Edited version of private advice

Authorisation Number: 5010106399400

Date of advice: 12 March 2025

Ruling

Subject: Small business restructure roll-over

Question 1

Will the proposed restructure qualify for roll-over relief under Subdivision 328-G of the Income Tax Assessment Act 1997?

Answer 1

Yes

This ruling applies for the following period:

DD MM YYY

The scheme commenced on:

DD MM YYY

Relevant facts and circumstances

Trust

The trustee of the Trust is Company A.

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

Person A owns all the shares in Company A and is the appointor of the Trust. A family trust election was made for the Trust dated DD MM YYYY, with Person A as the specified individual. This family trust election remains in force.

The directors of Company A are Person A, Person B and Person C.

The beneficiaries of the Trust are those persons or entities that form part of Person A's 'family group' for the purposes of Schedule 2F to the Income Tax Assessment Act 1936.

The Trust carries on a primary production business on numerous properties held by various entities controlled by Person A.

The aggregated turnover of the Trust has always been below $XX and will remain below $XX for the YYYY income year.

The Trust owns business operational assets which include:

•                xxx;

•                xxx; and

•                xxx.

Proposed restructure

The Trust intends to undertake a restructure of its primary production business. The Trust will transfer its business assets to a new company incorporated in Australia, New Co.

The Trust will transfer all its business operational assets to New Co. Subject to bank approval, it is intended that the Business loan facility and the visa card account will also be transitioned to New Co.

The Trust will hold all the shares in New Co and New Co will carry on the primary production business previously operated by the Trust. New Co will have the same directors as Company A.

New Co will not pay cash consideration for the transfer of the business assets. It will however assume the liability to repay certain amounts that had been debts of the Trust. The balance above these assumed liabilities will be treated as a distribution of capital by the Trust. New Co will be a beneficiary of the Trust, and a distribution of capital can be made under clause xx of the Trust Deed.

Reasons for the proposed restructure

Historically, the primary production business was undertaken as a partnership between Person A and their parent, Person D. As part of Person D's business succession and estate planning, the partnership business was rolled into the Trust in the year ended DD MM YYYY.

The proposed restructure aims to remove some of the administrative burden associated with carrying on a business through a trust. The trust structure requires tracking and dealing with unpaid beneficiary entitlements and involves extra complexity managing cashflow and investment, especially where there may be a desire to re-invest business income into business operations.

Use of a company allows after-tax profits to be retained thereby eliminating the creation of beneficiary entitlements that are required to be managed via the Division 7A rules.

Assumption

Both the Trust and New Co will choose to apply the roll-over under Subdivision 328-G in relation to the assets transferred under the proposed restructure.

The CGT assets transferred under the proposed restructure will be active assets i.e. the Trust will have used those assets in its business operations for more than half of their ownership period.

Relevant legislative provisions

Schedule 1 to the Taxation Administration Act 1953 Section 370-5

Income Tax Assessment Act 1997

Section 40-30

Subsection 40-340(1)

Section 152-40

Subdivision 328-G

Subsection 995-1(1)

Schedule 2F to the Income Tax Assessment Act 1936 Section 272-70

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 the Income Tax Assessment Act 1997 unless otherwise specified.

Question

Will the proposed restructure qualify for roll-over relief under Subdivision 328-G?

Summary

Yes. The proposed restructure will satisfy the requirements in section 328-430 for a roll-over to be available under Subdivision 328-G.

Detailed reasoning

Subdivision 328-G provides small business owners with the flexibility to restructure their businesses and the way their business assets are held while disregarding tax gains and losses that would otherwise arise.

Section 328-430 discusses when a roll-over is available. There are six requirements (a to f) in subsection 328-430(1) that must all be satisfied. 328-430(1) establishes that a roll-over 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.

Note:

The roll-over of a depreciating asset transferred in the restructuring of a small business is addressed in item 8 of the table in subsection 40-340(1).

The Trust (transferor) will transfer the assets of its primary production business to New Co (transferee). Each requirement in subsection 328-430(1) will be considered.

a)             Genuine restructure

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 the circumstances surrounding the restructure.

Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters provides guidance on the Commissioner's view about whether a transaction will be part of a 'genuine restructure of an ongoing business'.

The primary production business will continue to be carried on by New Co after the proposed restructure. The proposed restructure is intended to remove some of the administrative burden attached to the current structure. The Commissioner accepts that the restructure is a 'genuine restructure' of an ongoing business.

b)             Small business or related entity

Both the Trust and New Co need to be one or more of the following entities in the income year the restructure occurs:

(i)             a small business entity;

(ii)            an affiliate of a small business entity;

(iii)           connected with a small business entity;

(iv)          a partner in a partnership that is a small business entity.

Subsection 328-110(1) provides that you are a small business entity for an income year if you carry on a business in the current year and your aggregated turnover for the current year is likely to be less than $XX; or you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $XX.

The Trust and New Co will both carry on a business in the income year the restructure occurs, constituted by the primary production activities on the numerous properties held by various entities controlled by Person A.

The Trust is a 'small business entity' as its aggregated turnover in the year before the year the restructure occurs was less than $XX. New Co will be a small business entity because it is reasonable to estimate it would have had annual turnover of less than $XX had it carried on the primary production business for the whole of the year when the restructure occurs. This estimate is based on the fact it will take over the business previously run by the Trust and the Trust has always had aggregated turnover below $XX.

c)             Ultimate economic owner

Paragraph 328-430(1)(c) requires the transaction to not have the effect of materially changing which individual has, or which individuals have, the ultimate economic ownership of the assets.

Where a discretionary trust is involved in a small business restructure, section 328-440 provides that ultimate economic ownership of the assets will be considered to be maintained if:

•                immediately before and/or after the transaction takes effect, the asset is included in the property of a non-fixed trust that was a family trust, and

•                every individual who, just before and just after the transfer took effect, had ultimate economic ownership of the asset was a member of the family group of that family trust.

The Trust has a family trust election in place and is a family trust. Given the Trust owns all shares in New Co, the transfer of assets from the Trust to New Co will not affect which individuals have the ultimate economic ownership of those assets.

d)             Active assets

The asset being transferred must be a CGT asset (other than a depreciating asset) that is an active asset at the time the transfer takes effect. Broadly, the CGT asset will be an active asset if the Trust used it in the business for more than half of the period of its ownership. The availability of the roll-over is limited to CGT assets that have been used by the Trust in its business operations for more than half of their ownership period.

Depreciating asset

Section 40-30 provides that a depreciating asset is an asset that has limited effective life and can reasonably be expected to decline in value over the time it is used.

The note to subsection 328-430(1) states that the roll-over of a depreciating asset transferred in the restructuring of a small business is addressed in item 8 of the table in subsection 40-340(1). Section 40-340 outlines the circumstances in which roll-over relief is available where specified balancing adjustment events have occurred for a depreciating asset.

The Commissioner has exercised his remedial power in section 370-5 of Schedule 1 to the Taxation Administration Act 1953 to modify the operation of section 40-340. The effect of this modification is to ensure that where the restructure otherwise satisfies the requirement for a roll-over under Subdivision 328-G, the transfer of depreciating assets will have no direct income tax consequences.

In this case, a roll-over under section 40-340 is available for the transfer of depreciating assets that are also active assets because the proposed restructure would otherwise satisfy all the requirements for a roll-over under Subdivision 328-G.

e)             Australian resident

Paragraph 328-430(1)(e) requires both the Trust and New Co to meet the residency requirements outlined in section 328-445.

The Trust must be a resident trust for CGT purposes. A family 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.

Company A (the trustee of the Trust) and New Co are companies incorporated in Australia, meaning both are residents of Australia for tax purposes.

f)              Roll-over choice

Paragraph 328-430(1)(f) requires both the Trust and New Co to choose to apply the roll-over under Subdivision 328-G in relation to the assets transferred under the transaction.

The Trust and New Co will choose to apply the roll-over in relation to the transfer of the business assets. Therefore, the requirement in paragraph 328-430(1)(f) will be satisfied.

Conclusion

As each of the requirements in subsection 328-430(1) have been met, the Trust is eligible for roll-over relief under Subdivision 328-G in relation to the proposed restructure.