Edited version of private advice

Authorisation Number: 1052233746237

Date of advice: 5 April 2024

Ruling

Subject: Small business restructure roll-over

Question 1

Is a rollover available under section 328-430 of theIncome Tax Assessment Act 1997(ITAA 1997) in relation to the proposed transfer of the Property from Company X to the Y Trust?

Answer

No

Question 2

Will the proposed transfer of the Property from Company X to the Y Trust satisfy the genuine restructures - safe harbour rule in section 328-435 of the ITAA 1997?

Answer

Decline to rule

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commenced on:

1 July 2023YY

Relevant facts and circumstances

Company X owns an Asset (the Property) used in its business.

It is proposed to transfer the Property held by Company X to the Y Trust

The proposed restructure will allow future generations of the Family to continue operating the primary production businesses into the future.

The Property will continue to be used in the same primary production businesses after the transfer has taken place.

A family trust election (FTE) will be made for the transfer year.

Company X is a small business entity (SBE) as its aggregate turnover is under $10m for the relevant years.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-115

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 328-130

Income Tax Assessment Act 1997 section 328-430

Income Tax Assessment Act 1997 section 328-435

Income Tax Assessment Act 1997 section 328-440

Taxation Administration Act 1953 paragraph 357-110(1)(a) of Schedule 1

Reasons for decision

Question 1

Summary

The proposed transfer will not meet the requirements under section 328-430 of the ITAA 1997 to qualify for CGT small business restructure roll-over.

Detailed reasoning

The CGT small business restructure roll-over in Subdivision 328-G of the ITAA 1997 allows small businesses to transfer active assets from one entity (the transferor) to one or more other entities (transferees), on or after 1 July 2016, without incurring an income tax liability.

Subsection 328-430(1) of the ITAA 1997 provides that roll-over relief is available if the following conditions are met:

1.    The transfer of the asset is, or is part of, a genuine restructure of an ongoing business (paragraph 328-430(1)(a)).

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 (paragraph 328-430(1)(b)).

3.    There is no material change in the ultimate economic ownership of the transferred asset (paragraph 328-430(1)(c)).

4.    The asset being transferred is an active asset (paragraph 328-430(1)(d)).

5.    Both the transferor and each transferee are residents of Australia (paragraph 328-430(1)(e)).

6.    Both the transferor and each transferee choose to apply the roll-over (paragraph 328-430(1)(f))

Condition 1. Genuine restructure

Paragraph 328-430(1)(a) of the ITAA 1997 requires that the transfer of the asset is, or is part of, a genuine restructure of an ongoing business.

The transfer of the asset from Company X to the Y Trust is a restructure for the purpose of the genuine restructure of an ongoing business under paragraph 328-430(1)(a) of the ITAA 1997.

Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an on-going business and related matters explains that whether a transaction is or is part of a 'genuine restructure' will be a question of fact, determined having regard to all of the circumstances surrounding the restructure. In particular, the following features are indicative of a genuine restructure:

•        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.

•        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:

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

o        continuity of employment of key personnel, and

o        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.

Conversely, LCR 2016/3 at paragraph 10 lists some factors which tend to indicate that a restructure is not a 'genuine restructure of an ongoing business'. These include:

•        where the restructure is a preliminary step to facilitate the economic realisation of assets, or takes place in the course of a winding down to transfer wealth between generations,

•        where the restructure effects an extraction of wealth from the assets of the business (including accumulated profits) for personal investment or consumption or otherwise designed for use outside of the business,

•        where artificial losses are created or there is a bringing forward of their recognition,

•        the restructure effects a permanent non-recognition of gain or the creation of artificial timing advantages, and/or

•        there are other tax outcomes that do not reflect economic reality.

The Commissioner considers that the restructure is not a 'genuine restructure of an ongoing business'.

Consequently, in accordance with the views outlined in LCR 2016/3, the transaction is not part of a genuine restructure of an ongoing business as it is not one that could be reasonably expected to deliver benefits to in respect of any efficient conduct of business. There will be no change to the business operations other than who own and lease the Property. The proposed transaction does not aid the business to expand, grow or otherwise benefit its business operations.

Based on the relevant facts and circumstances presented, the Commissioner considers that the proposed transfer of Property does not have the effect of facilitating the growth or improving the efficiencies of the primary production businesses.

Conclusion - genuine restructure of an ongoing business

As the transfer of the asset is not, or is not part of, a genuine restructure of an ongoing business, paragraph 328-430(1)(a) of the ITAA 1997 will not be satisfied.

Condition 2. The small business entity condition

Paragraph 328-430(1)(b) of the ITAA 1997 requires that each party to the transfer is an entity to which one or more of the following applies:

(i)    it is an SBE for the income year during which the transfer occurred

(ii)   it has an affiliate that is an SBE for that income year

(iii) it is connected with an entity that is an SBE for that income year

(iv) it is a partner in a partnership that is an SBE for that income year

An entity is 'connected with' another entity pursuant to paragraph 328-125(1)(a) of the ITAA 1997 if either entity controls the other in a way described in section 328-125, or under paragraph 328-125(1)(b) if both entities are controlled in a way described in this section by the same third entity.

Application to your circumstances

The relevant parties to the proposed transfer are Company X as the transferor of the Asset, and the Y Trust as the transferee. Both the transferor and the transferees will each need to meet one of the tests listed in paragraph 328-430(1)(b) of the ITAA 1997 in the income year the proposed transfer occurs.

Company X is undertaking the business activities in the transfer year. Company X meets the SBE requirements under section 328-110 of the ITAA 1997, given their aggregated income is under $10 million per year. They are relevant entity to consider for the purposes of applying the roll-over tests in paragraph 328-430(1)(b) of the ITAA 1997.

As the Y Trust will be not carrying on a business, they require an entity that is an SBE to be an affiliate or connected to them for that income year. The Y Trust in not connected to an SBE under section 328-125 of the ITAA 1997 for the relevant income year.

As subparagraphs 328-430(1)(b)(i) to (iv) of the ITAA 1997 do not apply to each party to the transfer, the requirement under paragraph 328-430(1)(b) is not satisfied for the transferor and transferee.

Condition 3: Ultimate economic ownership

The transfer must not have the effect of materially changing the ultimate economic ownership of the transferred assets (subparagraph 328-430(1)(c)(i)) of the ITAA 1997. Where there is more than one ultimate economic owner, each individual share of that ultimate economic ownership must not be materially changed (subparagraph 328-430(1)(c)(ii)).

Under ordinary legal concepts, a beneficiary of a discretionary trust is not entitled to income or capital of the trust until the trustee exercises their discretion to distribute income or to make an appointment of capital. As such, beneficiaries of a discretionary trust cannot have ultimate economic ownership of the assets held by the trust.

However, section 328-440 of the ITAA 1997 contains an alternative ultimate economic ownership test for discretionary trusts for the purposes of paragraph 328-430(1)(c). Section 328-440 will be satisfied if:

(a) either or both:

(i) just before the transaction transferring the assets 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) just before the transfer took effect, every individual who had the ultimate economic ownership of the asset was a member of the family group (within the meaning of Sch 2F to the ITAA 1936 relating to the trust or trusts referred to in para (a), and

(c) just after the transfer takes effect, every individual who has the ultimate economic ownership of the asset is a member of that family group.

Section 328-440 of the ITAA 1997 is satisfied by the proposed transaction as just after the transfer, the asset will be included in the property of the Y Trust which is a non-fixed trust that is a family trust, and every individual who had the ultimate economic ownership of the transferred asset before the transfer, and every individual who has ultimate economic ownership of the transferred asset after the transfer, is a member of the family group (within the meaning of Schedule 2F to the ITAA 1936) relating to the Y Trust.

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.

Condition 4: Active assets

The requirement in paragraph 328-430(1)(d) of the ITAA 1997 requires the asset to be a CGT asset that is, at the time the transfer takes effect, an active asset.

The active asset condition under paragraph 328-430(1)(d) of the ITAA 1997 is not satisfied because the relevant entities are not SBE's or an entity that is connected with or affiliate of an SBE.

Conclusion

A roll-over is not available under section 328-430 of the ITAA 1997 in relation to the proposed transfer of the Property from Company X to the Y Trust as all of the requirements in subsection 328-430(1) have not been satisfied.

Question 2

The Safe Harbour

The Commissioner may decline to make a private ruling if the Commissioner considers that the correctness of a private ruling would depend on which assumptions were made about a future event or other matter (paragraph 357-110(1)(a) of Schedule 1 to the Taxation Administration Act 1953 (TAA)).

The Commissioner considers that, where possible, taxpayers should be provided with certainty in respect of prospective arrangements. However, in some circumstances, such as where the application of the law is particularly dependent on assumptions about future events or matters, a private ruling may not be an appropriate way for the Commissioner to provide the taxpayer with certainty (decision impact statement Commissioner of Taxation v Hacon Pty Ltd [2017] FCAFC 181).

Section 328-435 provides a safe harbour rule whereby, a transaction will be, or will be part of, a genuine restructure if, for a period of three years after the transaction occurs:

•        There is no change in ultimate economic ownership of any of the significant assets of the business that were transferred under the transaction; and

•        Those significant assets continue to be active assets; and

•        There is no significant or material use of those significant assets for private purposes.

The correctness of the private ruling in this case will require assumptions that the condition for the safe harbour in section 328-435 of the ITAA 1997 will be satisfied for the required three-year period. The Commissioner considers there to be too much uncertainty about future events in this case to rely on these assumptions and declines to make the ruling on this question as per paragraph 357-110(1)(a) of Schedule 1 to the TAA