Edited version of private advice

Authorisation Number: 1052377272398

Date of advice: 31 March 2025

Ruling

Subject: Income tax - capital gains

Question

Does the proposed transfer of land from the individual taxpayers to a new discretionary trust qualify for relief under subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20YY

Relevant facts and circumstances

1.  Taxpayer 1 and Taxpayer 2, together referred to as the Taxpayers, are Australian resident individuals and do not carry on a business individually. They are spouses.

2.  The Taxpayers own land (the Land).

3.  The land has all been used to grow cereal grains since the date of purchase.

4.  The business operates through a company, the Company, for which:

i)             the directors are Taxpayer 1 and Taxpayer 1's father

ii)             the shares are held equally between 2 discretionary trusts, with Taxpayer 1 and 2 being individual trustees of one trust, Trust 1, and Taxpayer 1 being sole director of the trustee company of the other discretionary trust, Trust 2.

5.  The Taxpayers are both beneficiaries of the shareholding trusts and both have a family trust election in place with Taxpayer 1 being the specified individual.

6.  The business carried on by the company is solely for the benefit of the 2 Taxpayers and their family.

7.  The business activities of the company are livestock farming, hay production and grain growing.

8.  The Company is financially dependent on the land and the taxpayers are financially dependent on the company business and act in concert to ensure that the company is run in such a way as to meet their financial requirements.

9.  There is no formal lease in place with the company concerning the use of the land owned by the Taxpayers due to the close intertwined relationship between the land holders and the company.

The proposed transfer

10.  The land owned by the taxpayers will be transferred to new discretionary trusts (the New Trusts), each with a corporate trustee.

11.  The New Trusts established to hold the land will have a family trust election in place with Taxpayer 1 named as the test individual.

12.  The Taxpayers will be the appointers of the New Trusts, giving them the unilateral ability to remove and appoint trustees.

13.  The Taxpayers and their family will be beneficiaries of the New Trusts.

14.  The New Trusts will each have an Australian resident corporate trustee which will have the Taxpayers as the only and equal shareholders.

15.  All entities party to the restructure are Australian residents for tax purposes.

16.  The Land will continue to be used by the Company in the carrying on of its primary production business activities.

17.  Both the transferor and transferee will choose to apply the roll-over in relation to the assets transferred under the transactions.

Other relevant facts

18.  Since a professional accounting firm was appointed as the professional advisor for the business, all land purchased by the group has been done so in trust, under the firm's advice.

19.  The Taxpayers are not in the course of winding down or realising their ownership interest. They intend to maintain and build their current trading position.

20.  The aggregated turnover of the Company for the 20YY income year, worked out as at the end of the year, is under $10 million.

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

All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question

Summary

The proposed transfer of land from the Taxpayers to the New Trusts will qualify for the roll-over under subdivision 328-G.

Detailed reasoning

Subsection 328-430(1) 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

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

c)            there is no material change in the ultimate economic ownership of the transferred asset

d)            the asset being transferred is an active asset of the relevant small business entity at the time of the transfer

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 outlines the following features that the Commissioner accepts will indicate that a transaction is, or is part of, a genuine restructure of an ongoing business:

•                     it is a bona fide commercial arrangement undertaken to facilitate growth, innovation and diversification, to adapt to changed conditions, or to reduce administrative burdens and compliance costs

•                     it is authentically restructuring the way the business is conducted, as opposed to a divestment or a 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, and

•                     it results in a structure likely to have been adopted had the small business owners obtained appropriate professional advice when setting up the business.

However, the Commissioner's view is that the restructure of an ongoing business by a business owner is not genuine if it is done in the course of winding down to transfer wealth between generations or realising their ownership interests. In the Commissioner's view, a restructure is likely to not be a genuine restructure of an ongoing business if:

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

•                     it effects an extraction of wealth from the assets of the business for personal investment or consumption

•                     it creates artificial losses or brings forward their recognition

•                     it effects a permanent non-recognition of gain or creates artificial timing advantages, and/or

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

Application to your circumstances

The transaction relevant under the proposed arrangement in relation to its eligibility for rollover in Subdivision 328-G is the transfer of the farming land from the Taxpayers to newly created discretionary trusts.

The Company conducts the primary production business and is the entity that is open to business risk. A separate entity already owns the land, which appears to show that substantial asset protection has already been achieved. However, it is accepted that the transaction will offer limited additional asset protection in circumstances where negligence of directors may be at issue. In this case, the personal assets of the director may be at risk, which, in this case, includes the land used in carrying on the business.

The other reason posited for this restructure is to assist in obtaining finance. This is not accepted. Whether the land is held by the Taxpayers or newly created trusts would make little difference to banks who may require the land to be mortgaged/securitised against any new loans. In either case, the controlling entity/ies of the land, which in either scenario are the Taxpayer/s, would need to agree to having the land mortgaged/securitised. As trust structures are usually seen by banks as more difficult/complex to work with and routinely require more paperwork, transferring the land into a trust structure may in fact be detrimental to the ease with which finance could be obtained.

The Commissioner accepts that:

•                     the result of the restructure is a structure likely to have been adopted had appropriate professional advice been obtained when setting up the business. This is evidenced by land purchases since that date being done in trust

•                     the land, although held by a different legal entity, will continue to be used in the carrying on of the business by the Company

•                     the economic ownership of the business for the purposes of section 328-430 (having regard for section 328-440) is maintained

•                     the restructure can be viewed as a response to a seemingly increasingly litigious landscape.

Conclusion - genuine restructure of an ongoing business

On balance, the Commissioner considers that the transaction will be part of a genuine restructure of an ongoing business for the purposes of paragraph 328-430(1)(a).

Small business entity

Section 328-110 provides that an entity is a CGT small business entity for an income year (current year) if it carries on business in the current year and either:

•                     it carried on business in the previous year and its aggregated turnover for the previous year was less than $10 million (paragraph (1)(b)(i)), or

•                     its aggregated turnover for the current year is likely to be less than $10 million (paragraph (1)(b)(ii)) (this test is not applicable where the entity has carried on business in each of the last 2 income years and the aggregated turnover for each of those years was more than $10 million (subsection (3)), or

•                     its aggregated turnover for the current year, worked out as at the end of the year is less than $10 million (subsection (4)).

An entity's aggregated turnover for an income year includes, pursuant to section 328-115, the annual turnovers for the income year of:

•                     the entity

•                     any other entities connected with the entity at any time during the income year, and

•                     any other entities that is an affiliate of the entity at any time during the income year.

Subsection 328-120 defines annual turnover and states:

An entity's annual turnover for an income year is the total *ordinary income that the entity *derives in the income year in the ordinary course of carrying on a *business.

Subsection 328-125(1) provides that an entity is connected with another entity if either entity controls the other, or if both entities are controlled by the same third entity.

Subsection 328-125(2) relevantly states:

An entity (the first entity) controls another entity if the first entity, its *affiliates, or the first entity together with its affiliates:

(a)            except if the other entity is a discretionary trust-own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of:

(i)          any distribution of income by the other entity; or

(ii)          if the other entity is a partnership-the net income of the partnership; or

(iii)          any distribution of capital by the other entity; or ...

In relation to the direct control of a discretionary trust subsections 328-125(3) and (4) state:

(3)            An entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its *affiliates, or the first entity together with its affiliates.

(4)            An entity (the first entity) controls a discretionary trust for an income year if, for any of the 4 income years before that year:

(a)          the trustee of the trust paid to, or applied for the benefit of:

(i)        the first entity; or

(ii)        any of the first entity's *affiliates; or

(iii)        the first entity and any of its affiliates;

any of the income or capital of the trust; and

(b)          the percentage (the control percentage) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year.

Subsection 328-125(7) provides that an entity will indirectly control another entity through an interposed entity if it controls an interposed entity that in turn controls (directly or indirectly) that other entity.

Section 328-130 is about when an entity is an 'affiliate of yours'. Subsection (1) provides that an affiliate of yours is an individual or company which acts (or could be reasonably expected to act) in accordance with your directions or wishes (or act in concert with you) in relation to the affairs of that individual or entity's business. Subsection (2) clarifies that an individual or company isn't your affiliate merely because of the nature of the business relationship you and the individual or company share.

Application to your circumstances

The parties to the transaction in this case will be the Taxpayers and the New Trusts. These entities do not carry on any business. The relevant entity carrying on business on the Land is the Company. It must therefore be established if the parties to the transaction are connected with, or affiliates of, the Company to determine whether paragraph 328-430(1)(b) will be satisfied.

Are the Taxpayers connected with or affiliates of the Company?

The Taxpayers jointly own land that is used in the business carried on by the Company. The Company is financially dependent on the land, and the Taxpayers are financially dependent on the Company. The Taxpayers are spouses. As such, it is reasonable to expect that they act in concert with each other in relation to the affairs of each other's business (being the Company)[1] and, thus, the Taxpayers are considered to be affiliates of each other under section 328-130.The Taxpayers are trustees and beneficiaries of Trust 1. As affiliates, they control Trust 1 pursuant to subsection 328-125(3) as the Trust could reasonably be expected to act in accordance with their wishes.

Trust 1 and Trust 2 own 50% each of the shares in the Company, giving each entity control of the Company in accordance with paragraph 328-125(2)(b).

Thus, the Taxpayers indirectly control the Company pursuant to subsection 328-125(7) and are connected with the Company under paragraph 328-125(1)(a).

Are the New Trusts connected with the Company?

As the Taxpayers will be joint appointers of the New Trusts, they are also taken to control the New Trusts under subsection 328-125(3).

As established above, the Taxpayers indirectly control the Company pursuant to subsection 328-125(7).

Thus, the Company and the New Trusts will be connected with each other under paragraph 328-125(1)(b) as the Taxpayers control them both.

Is the Company a small business entity?

The Company is a small business entity for the 20YY income year under paragraph 328-110(1)(b)(ii) as:

•                     it carries on business in the current year (20YY income year), and

•                     its aggregated turnover or the current year, worked out as at the end of the year, is under $10 million.

As the parties to the transaction are connected with an entity that is a small business entity for the income year, paragraph 328-430(1)(b) is satisfied.

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. Paragraphs 1.29 and 1.30 of the Explanatory Memorandum to the Tax Laws Amendment (Small Business Restructure Roll-over) Act 2016 explain that the ultimate economic owners of an asset are individuals who, directly or indirectly, beneficially own the 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 before 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.

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

There is no change in the ultimate economic ownership of the Land for the purposes of paragraph 328-430(1)(c) as, in accordance with section 328-440:

•                     just after the proposed restructure occurs, the Land will be included in the property of non-fixed trust/s that are family trust/s, i.e., the New Trusts, and

•                     every individual who had ultimate economic ownership of the Land just before the transfer, i.e. the Taxpayers, are/will be members of the family group relating to New Trusts, and

•                     just after the proposed restructure occurs, every individual with ultimate economic ownership of the Land, i.e. the beneficiaries of New Trusts, will be members of that family group.

Active assets

Paragraph 328-430(1)(d) relevantly provides that the asset to be transferred is a CGT asset (other than a depreciating asset) that is, at the time the transfer takes effect, 'if subparagraph (b)(ii) or (iii) applies - an active asset in relation to which subsection 152-10(1A) is satisfied in that income year' (subparagraph 328-430(1)(d)(ii)).

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)).

Subsection 152-10(1A) states:

Passively held assets-affiliates and entities connected with you

(1A)          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.

Note 1: The meaning of connected with is affected by section 152-78.

Note 3: For businesses that are winding up, see section 152-49 and subsection 328-110(5).

Application to your circumstances

Subsection 152-10(1A), and thus paragraph 328-430(1)(d), is satisfied in relation to the Land as:

•                     the Company is connected with the Taxpayers and is a CGT small business entity for the year

•                     the Taxpayers do not carry on business in the income year

•                     neither of the Taxpayers carry on a business in a partnership, and

•                     the Company is the entity that will carry on business at the relevant time in the income year.

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.

The Taxpayers are Australian residents. As each trustee of the New Trusts will be an Australian resident company, the New Trusts will also be Australian residents. Thus, section 328-445 and paragraph 328-430(1)(e) will be satisfied.

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, the Taxpayers and the New Trusts will all make the choice to apply the roll-over under Subdivision 328-G in relation to the assets transferred under the transaction, satisfying 328-430(1)(f).

Conclusion

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

Section 328-430(2) does not operate to prevent the roll-over as none of the parties to the transaction are an exempt entity or a superannuation entity.

[1] See examples at: https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/incentives-and-concessions/small-business-cgt-concessions/small-business-cgt-concessions-eligibility-conditions/small-business-affiliates