction in the turnover threshold to $2 million for the purposes of the small business restructure test requirements. For the purpose of this test, the aggregated turnover threshold will be $10 million for the income year.

Subsection 152-10(1A) allows access to the small business concessions where passively held assets are held by taxpayers who are connected to a small business entity. The provision is set out as follows:

Subsection 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.

The Current Landowners are connected with The Partnership which is a Small Business Entity with a turnover of less than $10 million. The proposed Z Trust will also be connected with The Partnership, satisfying paragraph 152-10(1A)(a).

The Current Landowners do not carry on a business individually or in partnership, they passively hold an asset.

The proposed Z Trust will also not carry on a business but will passively hold the land, satisfying paragraphs 152-10(1A)(b) and (c).

The Partnership carries on a business in relation to the asset, being the farming of that land. The land has been used in the farming business since it was purchased and is therefore an active asset. This activity will continue after the transfer, satisfying paragraph 152-10(1A)(d).

Therefore, at the time of the transfer the farm land is an active asset in relation to which subsection 152-10(1A) would be satisfied in that income year if paragraph 152-10(1AA)(b) were disregarded. The fourth condition in paragraph 328-430(1)(d) is satisfied.

Fifth condition

Paragraph 328-430(1)(e) requires the transferor and all transferees to meet the residency requirement in section 328-445 for an entity.

Section 328-445 provides that, for the purposes of paragraph 328-430(1)(e), a trust is a resident entity where it is a resident trust for CGT purposes. It further provides that a partnership is a resident entity where at least one of the partners is an Australian resident. A company will be a resident entity where the company is an Australian resident.

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, the Current Landowners are a partnership of three companies, and each of these companies is incorporated in Australia. As the partners are Australian residents so is the partnership. The proposed Z Trust will be an Australian resident, as the new corporate trustee will be incorporated in Australia and will therefore be an Australian resident.

As both transferor and transferee are residents, the fifth condition in paragraph 328-430(1)(e) is therefore satisfied.

Sixth condition

Paragraph 328-430(1)(f) requires the transferor and all transferees involved to choose to apply a roll-over in relation to the asset(s) being transferred.

If the proposed transaction proceeds, the Current Landowners and the XX Trust will elect to apply the small business restructure roll-over relief under Subdivision 328-G in relation to the transfer of the farm land.

The sixth condition in paragraph 328-430(1)(f) is therefore satisfied.

Conclusion

After application of the facts, the proposed transfer of the Current Landowners interests in farm land to the XX Trust, satisfies the requirements of the small business restructure rollover under Subdivision 328-G.