Edited version of private advice

Authorisation Number: 1052326268171

Date of advice: 31 October 2024

Ruling

Subject: Small business restructure rollover

Question

Does the proposed transaction qualify for roll-over relief under Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20xx

Year ending 20 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

Background

The Family Group owns land and conducts business activities on the land.

The land was acquired by various different individuals and entities.

The current legal ownership of the various properties doesn't fully reflect the geographical location of those properties and the associate operational challenges this creates.

Parent A and Parent B were married. They were the parents of Child A, Child B, Child C and Child D.

Parent A passed away on a specified date.

Parent B passed away on a specified date.

Company A

Company A was incorporated on a specified date.

The current directors of the company are Child B and their spouse, Child C and Child D's spouse.

The shareholders of Company A hold a specified number of "x", "y" and "z" class shares.

The "x", "y" and "z" class shares are entitled to dividends declared on their respective classes and are redeemable at the discretion of Company A. These shares hold no voting rights and are entitled to a return of paid-up capital only (no entitlement to surplus assets).

Company A conducts business operations on various properties held by various entities.

These properties are all located within close proximity of each other, and this is a driving factor behind the decision for Company A to operate these particular properties.

The annual turnover of Company A is $xxx.

Company A will be a small business entity for the 20xx income tax year and is expected to be for the 20xx income tax year.

Child B will be taken to control Company A in the 20xx and 20xx income tax years.

Company B

Company B was incorporated on a specified date.

Child A is the sole director of Company B.

The sole shareholder of Company B is Trust C.

Company B conducts business operations on the properties held by various entities.

These properties are located within close proximity of each other, and this is a driving factor behind the decision for Company B to operate these particular properties.

The annual turnover of Company B in 20xx was $xxx.

Company B will be a small business entity for the 20xx income tax year and is expected to be for the 20xx income tax year.

Child A will be taken to control Company B in the 20xx and 20xx income tax years.

Trust A

Trust A was established on a specified date.

Trust A is an Australian resident trust for CGT purposes.

Trust A has a corporate trustee.

Per the 20xx ASIC statement, Child B and Child A are directors of the corporate trustee.

The principal beneficiaries of the trust include Parent A, Parent B and their lineal issue.

The original appointors of the trust per the trust deed were Parent A, and then on their death Parent B. Parent A did not include any instructions regarding the appointorship of this trust in their Will.

Shares held by Parent A form part of the residue under their Will which was left to his children in equal shares as tenants in common.

Child A and Child B each received 50% of the distribution of income in 20xx.

No family trust election has been made in respect to this trust.

Child B will be the controller of Trust A in the 20xx and 20xx income tax years.

Trust B

Trust B was established on a specified date.

Trust B is an Australian resident trusts for CGT purposes.

Trust B has a corporate trustee. Child A and their spouse each hold a specified number of shares and are directors of the corporate trustee.

Child A is the appointor of the trust.

The settlor of the trust was Parent A.

The specified beneficiaries of the trust are Child A and their spouse and their children.

Child A received 100% of the distribution from Trust B in 20xx.

Trust B has provided an unsecured, non-interest bearing loan to Company B. The loan was used to fund working capital used to fund rent owed to Trust B by the Company. Total balance of loan was $xxx at 30 June 20xx. Trust B has not provided any other assets or funding to Company A or Company B.

Child A will be the controller of Trust B in the 20xx and 20xx income tax years.

Proposed transaction

It is proposed to transfer a specified property from Trust A to a trust controlled by Child B (through control of the corporate trustee), and under which their family and the families of Child C and Child D can potentially benefit.

It is also proposed to transfer specified properties from Trust B to a trust controlled by Child A (through control of the corporate trustee), and under which his family can benefit.

You have considered but not finalised the decision in terms of the specific details of the trusts that will acquire the land.

The new landholding trusts will all be resident trusts for CGT purposes.

The trustees for Trust A and Trust B and the two new landholding trusts will all choose to apply the roll-over in relation to the transfers of the specified properties.

Reason for proposed transaction

Aligning the landholdings of the properties held in the trusts by transferring certain landholdings out of those trusts so that the remaining landholdings of Trust B will only be those landholdings used by Company A, and the remaining landholdings for Trust A will be only those landholdings used by Company B.

As part of doing this:

•         The $xxx loan provided by Child A to the Trust B will be repaid. This will allow for the properties held by the Trust B that are being used by Company A to be disassociated from Child A and in turn Company B. It is hoped that this will allow for these properties to be better utilised as security in the future by Company A and associated entities.

•         The trust that will acquire the specified properties from Trust B intends to assume the loan owed to Child A as part of the consideration payable to Trust B for the land.

•         The properties being farmed by Company A will be removed from the Trust A, disassociating them from this trust and its associated bank debt. Company B will continue to be responsible for funding the repayments of this debt, reflecting the fact that the land remaining in the Trust A is the land that is being farmed by Company B.

The alignment of the properties will provide each company with the following benefits:

•         Currently joint overdraft and loan facilities are held between the businesses, as each operation must rely on the combined landholdings (or part thereof) to act as security for the debt. The alignment of the properties with the business operations will allow bank security to align with each separate business operation, allowing it to operate within its own bank guarantees and asset base and will significantly improve each operation's ability to grow as a result of reduction in complexity in finance and debt structure.

•         It will provide each business greater autonomy in their operations, when making decisions that impact the land. For example, currently business decisions regarding management or property development requires multiple authorisations due to the impact on multiple businesses, for them to be implemented. This slows decision making, disempowers the managers and leads to lost business opportunity.

Further information / contentions

The Family have no intentions of selling any of the properties. Further, they intend for trading to continue through Company B and Company A. The Family also do not intend for there to be any changes in the ownership of the shares in either Company B and Company A in at least the next three years.

The Family also do not intend for there to be any changes in the control of the new landholding trusts (including the ownership of their corporate trustees) for at least the next three years.

A family trust election has not yet been made in respect to Trust A or Trust B. Prior to the transfers occurring, the Family intend for Trust A, Trust B and the new landholding trusts to all make family trust elections.

The Family intend for Child A to be nominated as the test individual for all four trusts affected by the proposed transfers, being the Trust A, Trust B and the proposed two new landholding trusts.

You note that as the shareholders of the companies are discretionary trusts, the various shareholders are not capable of being affiliates of each other for the purposes of establishing that the two companies are connected to each other.

The aggregated turnover of Company A and Company B was under $10 million in the 20xx income tax year and is expected to be under $10 million in the 20xx income tax year.

Assumption

Just after the transaction takes effect, the asset is included in the property of a non-fixed trust that is a family trust; and

•         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 to the Income Tax Assessment Act 1936) relating to Trust B; and

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

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 Subdivision 328-G

Income Tax Assessment Act 1997 section 328-110

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

Income Tax Assessment Act 1997 subsection 328-440

Income Tax Assessment Act 1997 section 328-445

Taxation Administration Act 1953 section 370-5 of Schedule 1

Income Tax Assessment Act 1936 Schedule 2F

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-avoidancerule for income tax'.

Reasons for decision

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.

Application to your circumstances

In this case the purpose of the proposed transfers is intended to:

•         Align the ownership of the various properties held in the trusts with their respective geographical location, as currently Trust B and Trust A own a mix of properties located in different areas. This will achieve an appropriate ownership structure of these properties that reflects the manner in which the properties would have been acquired should advice be sort at their time of acquisition.

•         Also allow for the separation of the properties held by these trusts from debt that is connected with the operations of the entities not operating those properties.

•         Achieve the goals of aligning aggregations of land within a certain group of entities, being alignment to their respective business operations.

•         Provide each business greater autonomy in their operations, when making decisions that impact the land. For example, currently business decisions regarding management or property development requires multiple authorisations due to the impact on multiple businesses, for them to be implemented. This slows decision making, disempowers the managers and leads to lost business opportunity.

We accept that the proposed restructure is being undertaken for a commercial reason and is not unduly tax driven. Further we do not consider there is any evidence that it is an attempt to wind down or extract wealth from the business. Therefore, we accept the proposed transaction is a genuine restructure of an ongoing business.

Small business entity

Paragraph 328-430(1)(b) requires that each party to the transfer is an entity to which 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.

Application to your circumstances

In this case both Company B and Company A are small business entities. Although not tested, if it were to be established that Company B and Company A were affiliates of each other their aggregated turnover is less than $10 million.

Trust B as the transferor of specified properties is connected to Company B in the 20xx and 20xx income tax years, and Company B is a small business entity in the 20xx income tax year and is expected to be in the 20xx income tax year.

The new landholding trust as the transferee of a specified property will be connected to Company B in the 20xx and 20xx income tax years.

Both the transferor and transferee of the specified properties will therefore satisfy paragraph 328-430(1)(a)(iii).

Therefore, the small business entity test in paragraph 328-430(1)(b) will be satisfied for the transfer of the assets.

Ultimate economic ownership

Paragraph 328-430(1)(c) requires that 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

The term 'ultimate economic ownership' is not defined in the income tax provisions. Paragraph 1.29 and 1.30 of the Explanatory Memorandum to the Tax Laws Amendment (Small Business Restructure Roll-over) Act 2016 explains that the ultimate economic owners of an asset are individuals who, directly or indirectly, beneficially own an asset. As the ultimate economic owners can only be individuals, a look through approach applies where a company, partnership or trust owns the asset.

Under ordinary legal concepts, a beneficiary of a discretionary trust does not have any beneficial interest in any trust property prior to a distribution or appointment of income or capital. Instead, a beneficiary of a discretionary trust only has a right to require the trustee to consider whether or not to exercise their discretion (Gartside v. Inland Revenue Commissioner (1968) AC 553.

In relation to the application of the ultimate ownership test to discretionary trusts, the Commissioner's view provided in paragraph 107 of LCR 2016/3 is that a transfer of assets from or to a discretionary trust will generally not meet the requirements for ultimate economic ownership on their facts.

Alternative economic ownership test

Section 328-440 provides that for the purpose of paragraph 328-430(1)(c), 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; and

(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 to 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 that family group.

Application to your circumstances

In this case, the assets will be included in the property of a non-fixed trust that was a family trust both just before and just after the transaction takes effect.

Trust B and the new landholding entity will have a family trust election in place with Child A being named as the specified individual before the transfer takes effect.

It is assumed that just after the transaction takes effect, the asset is included in the property of a non-fixed trust that is a family trust; and

•         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 to the Income Tax Assessment Act 1936) relating to Trust B; and

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

Based on the assumption and the family trust elections being in place the ultimate economic test in paragraph 328-430(1)(c) of the ITAA 1997 will be satisfied because of the alternative test in section 328-440 of the ITAA 1997.

Active assets

Paragraph 328-430(1)(d) sets the requirement that the asset to be transferred 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

(iii)  if subparagraph (b)(iv) applies - an active asset and an interest in an asset of the partnership referred to in that subparagraph; and

A CGT asset (whether a tangible or intangible asset) is an active asset at a time if, at that time, you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by you, an affiliate of yours, or by another entity that is connected with you (subsection 152-40(1)).

Application to your circumstances

In this case, the assets are being used in the course of carrying on a business by an entity that is connected with you, satisfying paragraph 328-430(1)(d) of the ITAA 1997.

Residency requirements

Paragraph 328-430(1)(e) of the ITAA 1997 requires both the transferor and the transferee to meet the residency requirements outlined in section 328-445 of the ITAA 1997.

Where the entity is a trust, it must be a resident trust for CGT purposes. A discretionary 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, both Trust B and the new landholding entity will meet the residency requirements in in section 328-445 of the ITAA 1997 satisfying paragraph 328-430(1)(e) of the ITAA 1997.

All parties choose to apply the rollover

Paragraph 328-430(1)(f) of the ITAA 1997 requires that both the transferor and the transferee choose to apply the roll-over under Subdivision 328-G of the ITAA 1997 in relation to the assets transferred under the transaction.

In this case, both Trust B and the new landholding entity will make the choice to apply the roll-over under Subdivision 328-G of the ITAA 1997 in relation to the assets transferred under the transaction, satisfying 328-430(1)(f) of the ITAA 1997.

Conclusion

As each of the requirements of section 328-430 of the ITAA 1997 will be met, the proposed transaction will qualify for roll-over relief under Subdivision 328-G of the ITAA 1997.