Edited version of private advice

Authorisation Number: 1052246894226

Date of advice: 30 April 2024

Ruling

Subject: CGT - small business restructure rollover

Question 1

Is the transaction that occurred in April 20XX 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

Yes. The transaction that occurred on 1 April 20XX is part of a genuine restructure of an ongoing business for the purpose of paragraph 328-430(1)(a) of the ITAA 1997. It is accepted that the proposed transaction will provide asset protection, business growth, mitigating business risk, maintaining essential employee that will reasonably be expected to deliver benefits in regard to the efficient conduct of the business.

Question 2

On the basis that the answer to Question 1 is Yes: Is a rollover, under section 328-430 of the ITAA 1997, available for the transaction that occurred in April 20XX?

Answer

Yes. A rollover is available under section 328-430 of the ITAA 1997 for the transaction that occurred in April 20XX. 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.

Question 3

On the basis that the answer to Question 2 is Yes: Do the consequences described in sections 328-450, 328-455, 328-460, 328-465 and 328-470 of the ITAA 1997 (as applicable) apply to the transaction that occurred in April 20XX?

Answer

Yes. The respective consequences apply (as applicable) to the transaction that occurred on 1 April 20XX. Section 328-450 of the ITAA 1997 provides that if the transfer of an asset occurs under a transaction to which section 328-430 applies, the transfer of the asset has no direct consequences under the income tax law.

The income tax law applies as if the transfer takes place for the asset's roll-over cost (subsection 328-455(1) of the ITAA 1997. The roll-over of a depreciating asset transferred in a small business restructure is addressed in item 8 of the table in subsection 40-340(1) of the ITAA 1997.

Section 328-460 of the ITAA 1997 provides that, for the purposes of applying subsection 328-455(1) to the asset as a CGT asset (other than a revenue asset) that is a pre-CGT asset, a transferee is taken to have acquired the asset before 20 September 1985.

Section 328-465 of the ITAA 1997) deals with any membership interests which are issued as consideration for the transfer.

Where membership interests are issued in consideration for the transfer of a roll-over asset or assets, the cost base and reduced cost base of those new membership interests is worked out based on the sum of the roll-over costs and adjustable values of the roll-over assets, less any liabilities that the transferee undertakes to discharge in respect of those assets, divided by the number of new membership interests (s 328-465).

A capital loss that is made on any direct or indirect membership in the transferor or the transferee to which the roll-over has occurred will be disregarded except to the extent that the entity can demonstrate that the capital loss is attributable to a matter other than the transfer (s 328-470).

This ruling applies for the following periods:

Year ended 30 June 2023

Year ending 30 June 2024

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

Mr and Mrs X are Australian residents who carry on a business (the business) through an equal-interest partnership (the partnership). The primary assets of the partnership includes business assets, and plant and machinery to support business operations.

Mr and Mrs X, and their employee A, were the key personnel in the business. A is not related to either Mr or Mrs X.

The historical responsibilities of the key personnel are as follows:

•         Mr X as the general manager of the business where he managed X staff members, along with running a modern business and operating the machinery used in the business.

•         Mrs X managed the office compliance including bookkeeping and financials for the business.

•         A assists Mr X with looking after the business, operating machinery and assists Mrs X where required with managing the office compliance of the business.

In December 20XX, the new related company Transferee Pty Ltd (Transferee) was incorporated for the purposes of the restructure of the business. Mr and Mrs X were the initial shareholders of Transferee; they are its directors, and it is an Australian tax resident. At the time, following discussions between the taxpayers and their registered tax agent from May 20XX, there was an intention to bring A in as a minority employee shareholder.

The partnership's annual turnover for the income years ended 30 June 2022 and 2023 were under $X million; Transferee's turnover for the income year ended 30 June 2023 was nominal - under $X million.

In April 20XX the restructure occurred, which involved the provision by the partnership to Transferee of all things necessary for the continuing operation of the business, being:

•         Ownership of all plant and equipment stipulated in the sale contract, being all assets listed in the fixed asset register as at the transfer date apart from any assets subject to an existing hire purchase arrangement (excluded assets).

•         A right, under contract, to use the abovementioned excluded assets.

•         All trading stock on hand at the transfer date.

•         The right to use the land on which the business is operated via agreement of the relevant leases effective as of the transfer date.

•         Business contracts were transferred from the partnership to Transferee on 1 May 20XX.

In December 20XX, Mr and Mrs X as directors of Transferee opened a bank account as initial preparation to carry on the business.

Between December 20XX and March 20XX, steps were conducted to restructure the business, including instructions to the lawyers and consideration of tax implications. By December 20XX, independent advice was sought by A regarding financing the purchase of shares such as through the potential sale of their house.

In March 20XX, Mr and Mrs X engaged lawyers to prepare the business sale documentation and a shareholders' agreement with A in preparation for the transfer of the business to Transferee, and A's acquisition of shares in Transferee.

In relation to A's future shareholding in Transferee, following the restructure, it was intended that A would pay $y for a x% shareholding interest in Transferee (by way of newly issued shares), with effect from 1 July 20XX. Vesting conditions in A's shares had been discussed, although it was likely that A would acquire the initial shares using their personal cash and thus there would be no vesting conditions. Any future shares for A, particularly where the funding of the acquisition was to be by the business and/or Mr and Mrs X, may have had vesting conditions considered.

Reasons for restructure

The purpose of the restructure was to achieve a number of commercial benefits and address key business needs, including (but not limited to) better asset protection; business growth; mitigation of business risk; and maintaining an essential employee.

The partnership structure of the business meant that the land on which the business operated was exposed to business risk. Further, any potential future investments Mr and Mrs X may have decided to make would also be exposed to business risk. The restructure allowed Mr and Mrs X to separate the business risk from the land assets, and other future investments, by segregating the business into a limited liability company. Whilst it is acknowledged that there is exposure to risk for the directors, the restructure provides greater risk segregation and therefore asset protection.

Asset protection is a factor due to strong growth in the business prices over recent years, based on statistical data from the relevant business department. Accordingly, assets in the name of Mr and Mrs X - largely being land - have increased in value. This meant that the ordinary business risks faced by Mr and Mrs X (such as obtaining business loans with banks) became more significant, as a higher value of assets were jeopardised in the partnership structure.

It was the long-term goal of Mr and Mrs X to continue the business into the distant future. Their future plans were to ultimately retire after further years in business. Their wish was for the staff with the appropriate expertise and knowledge to gradually gain more and more ownership and control of the business' decisions. The ultimate long-term goal was to handover the business to someone they trusted to see it succeed in the future, as much as the operations had succeeded under the management of Mr and Mrs X. They decided a company would best meet this need as the structure would allow for select employees to progressively purchase shares, and result in a relatively easy shift in control and ownership when they were ready to transition to retirement. To this end, A was identified as the employee to ultimately hand the business over to.

For the business, it is difficult to find experienced workers that are willing to stay in the business long-term. A had been with the business for several years prior to the restructure and was seen as having the necessary skills and expertise to manage the business at a high level. In order to facilitate further growth, it became a priority to maintain A as an employee by incentivising him to continue with the business. After learning from their accountants about how a company structure could work, Mr and Mrs X had decided to move the business to a company and allow A to acquire an initial x% of the ownership interest in the business with limited liability. The company structure would also have meant A could acquire further shares in the company in the years to come.

Regarding business risk, there is a high risk of workplace injuries in their field of business, and as the business was operated in a partnership, the partners' personal assets were at risk. Operating the business via a company structure would alleviate this risk.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 328-G

Income Tax Assessment Act 1997 section 328-430

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

Income Tax Assessment Act 1997 section 328-450

Income Tax Assessment Act 1997 section 328-455

Income Tax Assessment Act 1997 section 328-460

Income Tax Assessment Act 1997 section 328-465

Income Tax Assessment Act 1997 section 328-470