Edited version of private advice

Authorisation Number: 1052399617884

Date of advice: 26 May 2025

Ruling

Subject: Small business restructure roll-over

Question 1

Was Company A automatically a member of Person A's family group, under subsection 272-90 in Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936), when Company A was wholly owned by Trust A?

Answer 1

Yes

Question 2

Is Company A automatically a member of Person A's family group, under subsection 272-90 in Schedule 2F of the ITAA 1936, now that Company A is owned by the 5 individuals in Person A's family?

Answer 2

No

Question 3

Has Company A ever automatically been a member of Person B's family group under subsection 272-90 in Schedule 2F of the ITAA 1936?

Answer 3

No

Question 4

Can Company A make an interposed entity election under section 272-85 of the ITAA 1936 to be included in Person B's family group?

Answer 4

Yes

Question 5

If Trust A held the ordinary shares in Company A, could Company A make an interposed entity election under section 272-85 of the ITAA 1936 to be included in Person B's family group?

Answer 5

No

This ruling applies for the following periods:

DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

Company A was incorporated in Australia and is a tax resident of Australia.

Prior to DD MM YYYY, the ordinary shares in Company A were transferred to Person A and Person A's spouse to hold personally. These ordinary shares have the right to receive dividends from the company and a right to participate in any surplus assets on the winding up of the company.

Also prior to DD MM YYYY, each of Person A, Person A's spouse and their three children were issued an A, B, C, D, and E class share in Company A, again held personally. These A, B, C, D and E class shares have a right to receive a dividend at the discretion of the directors of the company and have a right to the return of the capital paid up on each share.

Company A is a beneficiary of the Trust A and is used by Person A and Person A's spouse for investment activities. Trust A was previously the sole shareholder of Company A. Person A and Person A's spouse are the trustees of Trust A.

Company A has not ever previously made an interposed entity election.

Trust A is a discretionary trust that has made a family trust election specifying Person A as the individual whose family group is to be taken into account in relation to the election. Trust A was previously the sole shareholder of Company A.

Trust A intends to make a retrospective interposed entity election with the Trust B in order to be part of the Person B's Family Group from DD MM YYYY.

Trust B is a discretionary trust that has made a family trust election specifying Person B as the individual whose family group is to be taken into account in relation to the election. Person B is Person A's uncle.

Relevant legislative provisions

Income Tax Assessment Act 1936 Sch 2F

Income Tax Assessment Act 1936 Sch 2F section 272-10

Income Tax Assessment Act 1936 Sch 2F section 272-80

Income Tax Assessment Act 1936 Sch 2F section 272-85

Income Tax Assessment Act 1936 Sch 2F section 272-87

Income Tax Assessment Act 1936 Sch 2F section 272-90

Income Tax Assessment Act 1936 Sch 2F section 272-95

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

All legislative references are to Schedule 2F of the Income Tax Assessment Act 1936 unless otherwise specified.

Question 1

Was Company A automatically a member of Person A's family group, under subsection 272-90, when Company A was wholly owned by Trust A?

Summary

Yes, when Company A was wholly owned by Trust A it was automatically a member of Person A's family group because Trust A had fixed entitlements to all of its income and capital and Person A was the individual specified in the family trust election made by Trust A.

Detailed reasoning

Subsection 272-90(5) provides that a company, partnership or trust is a member of the primary individual's family group in relation to the conferral of a present entitlement to, or a distribution of, income or capital if, when the conferral takes place, or the distribution is made:

a)             the primary individual or;

b)             one or more members of the primary individual's family or;

c)              the trustees of one or more family trusts, provided the primary individual is specified in the family trust election of each of those family trusts:

or any combination of the above, have fixed entitlements directly or indirectly, and for their own benefit, to all of the income and capital of the company, partnership or trust.

From the point in time when Trust A owned all shares in Company A, Company A was automatically a member of Person A's family group under subsection 272-90(5). At that stage, Trust A was a family trust where Person A (the primary individual) was the individual specified in the family trust election. Therefore, because Trust A, as the sole shareholder of Company A, had fixed entitlements to all of the income and capital of Company A, Company A was a member of Person A's Family Group.

Question 2

Is Company A automatically a member of Person A's family group, under subsection 272-90, now that Company A is owned by the 5 individuals in Person A's family?

Summary

No, when the individuals took ownership of the various shares in Company A, it stopped being a member of Person A's family group.

Detailed reasoning

Prior to DD MM YYYY, the shares in Company A began to be owned by Person A, Person A's spouse and each of their three children. The payment of dividends from Company A on each class of share is discretionary and dividends may be paid to one or more of the share classes to the exclusion of other classes. Therefore, no person or entity had any fixed entitlement to the income of Company A and subsection 272-90(5) no longer operated to include Company A in Person A's family group.

Question 3

Has Company A ever automatically been a member of Person B's family group under subsection 272-90?

Summary

No, Company A has never been part of Person's B family group as Person B, his family members and family trusts with Person B specified in the family trust election have never had fixed entitlements to all of the income and capital of Company A.

Detailed reasoning

The shares in Company A have, at all relevant times, been owned either by Trust A (which has Person A and not Person B specified in its family trust election) or by multiple individuals in Person A's family (who are also in Person B's family). The payment of dividends from Company A on each class of share is discretionary and dividends may be paid to one or more of the share classes to the exclusion of other classes. Therefore, at no time did Person B, his family members and family trusts with Person B specified in the family trust election have fixed entitlements to all of the income of Company A.

Question 4

Can Company A make an interposed entity election under section 272-85 to be included in Person B's family group?

Summary

Yes, an interposed entity election can be made so that Company A is included in Person B's family group because Company A passes the family control test.

Detailed reasoning

Person B is the individual specified in the family trust election relevant to this interposed entity election. Therefore, he is the 'primary individual' for the purposes of working out the members of Person B's family group under section 292-90 and is the 'test individual' we consider when looking at the meaning of family under section 272-95.

Person B's Family Group

Section 272-90(2) provides that a member of the primary individual's family is a member of the primary individual's family group in relation to the conferral of a present entitlement to, or a distribution of, income or capital.

Section 272-95 defines the family of an individual (the test individual) to consist of the test individual and all of the following:

a)             any parent, grandparent, brother or sister of the test individual or the test individual's spouse;

b)             any nephew, niece or child of the test individual or the test individual's spouse;

c)              any lineal descendant of a nephew, niece or child referred to in paragraph (b);

d)             the spouse of the test individual or of anyone who is a member of the test individual's family because of paragraphs (a), (b) and (c).

Person A, Person A's spouse and their children are all included in the family of Person B (the test individual) because:

•                Person A satisfies paragraph 272-95(1)(b) because she is the niece of Person B.

•                Person A's spouse satisfies paragraph 272-95(1)(d) because he is the spouse of Person A.

•                The children of Person A and Person A's spouse satisfy paragraph 272-95(1)(c) because they are all lineal descendants of Peron A.

Family control test

An entity cannot make an interposed entity election under section 272-85 unless it passes the family control test.

Subsection 272-87(3) sets out the family control test requirements for companies and partnerships. A company or partnership in respect of which an interposed entity election is proposed to be made passes the family control test if a group consisting of:

a)             the individual who is specified in the family trust election mentioned in subsection 272-85(1) in relation to the interposed entity election; or

b)             one or more members of the individual's family under section 272-95; or

c)              the trustees of one or more family trust, provided the individual is specified in the family trust election of each of those family trusts; or

d)             any person covered by any combination of the above paragraphs;

have between them, directly, or indirectly, and for their own benefit, fixed entitlements to a greater than 50% share of the income or a greater than 50% share of the capital of the company or partnership.

Fixed entitlements

Fixed entitlement to share of income or capital of a company is defined in section 272-10. Where the shareholder in a company holds shares carrying the right to receive:

1)             some or all of the dividends that may be paid by the company, the shareholder has a fixed entitlement to a share of the income of the company equal to the percentage of the total dividends represented by the dividends that the shareholder has a right to receive.

2)             the whole or part of any distribution of the paid-up share capital of the company in the event of any return of capital to shareholders, the shareholder has a fixed entitlement to a share of the capital of the company equal to the percentage of the total distribution represented by the amount that the shareholder has a right to receive.

Members of Person B's family do not have fixed entitlements to all of the income and capital of Company A because the payment of dividends on each share class is discretionary. As a result, there is no fixed entitlement to the income of Company A. However, looking at capital entitlements, it is evident that members of Person B's family have between them a fixed entitlement to a greater than 50% share of the capital of Company A.

All shareholders of Company A fall within the family of Person B. Between them, Person A, Person A's spouse and their three children have fixed entitlements, totalling 100%, to the capital of Company A. Company A therefore passes the family control test, and an interposed entity election can be made to include Company A in Person B's family group.

Question 5

If Trust A held the ordinary shares in Company A, could Company A make an interposed entity election under section 272-85 to be included in Person B's family group?

Summary

No, an interposed entity election would not be possible because Company A would not pass the family control test set out in subsection 272-87(3).

Detailed reasoning

For there to be an interposed entity election, Company A needs to pass the family control test.

Person B and the members of their family would have no fixed entitlements (direct or indirect) to a greater than 50% share of the income or capital of Company A where its ordinary shares are owned by Trust A. Furthermore, the Trust A has specified Person A and not Person B in its family trust election. Therefore, no combination of Person B, members of their family, or family trusts that have specified Person B in their family trust elections will hold fixed entitlements to a greater than 50% share of the income or capital of Company A.

Company A would not pass the family control test and could not make an interposed entity election.