Edited version of private advice

Authorisation Number: 1052307291489

Date of advice: 19 September 2024

Ruling

Subject: CGT - small business concessions - small business restructure rollover

Question 1

Would the proposed transfer of the 25% interest each held in The Land qualify for the small business restructure rollover under Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No. Based on information provided, the Commissioner considers that the drivers for the restructure are more aligned to succession and estate planning rather than commercial rationale or facilitating the needs and efficiencies of operations of the ongoing business.

Question 2

Would this be a genuine restructure of an ongoing business pursuant to paragraph 328-430(1)(a) of the ITAA 1997?

Answer 2

No. Further to the answer to Question 1, the Commissioner does not consider that genuine needs for the efficient conduct of an ongoing business will, or have, been fully addressed or articulated.

Question 3

Would this satisfy the safe harbour rule in section 328-435 of the ITAA 1997?

Answer 3

Decline to rule.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Background

The Land was purchased in 20XX. It was purchased by persons A, B, C and D as joint tenants. Persons A and B are aged in their 70s and Persons C and D are aged in their 40s.

Persons A and B are looking to transfer their 25% interest each held to a new group entity, the Landholding Trust. This trust has not yet been established.

The business operation business operations. Trading used to be run through a partnership of the 4 persons and a related Business Trust. The partnership's final return was 2023. The Land is now currently farmed by the Business Trust.

Persons A and B have little to no involvement in the day to day running of the business due to their ages. The vast majority of the running of the business and the work is undertaken by Persons C and D. Persons C and D are the main business operators and decision makers and will be running the business for the foreseeable future.

The business does not make loans. The business has term debt and overdraft debt. The business operations of the business are funded by term loans to finance land purchases held in other entities. These loans are mortgaged against land held outside of the trading trust, and therefore require mortgages and guarantees to be signed.

Proposed transaction

It is proposed that a new corporate trustee will be the corporate trustee to the new Landholding Trust. Persons C and D will be the directors and shareholders. The Landholding Trust will be a connected entity of Persons C and under the subsection 328-125(3) of ITAA 1997 control test (trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the entity, its affiliates or the entity together with its affiliates).

The Landholding Trust will lodge a Family Trust Election which will be in place at the time of the transfer. Persons A or B will be the test individual.

Person A also holds X shares in a related company that owns additional land. Some of these shares are pre-CGT and these shares will transfer to another trust controlled by Persons C and D. The post-CGT shares will be retained by Person A because there would be significant capital gains tax (CGT) and stamp duty if they were transferred.

No other business assets will transfer, including depreciating assets. Only the land and shares are proposed to be transferred.

After the transfer the 50% interest in The Land held by the Landholding Trust will not be transferred; it will continue to be an active asset; and there will be no significant or material use for private purposes in the 3-year period after the transfer.

Reasons for the proposed transaction

The main reasons provided for the land transfer are as follows:

1)            If joint tenancy of the land is severed, then the land would be part of Persons A and B's estate upon their death, which could be challenged by Person C's siblings.

2)            Giving security of tenure over the land to Persons C and D, for the continued operation and viability of the ongoing business.

3)            As Persons A and B age, their ability to co-sign and understand bank covenants will diminish which will put risk to the continued operation and viability of the ongoing business from a financial point of view.

4)            If they received appropriate advice at the time of purchase, then they would have at least purchased Persons A and B's 50% share in a trust.

Further reasons provided are as follows:

•                     Person A to still retain some ownership in the Land.

•                     Financing issues will come with this - shareholders' agreement will be put in place so that the agreement covers the company's ability to get finance, should anything happen.

•                     Future borrowing power and future business viability are other considerations.

•                     The business is currently structured such that Person A has some equity.

•                     Being in the business, it runs on external finance and bank loans are regularly renewed to keep the business going. Persons A and B sign these loans. As they age, if they don't have the capacity to sign such documents, the business operations will be impacted and if it cannot obtain finance, things will fall over very quickly. If Persons A and B lose their capacity, or if the land can't be used in the business operations (in a "practical" sense, e.g., it becomes infertile) then that affects trading and business viability.

•                     The restructure will transition control of the business to Persons C and D. Persons C and D will control the trading entity and hold their total 50% share of the land in their own names. This should have been the structure put in place from the start, but the previous accountant who advised on the actual structure was in his 70s and did not provide the right advice at the time.

•                     A stamp duty exemption will be claimed on the transfer of their combined 50% share, meaning no transfer duty is applicable. However, there would be transfer duty applicable if Persons C and D transferred their combined 50% share to the Landholding Trust, which would be a significant financial strain on the business. This is why they are only considering transferring Persons A and B's combined 50% share.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 328-G

Income Tax Assessment Act 1997 section 328-430

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

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

Income Tax Assessment Act 1997 section 328-435

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

Does Part 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'.

Review rights when we have declined to make a private ruling

If you are dissatisfied with this decision, you can apply to the Federal Court or the Federal Circuit Court of Australia for a review under the Administrative Decisions (Judicial Review) Act 1977 within 28 days of this decision. If you choose this option, we suggest you seek professional advice on how to proceed. You can find further information about this process and how to apply at ato.gov.au/external_review

Reasons for decision

Question 1

Summary

Based on information provided, the Commissioner considers that the drivers for the restructure are more aligned to succession and estate planning rather than commercial rationale or facilitating the needs and efficiencies of operations of the ongoing business.

Detailed reasoning

Section 328-430 of the ITAA 1997 explains when a roll-over is available. Subsection 328-430(1) provides that a roll-over under this Subdivision is available in relation to an asset that, under a transaction, an entity (the transferor) transfers to one or more other entities (transferees) if:

(a) the transaction is, or is a part of, a genuine restructure of an ongoing business; and

(b) each party to the transfer is an entity to which any 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; and

(c) 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 ownership; and

(d) 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; and

(e) the transferor and each transferee meet the residency requirement in section 328-445 for an entity; and

(f) the transferor and each transferee choose to apply a roll-over under this Subdivision in relation to the assets transferred under the transaction.

The Commissioner's views on the meaning of the term 'genuine restructure of an ongoing business' in Subdivision 328-G are expressed in Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters (LCR 2016/3).

Paragraph 5 of LCR 2016/3 states that 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.

Paragraph 6 of 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. It can encompass a restructure of the way in which business assets are held where that structure is likely to have been adopted had the business owners obtained appropriate professional advice when setting up the business. However, it is a composite phrase emphasising that the SBRR is not available to small business owners who are restructuring in the course of winding down or realising their ownership interests.

Paragraph 7 of LCR 2016/3 states that 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

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.

Paragraph 8 of LCR 2016/3 states that 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.

Paragraph 10 of LCR 2016/3 states that 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.

Paragraphs 37 to 44A of LCR 2016/3 provide Example 4 which is about restructuring a business with a view to simplifying tax affairs. In this example, a business operator restructured from a company and trust structure to a sole trader structure. It was concluded that significant benefits were achieved to the ongoing efficient conduct of his business. On the evidence, the restructure had relieved the business operator from additional outlays, and administrative and compliance burdens in running his business, and is a 'genuine restructure of an ongoing business'.

Example 4 of LCR 2016/3 appears to be in contrast to this present case, whereby additional non-fixed trusts are added into the group structure thereby increasing administrative complexity and compliance costs, as opposed to simplifying or streamlining operations.

The Commissioner acknowledges the response provided to this issue when raised, where it was stated that "a 10% increase in their compliance costs would be immaterial in comparison to the burdens placed on the business [as noted elsewhere]." However, the Commissioner must also acknowledge that this proposed transfer would not simplify affairs or reduce complexity or administrative burdens.

Referring to paragraph 8 of LCR 206/3, the Commissioner acknowledges that the proposed restructure would not attract stamp duty; and that stamp duty would be applicable if Persons C and D transferred their combined 50% share to the Landholding Trust. However, it is also noted that the proposed restructure will not result in any changes (reductions) to tax rates accessed by the family group's entities and that all group entities will continue to attract the highest marginal tax rates as applicable.

In explaining how Person A's equity in the business is an issue that needs addressing, it was stated that all 4 individuals have an equity stake in the business by being beneficiaries; as Persons A and B continue to age, they will be paid out their unpaid present entitlements as Persons C and D are, and have been, the key drivers and individuals involved in the business for a number of years. It was also stated that as Persons A and B to continue to age, with Person B already having health issues, the ability of them to understand and sign mortgages and guarantees will continue to diminish.

Paragraphs 53 to 59 of LCR 2016/3 provide Example 6 which discusses the application of Subdivision 328-G of the ITAA 1997 to a restructure involving succession planning and inter-generational transfers of wealth with a view to ultimately facilitate economic realisation of assets. In this example, it was concluded that the small business restructure rollover was not available because the restructure was undertaken in the course of winding down and facilitating an inter-generational transfer of wealth, as opposed to a bona fide restructure of an ongoing business.

It is also noted that the shares in the related company held by Person A will not form part of the restructure for which Subdivision 328-G relief is sought, because:

•                     The asset being transferred must also be an active asset, satisfying one of the requirements under paragraph 328-430(1)(d) of the ITAA 1997.

•                     Under subparagraph 328-430(1)(d)(ii) of the ITAA 1997, the shares in the related company must be an active asset to which subsection 152-10(1A) of the ITAA 1997 applies.

An asset that satisfies subsection 152-10(1A) is an asset that is used, or held ready for use, in the course of carrying on a business conducted by an affiliate or entity connected with the transferor or transferee.

Question 2

Summary

No. Further to the answer to Question 1, the Commissioner does not consider that genuine needs for the efficient conduct of an ongoing business will, or have, been fully addressed or articulated.

It has not been demonstrated how the current business activities, or the conduct of the ongoing business overall, will be benefitted by the restructure going forward. There will be no change to the entity operating the business, its business activities or how it conducts these activities and its ongoing business. In the current business structure, the business operations are already conducted by an entity separate to those who own the real property upon which the business is conducted.

The Land was acquired in 20XX and is held by entities separate to the trading entity. The business has been operating for a number of years, and the trading entity will not change. This appears to show that asset protection has already been achieved and is not a significant aspect of the proposed restructure (contrasted with Example 1 in LCR 2016/3).

The Commissioner does consider that the proposed restructure is a genuine restructure of an ongoing business that is expected to deliver benefits to the business owners in respect to their efficient conduct of the business by providing greater asset protection. The facts and circumstances provided do not provide support that the restructure is in response to a bona fide commercial arrangement undertaken to facilitate innovation and diversification, as there are no proposed restructure changes to the operational entity, but rather being an initial step in a broader reorganisation of the Taxpayers' affairs.

Question 3

Summary

Decline to rule.

Section 328-435 of the ITAA 1997 provides a safe harbour rule whereby, for the purposes of paragraph 328-430(1)(a) (but without limiting that paragraph), a transaction is, or is a part of, a genuine restructure of an ongoing business if, in the 3 year period after the transaction takes effect:

a) there is no change in ultimate economic ownership of any of the significant assets of the business (other than trading stock) that were transferred under the transaction; and

(b) those significant assets continue to be active assets; and

(c) there is no significant or material use of those significant assets for private purposes.

Paragraph 357-110(1)(a) of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that 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.

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 (see the ATO's Decision impact statement from Commissioner of Taxation v Hacon Pty Ltd [2017] FCAFC 181).

Because the Commissioner does not consider that the transfer of the Land to a new landholding trust is part of a genuine restructure of an ongoing business pursuant to paragraph 328-430(1)(a) of the ITAA 1997, satisfaction of the genuine restructure requirement and subsequently the overall conditions outlined in subsection 328-430(1) of the ITAA 1997 depend upon the application and satisfaction of the safe harbour rule in section 328-435 of the ITAA 1997.

Given that the Commissioner considers there to be too much uncertainty about future events in this case to make the assumptions required to provide a private ruling on the application of safe harbour in section 328-435 of the ITAA 1997, the Commissioner declines to rule on whether the proposed transfer qualifies for rollover relief under Subdivision 328-G of the ITAA 1997, in accordance with paragraph 357-110(1)(a) of Schedule 1 to the TAA.