Edited version of private advice

Authorisation Number: 1052237993061

NOTICE

This private ruling was revised following an issue. This edited version has therefore been replaced with the edited version of the private ruling with the authorisation number of 1052240384043.

Date of advice: 9 April 2024

Ruling

Subject: Small business restructure roll-over

Question 1

Is the proposed transfer part of a genuine restructure of an ongoing business for the purpose of paragraph 328-430(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the proposed transfer satisfy the safe harbour provision in section 328-435 of the ITAA 1997?

Answer

Decline to rule.

Question 3

Is each party to the transfer connected with an entity that is a small business entity in the year of transfer for the purpose of paragraph 328-430(1)(b)(iii) of the ITAA 1997?

Answer

Yes.

Question 4

Will the transaction have the effect of materially changing which individual has the ultimate economic ownership of the asset, or any individual's share of that ultimate economic ownership for the purpose of paragraph 328-430(1)(c) of the ITAA 1997?

Answer

Yes.

Question 5

Is the asset subject to the proposed transfer a CGT asset that is, at the time the transfer takes effect, an active asset in relation to which subsection 152-10(1A) of the ITAA 1997 is satisfied in that income year, or would be satisfied in that income year if paragraph 152-10(1AA)(b) of the ITAA 1997 were disregarded, for the purpose of paragraph 328-430(1)(d)(iii) of the ITAA 1997?

Answer

Yes.

Question 6

Will the proposed transfer qualify for the small business restructure roll-over under subdivision 328-G of the ITAA 1997?

Answer

Decline to rule.

This ruling applies for the following period:

30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

1.    You own various parcels of land (the land).

2.    Your 100% share of the titles that make up the land were acquired over a number of years:

•         The land was originally owned by your relative

•         When your relative passed away an interest in the land was inherited by each of their X children

•         When your parent passed away in prior to, their share of the land was inherited by their X children (you and your siblings)

•         You purchased a share in the land from your relative in 20XX

•         You purchased a share in the land from your siblings in 19XX

3.    For the entirety of its ownership by your family the land has been utilised in the business conducted by the trading company, Company A.

4.    You hold a license which is used in the business.

Other associated entities

5.    Company A was incorporated prior to 20 September 1985.

6.    The shares on issue in Company A consist of X C class shares and Y A class preference shares.

7.    From the date of incorporation, the shares in Company A were held on trust for your benefit per the terms of your parent's will.

8.    All of the shares in Company A are currently owned by you and were transferred to you via the terms of your parent's will.

9.    Company A conducts a significant operation on the land held by the family group and has expanded operations via acquisitions of land by other related party entities.

10.  Company A acquired land known prior to 20 September 1985 for use in the business conducted by the company.

11.  Company A also holds a licence used in the business conducted by the company.

Company B

12.  Company B was incorporated prior to 20 September 1985.

13.  The shares on issue in Company B consist of X ordinary shares. All of the shares in Company B are currently owned by Company A.

14.  Company B was a shelf corporation that had not traded or held any assets prior the shares being transferred to Company A.

15.  The shares in Company B were transferred to company A in 1987 from the previous owners of the shelf company.

16.  Company B acquired land known prior to 20 September 1985 for the use in the business conducted by the trading company, Company A.

Company C

17.  Company C was incorporated prior to 20 September 1985.

18.  The shares on issue in Company C consist of X A Class shares and X B Class shares. The A Class shares are owned one each by you and your spouse. The B class shares are owned by Company D as trustee for the Family Trust.

19.  The Memorandum and Articles of Association of Company C stipulate that the A Class shares in Company C shall be the only shares in the capital of the company which shall confer the right to vote at any general meeting of the company.

20.  The shares on issue in Company D are X ordinary shares. The ordinary shares are owned by you and your spouse. Company D does not undertake any activities except to act as the trustee company for the Family Trust.

21.  The Family Trust made a family trust election in 1995 naming you as the specified individual.

22.  Company C acquired land prior to 20 September 1985 for use in the business conducted by the trading company, Company A.

Trust A

23.  Trust A is a discretionary trust settled and established via trust deed in 2019.

24.  The Trustees of Trust A are you and your children.

25.  The Appointers of Trust A are you and your children jointly, or such person or persons as each of them shall by Will or Deed appoint.

26.  The primary beneficiaries of Trust A are you and various other individuals.

27.  The trust deed provides for a wide range of general beneficiaries, which includes, inter alia, the spouses and siblings of the primary beneficiaries and remoter issue.

28.  The trust deed provides the trustee with a wide range of other business and investment powers as would be ordinarily expected in a discretionary trust deed.

29.  Trust A acquire land in 2020 for the use in the business conducted by the trading company, Company A.

Company A -business details

30.  You, Company A, Company C and Trust A make the properties they own available to Company A for use in its business by way of informal lease agreements.

31.  The family has been running an enterprise since the early 1900s.

32.  The operations of Company A currently include various business activities.

Proposed transaction

33.  A new trust will be settled known as the Land Trust.

34.  The trustee of the Land Trust will be a company of which you are the sole shareholder and director. You will also be the appointer of the new trust.

35.  The trustees of the new trust will make a family trust election in which you will be the specified individual.

36.  You intend to transfer the land and licence to the new trust.

37.  After the proposed transfers, the new trust will continue to make the land and water assets available to Company A to carry on its business.

38.  The assets subject to the transfer will continue to be active assets used in the business conducted by

39.  Company A post the proposed transfer.

40.  In the event that the new trust has a tax loss, or no net income for the year ended 30 June 2024, the trustee will make a nomination (pursuant to section 152-78 of the ITAA 1997) in favour of you

41.  You have a loan to a financial institution for approximately $X in relation to the land.

42.  The new land trust plans to seek a loan from a financial institution for a percentage of the value of the land.

43.  The new land trust will pay you an amount, dependant on what the bank agrees to lend the trust, however an amount of $X will remain as a loan owing to you from the new land trust.

44.  No documentation has been prepared for the loans.

45.  The new land trust will charge rent for use of the land by the related entity. The new land trust will also claim interest deductions in relation to the loan.

Reasons for the proposed transaction

46.  The activities carried out on the land pose risk to neighbouring properties, employees and the general public. These risks include but are not limited to:

•         Significant fire risk spreading to neighbouring properties and towns.

•         The use of and potential drift onto neighbouring properties of potent chemicals.

47.  These activities all pose a risk of litigation against the landholding entity.

48.  You are also seeking to separate the business debt from personal debt. The business has been able to obtain finance as required, the issue that the restructure is seeking to resolve is that the land and the associated debt is currently held in your name. By restructuring, the land will be transferred to the discretionary trust, which will also take on debt against the land.

49.  The Land Trust plans to seek finance to pay you for the transfer of land. The finance obtained will be used to repay the $X debt in your name currently owing to the bank for the original purchase of the land.

50.  Any amount remaining after you repay the debt for the original purchase of the land will be used to repay other business and family debt owed to the bank by Company A.

Other details

51.  The aggregated turnover of the group for the year ended 30 June 2023 is less than $10 million.

52.  There is no significant private use of any of the assets.

53.  All of the entities are Australian residents for tax purposes.

54.  You and the Land Trust will choose to apply the small business restructure roll-over.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 328-430(1)(a)

Income Tax Assessment Act 1997 section 328-435

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

Income Tax Assessment Act 1997 paragraph 328-430(1)(c)

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

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

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

Income Tax Assessment Act 1997 Subdivision 328-G

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

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Question 1

Summary

We do not consider the transfer of the land and licence to be a genuine restructure of an ongoing business.

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.

8. The Commissioner acknowledges that tax considerations are factors that can be taken into account under a genuine small business restructure. For example, a sole trader subject to the highest marginal rate moving to a company structure to access the lower corporate tax rate.

9. However, this is not without limits. There are concerns where the restructure is contrived or unduly tax driven in the sense that it achieves a tax outcome that does not reflect the economic reality or creates an outcome that would, but for the SBRR, ordinarily attract other integrity measures in the law. For example, a restructure directed at eliminating an impending or existing tax liability, would indicate that a restructure is not a 'genuine restructure of an ongoing business'.

10. Other factors which tend to indicate that a restructure is not a 'genuine restructure of an ongoing business' 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.

Asset protection

Example 1 in LCR 2016/3 (paragraph 17 to 23), involves an individual (Mark) who is expanding his sole trader bookkeeping business into the riskier operations of financial advice. After being sued by a client for negligent financial advice, Mark has decided he is not prepared to conduct his business on his own account.

Mark is transferring assets from the original entity (himself) to quarantine his business from his personal assets. This is a benefit to Mark in terms of his ability to grow the riskier operations and enhance its profits. The restructure is a response to his business needs, facilitates further growth and is not unduly tax driven. The economic ownership of the business is maintained. Accordingly, the 'genuine restructure of an ongoing business' condition is satisfied.

Application to your circumstances

In this case, the land and licence you own are used in the business carried on by Company A. You intend to transfer ownership of the land and licence to a newly formed discretionary trust. In the private ruling application, it was advised that the proposed restructure was being undertaken to protect the assets from the inherent risks of the ongoing business operations.

The business has been operating, via a separate entity, for a significant period of time and the circumstances can be distinguished from example 1 of LCR 2016/3 which considers asset protection. In the example, the business operator's restructure was in response to an emerging business need that occurred as a result of the expansion of their activities. The catalyst for restructuring in the example is the business commencing riskier financial advice operations and the transaction allows the business operations to be separated from Mark's personal assets.

In this case, the business has been in operation for more than X years and is conducted by a separate company. Based on the information provided the restructure does not appear to be in response to business needs, a change in activities or any other specific happening. Further, in the current structure the business operations are already conducted by an entity separate to you as the land holder. The proposed restructure will not change the type of entity in which the ongoing business is conducted and will not involve any changes to the way the ongoing business is conducted.

A further reason identified for the restructure is to separate business debt from personal debt. As a result of the proposed transfer, you will receive monies from the Land Trust to repay the $X debt that is currently owing to the bank for the original purchase of the land. We consider this to be an extraction of wealth for personal consumption, that is the paying out of a debt in your personal name.

In this case it is considered that any benefits the proposed restructure may provide to the ongoing business can be seen to be outweighed by the additional costs and administrative complexities introduced by adding a new discretionary trust to the group structure.

Therefore, we do not consider the transaction to be a genuine restructure of an ongoing business.

Question 2

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 ATO 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.

Safe harbour

Section 328-435 of the ITAA 1997 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.

Application to your circumstances

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 in proving a private ruling on the basis of assumption, therefore is declining to rule on this matter as per paragraph 357-110(1)(a) of Schedule 1 to the Taxation Administration Act 1953 (TAA).

Question 3

Subparagraph 328-430(1)(b)(iii) of the ITAA 1997 is satisfied where each party to the transfer is connected with an entity that is a small business entity for that income year.

You are a small business entity in accordance with section 328-110 of the ITAA 1997 if you carrying on a business in the current year; and one or both of the following applies:

•         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

•         your aggregated turnover for the current year is likely to be less than $10 million

In accordance with subsection 328-125(1) of the ITAA 1997 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

Control of a company

You control a company if you, your affiliates, or you together with your affiliates, have either:

• shares and other equity interests (or the right to acquire them) in the company that give you and/or your affiliates at least 40% (the control percentage) of the voting power in the company
• interests (or the right to acquire them) with the right to receive at least 40% (the control percentage) of any income or capital the company distributes.

Control of a discretionary trust

The 2 tests for determining control of a discretionary trust are the:

• distribution test
• influence over trustee test

You control a discretionary trust if you meet either of these tests.

Influence over trustee test

You meet this test if the trustee either acts, or might reasonably be expected to act, according to directions or wishes of you, your affiliate or you together with your affiliates.

You must consider all the circumstances to work out whether you meet this test. For example, to prove that you had no influence over the trustee, it would not be enough for the trust deed to say the trustee must ignore your directions or wishes.

Some factors you might consider include:

• the way the trustee has acted in the past
• the relationship between you or your affiliates (or both) and the trustee
• the amount of property or services you or your affiliates (or both) transferred to the trust
• any arrangement or understanding between you and any person who has benefited under the trust in the past.

Application to your circumstances

In this case, the assets you own are used in the course of carrying on a business by Company A. You are the sole shareholder of Company A and therefore it is connected with you.

After the proposed transfer, the assets will be held by the Land Trust. The trustee of the Land Trust will be a company of which you are the sole shareholder and director. You will also be the appointer of the trust. We accept that the Land Trust will be connected with Company A as they will both be controlled by you.

Therefore, we accept that each party to the transfer is connected with an entity that is a small business entity for that income year.

Question 4

Paragraph 324-430(1)(c) of the ITAA 1997 sets out the ultimate economic ownership requirements for the small business restructure roll-over. In order to satisfy the conditions for the roll-over the transaction must not have the effect of materially changing which individual has, or which individuals have, the ultimate economic ownership of the asset and if there is more than one such individual, each individual's share of that ultimate economic ownership.

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; an

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 of 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 the family group.

Application to your circumstances

In this case, just prior to the proposed transfer the ultimate economic ownership of the assets was held by you. Given the proposed transaction involves the assets being transferred to a non-fixed trust, we need to consider the alternate ultimate economic ownership test. In this case we accept that 328-440 of the ITAA 1997 is satisfied as just after the transaction the assets are included in the property of a family trust of which you are the specified individual. Therefore, 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.

Question 5

Subparagraph 328-430(1)(d)(ii) of the ITAA 1997 explains that the a roll-over can apply where the asset is a CGT asset (other than a depreciating asset) that is, at the time the transfer takes effect an active asset in relation to which subsection 152-10(1A) of the ITAA 1997 is satisfied in that income year, or would be satisfied in that income year if paragraph 152-10(1AA)(b) of the ITAA 1997 were disregarded.

Note 152-10(1AA)(b) of the ITAA 1997 states that you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million.

Subsection 152-10(1A) of the ITAA 1997 states that:

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.

Application to your circumstances

In this case, as discussed at question 2, we accept that Company A is connected with you and will also be connected with the Land Trust. Neither you or the trust will carrying on a business and further Company A will be a small business entity in the relevant year. Therefore, we accept that the relevant CGT assets meet the requirement set out in subparagraph 328-430(1)(d)(ii) of the ITAA 1997.

Question 6

Subdivision 328-G allows for tax-neutral consequences for a small business that restructures the ownership of the assets of the business without changing the ultimate economic ownership of the assets.

Subsection 328-430(1) outlines the conditions to be met for the roll-over relief to be available and all conditions in subsection 328-430(1) need to be met for the Subdivision 328-G roll-over to be applied to the transfer of the roll-over.

Application to your circumstances

As the transfer of the assets from you to the Trust is not considered part of a genuine restructure of and ongoing business (per question 1), satisfaction of the genuine restructure requirement and subsequently the overall conditions outlined in subsection 328-430(1) depends upon the application of the safe harbour rule in section 328-435.

Given that we consider there to be too much uncertainty about future events in this case to make the assumptions required to provide a private ruling on the safe harbour (per question 2), for the same reasons the Commissioner is also declining to make the ruling on whether the proposed transfer qualifies for rollover relief under Subdivision 328-G of the ITAA 1997, as per paragraph 357-110(1)(a) of Schedule 1 to the TAA.