Edited version of private advice

Authorisation Number: 5010082923064

Date of advice: 13 June 2022

Ruling

Subject: CGT- small business rollover

Question

Would the Commissioner be satisfied under Subdivision 328-G of the Income Tax Assessment Act 1997 to allow small busines restructure rollover relief to apply to the transfer of primary production business real property from individuals P, Q, R and S to the Trustee of a Trust without incurring an income tax liability?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX - 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.    P and Q are the parents of R and S, who are their biological children.

2.    P, Q, R and S are all Australian residents for income tax purposes.

Partnership of P, Q and B

3.    P, Q and B are partners in a Partnership 1 (P1).

4.    Pursuant to the P1 Partnership Deed, each of the partners have outlined their share of P1's profits and losses as follows:

a)    30% to P

b)    20% to Q

c)    50% to B.

5.    P1 has Property 1 as part of its partnership assets. P and Q each have a 50% ownership interest in Property 1 as tenants-in-common, in their capacity as individuals.

6.    P1 carries on a business using Property 1. P1 has an aggregated turnover less than $10 million in the year ended 30 June 20XX.

Partnership of R and S

7.    R and S are partners in Partnership 2 (P2).

8.    P2 does not have a written agreement and is governed by common law principles, whereby all income, losses and control are shared equally (50%) between R and S.

9.    P2 has the following as part of its partnership assets:

a)    Property 2 which is owned 100% by R (in their individual capacity)

b)    Property 3 which is owned 100% by S (in their individual capacity).

10.  P2 carries on a business using Property 2 and Property 3. P2 has an aggregated turnover less than $10 million in the year ended 30 June 20XX.

Family involvement in business

11.  P, Q, R and S operate a business using Property 1, Property 2 and Property 3.

12.  P and Q contribute their personal labour to the business on a full-time basis. P performs the day-to-day activities of the business including manual labour, machinery operation and decision-making. Q is involved in bookkeeping, decision-making and machinery operation.

13.  R and S also contribute a significant amount of their personal labour to the business. This includes performing day-to-day activities of the business including manual labour, machinery operation, decision-making and livestock breeding expertise.

Trust

14.  On Y May BIBB, a Trust was established in Australia. This Trust has a corporate trustee (Trustee). P and Q are the sole directors and shareholders (owning 50% of ordinary shares each) in the Trustee.

15.  The beneficiaries of the Trust include 'Primary Beneficiaries', 'Secondary Beneficiaries', 'Tertiary Beneficiaries' and 'Default Beneficiaries' 'whether named or described' in the Trust Deed (excluding 'Excluded Persons'), or becoming a Beneficiary after the Trust Deed, even if:

(a)  Any of them may not be in existence or do not come within the meaning of any of these expressions at the Deed Date and

(b)  In the case of the trustee of any trust or settlement, the trust or settlement has not been formed or is not in existence or does not come within the relevant category of Beneficiary at the Deed Date

16.  The 'Primary Beneficiaries' are listed at item J of the Trust Deed Schedule as P and Q.

17.  The 'Secondary Beneficiaries' are listed at item K of the Trust Deed Schedule as R and:

(a)  Any person who is, become or has been:

                         i.    a Spouse of the Primary Beneficiary;

                        ii.    a Child or remoter issue, uncle, aunt, niece, nephew, cousin, parent, brother or sister of a Primary Beneficiary;

                       iii.    a Child or remoter issue, uncle, aunt, niece, nephew, cousin, parent, brother or sister of a Spouse of a Primary Beneficiary;

(b)  Any person (in that capacity only) who is or becomes the executor or trustee of the estate of any deceased beneficiary.

18.  The 'Tertiary Beneficiaries' are listed at item L of the Trust Deed Schedule as:

Subject to the laws against perpetuities:

(a)  any proprietary corporation in which any other Beneficiary is the holder of at least one share or has a beneficial interest in at least one share;

(b)  any proprietary corporation in which any other Beneficiary is a director;

(c)   any proprietary corporation in which the Trustee is the holder of at least one share or has a beneficial interest in at least one share;

(d)  any trust or superannuation fund in which at least one other Beneficiary of this Trust is a beneficiary or has a beneficial interest or expectancy whether vested, contingent or otherwise or is a member;

(e)  any Spouse, Child or remoter issue, uncle, aunt, niece, nephew, cousin, parent, brother or sister of the other Beneficiary referred to in (a), (b), (c) or (d) above;

(f)    any trust of which the Trustee of this Trust is, becomes or has been a trustee or a beneficiary (however described) or unit holder;

(g)  where any corporation is named as or becomes a Beneficiary or Trustee, each of the directors and officers of the corporation and each holder of at least one share or of a beneficial interest in at least one share in the corporation;

(h)  any person who is, becomes or has been:

i)      a Spouse of a person in (g) above

ii)     a Child or remoter issue, uncle, aunt, niece, nephew, cousin, parent, brother or sister of a person in (g) above; or

iii)   any Spouse of a person in (ii) above; or

(i)    any church or any religious, cultural, sporting, medical, environmental, research or artistic organisation or entity or any educational institution or school or any organisation or entity which promotes endeavours in any of these fields;

(j)    any entity which is tax exempt or a deductible gift recipient under the Act;

(k)   any charity or charitable institution or the trustee of any charitable trust.

19.  The 'Default Beneficiaries' are listed at item M of the Trust Deed Schedule as 'Nil'.

20.  The 'Excluded Persons' are listed at item M of the Trust Deed Schedule as 'Nil'.

21.  According to clause I and item H of the Trust Deed Schedule, the Trustee is an Australian resident trust for income tax purposes.

22.  The Trust has made a Family Trust Election (FTE) nominating P as the 'test individual' pursuant to section 272-95 of ITAA 1936.

23.  Therefore, the Trust is a 'family trust' pursuant to section 272-75 of ITAA 1936 and within the meaning in Schedule 2F of the ITAA 1936.

Transfer of property to Trust

24.  On X October AIAA:

a) P and Q transferred Property 1 to the Trust

b) R transferred Property 2 to the Trust.

c) S transferred Property 3 to the Trust.

Reasons for business restructure

25.  The transfer of Property 1, Property 2 and Property 3 to the Trust (the restructure) was performed to allow for the consolidation of major business assets in a single entity (the Trust). There will be no notable change in business operations due to the restructure and all three properties (business assets) will remain as active assets of the business after the restructure.

26.  It is intended that the business assets will remain in the Trust for the foreseeable future.

27.  The business assets will also not be sold or transferred to another entity within the next three years and have not been used for private purposes (and will not be after the restructure).

28.  The other reasons for the restructure include:

a)            The ability to access funds in an efficient and timely manner - by allowing the financial institution (bank) used to source working capital for the business, to review and disburse the funds required for working capital and asset acquisition in a more timely manner.

b)            Asset protection

•         The business requires decision making based on imperfect information based on factors outside the business owners control. Moving the business assets to the Trust will reduce the exposure of these business assets to potential business risks.

•         The conduct of the business requires the operation of heavy machinery which can lead to property damage and personal injury (if a malfunction or user error occurs). As running a business carries a certain level of risk, moving the business assets from being owned personally (in an individual capacity) to a separate entity (the Trust) will also provide a certain level of protection from these business risks.

29.  After the restructure, the roles of P, Q, R and S in the business will remain unchanged.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 272-75

Income Tax Assessment Act 1936 section 272-90

Income Tax Assessment Act 1936 section 272-95

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1936 section 152-10(1A)

Income Tax Assessment Act 1936 section 152-10(1AA)

Income Tax Assessment Act 1936 section 152-40

Income Tax Assessment Act 1997 section 272-90

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-125

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

Income Tax Assessment Act 1997 section 328-440

Income Tax Assessment Act 1997 section 328-445

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Relevant legislative provisions

1)     Subsection 328-430(1) of the ITAA 1997 provides the requirements that must be satisfied for the small business restructure rollover (SBRR) to be available:

328-430(1)

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;...

(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;

...(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.

Small Business Entity

2)     Subsection 328-110(1) of the ITAA 1997 provides the following definition for 'small business entity':

General rule: based on aggregated turnover worked out as at the beginning of the current income year

328-110(1)

You are a small business entity for an income year (the current year) if:

(a) you carry on a *business in the current year; and

(b) one or both of the following applies:

...

(ii) your aggregated turnover for the current year is likely to be less than $10 million.

...

Partners in a partnership

328-110(6)

A person who is a partner in a partnership in an income year is not, in his or her capacity as a partner, a small business entity for the income year

Connected with

3)     Section 328-125 of ITAA 1997 provides for when an entity is 'connected with' another entity:

328-125(1)

An entity is connected with another entity if:

(a) either entity controls the other entity in a way described in this section; or

(b) both entities are controlled in a way described in this section by the same third entity.

...

Direct control of an entity other than a discretionary trust

328-125(2)

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

...

Direct control of a discretionary trust

328-125(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.

328-125(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.

Ultimate economic ownership - discretionary trusts

4)     Section 328-440 of ITAA 1997 provides the following alternative method for satisfying the 'ultimate economic ownership' condition by non-fixed (discretionary) trusts:

328-440 Ultimate economic ownership - discretionary trusts

For the purposes 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.

Family Trust

5)     Section 272-75 of ITAA 1936 defines a 'family trust' as follows:

272-75 FAMILY TRUST

A trust is a family trust at any time when a family trust election (see subsection 272-80 (1)) in respect of the trust is in force

6)     Section 272-90 of ITAA 1936 relevantly defines a 'family group' as follows:

272-90(2)

A member of the primary individual's family (see section 272-95 ) is a member of the primary individual's family group in relation to the conferral or distribution.

7)     Section 272-95 of ITAA 1936 defines 'family' as:

272-95(1)

The family of an individual (the test individual) consists of the test individual and all of the following (if applicable):

(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; ...

CGT asset

8)     Section 108-5 defines CGT asset as follows:

108-5(1)

A CGT asset is:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

...

Note 1:

Examples of CGT assets are:

   land and buildings;...

Active asset

9)     Subsection 152-40(1) of the ITAA 1997 relevantly provides the following definition of active asset:

SECTION 152-40 Meaning of active asset

152-40(1)

A *CGT asset is an active asset at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) 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:

(i) you; or...

(iii) another entity that is *connected with you;...

Passively held assets

10)  The small business CGT concessions may be obtained where an entity has a CGT asset but does not carry on a business (other than as a partner in a partnership) if the following conditions in subsection 152-10(1A) of the ITAA 1997 are met:

152-10(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.

Australian residency

11)  Section 328-445 of ITAA 1997 relevantly provides the following in relation to being considered as an Australian resident:

For the purposes of paragraph 328-430(1)(e), the residency requirement for an entity is that:

(a) if the entity is an individual or a company - the entity is an Australian resident; or

(b) if the entity is a trust - it is a *resident trust for CGT purposes;...

12)  According to subsection 995-1(1) of the ITAA 1997, a 'resident trust for CGT purposes' is defined as:

a trust is a resident trust for CGT purposes for an income year if, at any time during the income year:

(a) for a trust that is not a unit trust, a trustee is an Australian resident or the central management and control of the trust is in Australia; or...

Relevant ATO Guidance

Genuine restructure of an ongoing business

13)  The Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters (LCR 2016/3) sets out the following relevant guidance on the meaning of the term 'genuine restructure of an ongoing business' as used in paragraph 328-430(1)(a) of ITAA 1997:

6. 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...the SBRR is not available to small business owners who are restructuring in the course of winding down or realising their ownership interests.

7. 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.

...

•         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

...

Ultimate economic ownership - non fixed trusts

14)  LCR 2016/3 also provides the following guidance on how ultimate economic ownership can be maintained by non-fixed trusts:

107. A transfer of assets from or to a discretionary trust will generally not meet the requirements for ultimate economic ownership on their facts. Where it is not possible to demonstrate that ultimate economic ownership of the assets has been maintained, an alternative ultimate economic ownership test is available.[11]

108. The alternative ultimate economic ownership test provides additional flexibility to small family businesses carried on through non-fixed trusts by allowing them to meet the requirement to maintain proportionate ultimate economic ownership of the transferred assets if the ultimate economic ownership of those assets remains within the family.

109. The alternative test is only available when assets are included in the property of a non-fixed trust that is a family trust[12], that is, a non-fixed trust for which there is a family trust election in force.

Application of facts to the law

328-430(1)(a) - Genuine restructure of an ongoing business

15)  The key personnel of the business (being P, Q, R and S) will remain involved in the business and there will be no changes to their roles after the restructure.

16)  The business assets will remain an active asset of the business and it is intended that these business assets will remain with the Trust for the foreseeable future.

17)  The consolidation and protection of business assets through the Trust will allow the business to source the funds required for working capital in an efficient and timely manner, and will protect the individuals from business risks (such as personal injury claims). These business assets will be used in the same way in the same business.

18)  As such, the factors outlined above will reduce administrative burdens, compliance costs and cash flow impediments after the restructure. This, in combination with the continued use of the busines assets as active assets and continuity of employment of key personnel will, on balance, be sufficient to conclude that this transaction is a 'genuine business restructure' for the purposes of paragraph 328-430(1)(a) of ITAA 1997.

328-430(1)(b) - small business entity requirement

19)  The following parties to the transfer (restructure) must each satisfy paragraph 328-430(1)(b) of ITAA 1997:

c)   P

d)  Q

e)  R

f)    S

g)  P1

h)  P2

i)    Trust.

P, Q & P1

20)  P1 is a small business entity (SBE) which satisfies subsection 328-110 of the ITAA 1997 as:

a)   it carries on a business in the current year (paragraph 328-110(1)(a) of ITAA 1997) and

b)  its aggregated turnover is less than $10 million in the current year (paragraph 328-110(1)(b) of ITAA 1997).

21)  P and Q are partners in P1. Therefore, P and Q satisfy subparagraph 328-430(1)(b)(iv) of ITAA 1997, as each are partners in a partnership that is a SBE.

R, S & P2

22)  P2 is a SBE which satisfies subsection 328-110 of the ITAA 1997 as:

a)    it carries on a business in the current year (per paragraph 328-110(1)(a) of ITAA 1997), and

b)  its aggregated turnover is less than $10 million in the current year (per paragraph 328-110(1)(b) of ITAA 1997).

23)  R and S are partners in P2. Therefore, R and S satisfy subparagraph 328-430(1)(b)(iv) of ITAA 1997, as each are partners in a partnership that is a SBE.

Trust

24)  P1 is 'connected with' the Trust pursuant to subsection 328-125(4) of ITAA 1997 as:

a)    in both the income years before the current year, the Trustee:

o   paid to P 50% of the Trust's income, and

o   paid to Q 50% of the Trust's income

(per paragraph 328-125(4)(a) of ITAA 1997);

b)    the Trust has paid 100% of its income to P1, as P and Q are both partners in P1;

c)    the Trustee has thus paid at least 40% of the total amount of income for both the previous two income years to P1 (per paragraph 328-125(4)(b) of ITAA 1997).

25)  Therefore, the Trust satisfies subparagraph 328-430(1)(b)(iii) of ITAA 1997, as it is connected with P1 which is a SBE.

328-430(1)(c) - no material change in the ultimate economic ownership

26)  Discretionary trusts may meet the 'ultimate economic ownership' test by satisfying section 328-440 of ITAA 1997.

27)  The Trust is a non-fixed (discretionary) trust which has a FTE in place. Therefore, it is a 'family trust' within the meaning of Schedule 2F of the ITAA 1936 (see paragraph 23 above at 'Relevant facts and circumstances').

28)  Just before the restructure, the ownership of the business assets that were transferred were as follows:

       i.       Property 1 - owned by P and Q in their personal capacity (as tenants-in-common)

      ii.      Property 2 - owned by R in his personal capacity

     iii.      Property 3 - owned by S in his personal capacity.

29)  Just after the restructure, the business assets (Property 1, Property 1 and Property 3) were included in the property of the Trust, which is a family trust (pursuant to 328-440(a)(ii) of ITAA 1997).

30)  The beneficiaries of the Trust are members of P's 'family group'' pursuant to section 272-90 of the ITAA 1936. These beneficiaries were the same members of P's 'family group' who had the ultimate economic ownership of the business assets, as before the transfer (restructure) pursuant to 328-440(b) of ITAA 1997.

31)  After the transfer (restructure), every individual who has the ultimate economic ownership of the business assets are the same members of P's 'family group' pursuant to 328-440(c) of ITAA 1997.

32)  Therefore, section 328-440 of ITAA 1997 is satisfied by the Trust.

33)  As section 328-440 of ITAA 1997 is an alternative method of satisfying paragraph 328-430(1)(c) of ITAA 1997 by non-fixed trusts, it can be concluded that paragraph 328-430(1)(c) of ITAA 1997 has been met.

328-430(1)(d)

34)  Property 1, Property 2 and Property 3 (business assets) are each 'CGT assets' meeting the definition in section 108-5 of the ITAA 1997.

328-430(1)(d)(i) - active asset

35)  As subparagraph 328-430(1)(b)(i) of ITAA 1997 applies, the CGT assets (Property 1, Property 2 and Property 3) must be 'active assets' within the meaning of that term in subsection 152-40(1) of ITAA 1997.

36)  As P and Q own Property 1, and S and R own Property 2 and Property 3 (respectively) and each of these properties are used in the carrying on of a business by P1 and P2, subsection 152-40(1) of ITAA 1997 has been met.

328-430(1)(d)(ii) - passively held assets

37)  As subparagraph 328-430(1)(b)(iii) applies, subsection 152-10(1A) of ITAA 1997 must be satisfied by the Trust.

38)  Subsection 152-10(1A) of ITAA 1997 is satisfied by the Trust for the current income year as:

a)   P1, who is the SBE, is connected with the Trust (per paragraph 152-10(1A)(a) of ITAA 1997)

b)   The Trust does not carry on a business (per paragraph 152-10(1A)(b) of ITAA 1997)

c)   P1 is the entity which carries on the business (per paragraph 152-10(1A)(d) of ITAA 1997).

39)  Therefore, subsection 152-10(1A) of ITAA 1997 is satisfied as the Trust passively holds Property 1, Property 2 and Property 3 which is used by P1 and P2 in its business.

328-430(1)(d)(iii) - interest in a partnership

40)  As subparagraph 328-430(1)(b)(iv) of ITAA 1997 applies, the CGT asset must be an active asset and an interest in an asset of a partnership.

41)  Property 1, Property 2 and Property 3 are all active assets.

42)  Property 1 is an asset of P1, and Property 2 and Property 3 are assets of P2. Therefore, Property 1 is an interest in an asset of P1, and Property 2 and Property 3 are interests in the assets of P2.

43)  Therefore, subparagraph 328-430(1)(b)(iv) of ITAA 1997 is satisfied by P, Q, S and R.

328-430(1)(e) - Australian residency

44)  The transferors are P, Q, S and R. Each of these individuals are Australian residents.

45)  The transferee is the Trust, which is a 'resident trust for CGT purposes' as it has an Australian resident trustee.

46)  Therefore, paragraph 328-430(1)(e) of ITAA 1997 has been satisfied.

328-430(1)(f) - choice

47)  As the transferors (P, Q, S and R) and transferee (the Trust) have chosen to apply the rollover under Subdivision 328-G of ITAA 1997, paragraph 328-430(10(f) of ITAA 1997 is satisfied.

SBRR - Conclusion

48)  Therefore, as all the conditions in subsection 328-430(1) of the ITAA 1997 have been satisfied, the SBRR is available in relation to the business assets.