Edited version of private advice

Authorisation Number: 7925146427066

Date of advice: 13 October 2021

Ruling

Subject: Small business restructuring rollover

Question 1

Will the transfer of X be part of a genuine restructure of an ongoing business for the purposes of section 328-430 of the ITAA 1997?

Answer

Yes.

Question 2

Will a rollover under Subdivision 328-G of the ITAA 1997 be available in relation to X which is transferred under the proposed transaction?

Answer

Yes.

This ruling applies for the following period periods:

1 July 20AB - 30 June 20AC

The scheme commences on:

1 July 20AC

Relevant facts and circumstances

P

P is a company incorporated in Australia.

Q and R are the sole directors and shareholders of P (each owning 50% of the shares issued). Q and R are also spouses of each other.

P owns stock, plant and equipment, and goodwill relating to the business known as the 'Z'. P also owns part of the premises from which the Z operates.

P also owned business assets relating to Y operations. These Y operations were recently sold by P to a third party and are no longer part of P's business operations.

P's business operations

The Z business is operated from premises located at X and U, Australia. P owns X and R owns U.

P's aggregated turnover for the 20AB income year was less than $10 million.

The following individuals play a key role in P's business operations:

a)    R looks after sales and marketing (other than for corporate clients) and administrative duties

b)    Q has control over all aspects of the business operations (including reviewing customer contracts, supply contracts, and the purchase of capital items)

c)    S (Q and R's daughter) looks after marketing for corporate clients

d)    T (S's spouse) looks after production, food costing and staff.

V Trust

The V Trust is a non-fixed trust within the meaning of section 272-70 of Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936).

V Trustee is the corporate trustee of the V Trust. V Trustee was incorporated in Australia. Q and R are its sole directors and shareholders (each owning 50% of the issued shares).

The V Trust will make a Family Trust Election (FTE) in accordance with section 272-80 in Schedule 2F of the ITAA 1936. The test individual for the purposes of this FTE will either be Q or R. By making the FTE, the V Trust will be a 'family trust' within the meaning of section 272-75 of Schedule 2F of the ITAA 1936.

According to Schedule 2 of V Trust's Trust Deed (V Trust Deed), the primary beneficiaries are Q and R, with T and S being within the class of secondary beneficiaries.

Restructure of P's assets

Q and R have restructured the assets of P to allow X to be separated from:

a)    past risks associated with P; and

b)    operations of Z.

The past risks associated with P included the Y as well as the Z.

There will be no changes to the roles of Q, R, S and T once X is transferred to the V Trust.

P transferred X to the V Trust on 30 June 20AC.

Proposed restructure of Z

Q and R are considering a restructure of the ownership of the Z during the 20AD income year, in either of the following ways:

a)    Transfer of D% of P shares to an entity controlled by T and S (T & S Entity)

b)    Transfer of G% of P shares as follows:

i)              F% of P shares to a trust controlled by Q and R

ii)             D% of P shares to the T & S Entity

c)    Transfer by P of a D% interest in the business assets of the Z to the T & S Entity.

Regardless of how the Z is restructured, it is Q and R's intention that:

a)    Z will continue to operate at U and X, Australia

b)    there will be no change in the ultimate economic ownership of U (such as via the sale of this asset)

c)    the plant and equipment will continue to be used in the Z (unless it is sold as part of normal business operations)

d)    Q and/or R will together own or control directly or indirectly a F% interest in the Z

e)    V Trust will be connected to P.

Relevant legislative provisions

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 1997 subsection 152-10(1A)

Income Tax Assessment Act 1997 subsection 152-10(1AA)(b)

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 subsection 328-110(1)

Income Tax Assessment Act 1997 subsection 328-125(3)

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

Income Tax Assessment Act 1997 section 328-435

Income Tax Assessment Act 1997 section 328-440

Income Tax Assessment Act 1997 section 328-445

Reasons for decision

Summary

P satisfies subsection 328-430(1) of ITAA 1997 to be able to access the SBRR under Subdivision 328-G of ITAA 1997.

Detailed reasoning

Relevant legislative provisions

Subsection 328-430(1) of the ITAA 1997 provides the requirements that must be satisfied for the 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;... and

(c) the transaction does not have the effect of materially changing:

(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

...

(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.

Alternative test

Section 328-435 of ITAA 1997 provides an alternative way to meet the 'genuine restructure on an ongoing business' condition in paragraph 328-430(1)(a) of ITAA 1997:

328-435 Genuine restructures - safe harbour rule

For the purposes of paragraph 328-430(1)(a) (but without limiting that paragraph), a transaction is, or is a part of, a genuine restructure of an ongoing *business if, in the 3 year period after the transaction takes effect:

(a) there is no change in ultimate economic ownership of any of the significant assets of the business (other than *trading stock) that were transferred under the transaction; and

(b) those significant assets continue to be *active assets; and

(c) there is no significant or material use of those significant assets for private purposes.

Small Business Entity

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:

(i) 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 $10 million;...

CGT small business entity

In order for an entity who owns a CGT asset and who does not carry on a business to meet subparagraph 328-430(1)(d)(ii) of ITAA 1997, they must satisfy subsection 152-10(1A) of ITAA 1997 or satisfy subsection 152-10(1A) if paragraph 152-10(1AA)(b) were disregarded, in the income year that the CGT asset is transferred.

Subsection 152-10(1A) of ITAA 1997 provides as follows:

Passively held assets - affiliates and entities connected with you

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 P, 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.

Connected with

Subsection 328-125(3) of ITAA 1997 relevantly provides the following in relation to how an entity directly controls a discretionary test and is therefore 'connected with' a discretionary trust:

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.

Ultimate economic ownership

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:

(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 Group

'Family group' is relevantly defined in section 272-90 of ITAA 1936 as follows:

272-90(1)

This section states whether a person is a member of the family group of the individual (the primary individual) specified in the family trust election in relation to a conferral of a present entitlement to, or a distribution of, income or capital of a company, partnership or trust, upon or to the person.

Family member

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.

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;...

CGT asset

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

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...

Australian residency

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;...

Relevant ATO Guidance

Genuine restructure of an ongoing business

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.

...

Genuine restructure - the safe harbour rule

77. The SBRR contains a safe harbour rule. This rule provides an alternative way to meet the 'genuine restructure of an ongoing business' condition. It is satisfied if there is no change in ultimate economic ownership of any of the significant assets of the business, other than trading stock. Those assets must continue to be active assets of the business

78. Where the safe harbour rule is satisfied, it is not necessary to consider whether the arrangement would otherwise be a 'genuine restructure of an ongoing business' under paragraph 328-430(1)(a).

79. The safe harbour rule does not limit or expand what would otherwise be considered a 'genuine restructure of an ongoing business' within its ordinary meaning.

80. The safe harbour rule only operates to treat the restructure as being genuine for the purposes of paragraph 328-430(1)(a) and does not affect how the purpose and effect of the restructure is considered for other tax purposes.

Ultimate economic ownership - non fixed trusts

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 law to the facts

Genuine restructure of an ongoing business - paragraph 328-430(1)(a) of ITAA 1997

From the information provided in relation to X (which was transferred to the V Trust on 30 June 20AC), it appears that:

a) there will be no change in the ultimate economic ownership of X in the 20AC income year

b) X will continue to be an active asset in the 20AC income year

c) X has not been used for private purposes in the 20AC income year.

Therefore, P will satisfy the 'genuine restructure of an ongoing business' requirement under the safe harbour rule if it continues to maintain X as stated above (at paragraph 15 (a), (b) & (c)) for the 3-year period from the 20AC income year (that is, until the 20AG income year).

We do not consider that transferring ownership of X to the V Trust will result in greater and/or increased operating efficiencies, meaning that this transaction is part of a genuine restructure of an ongoing business. We place greater weight on the fact that ownership of X has been changed for asset protection reasons (that is, to allow X to be separated fromthe past risks associated with P and the operation of Y Z).

When determining if this transfer is made for operational reasons (efficiencies), we also place weight on the fact that there will be no changes to the duties and roles of the key personnel (Q, R, S and T) once X is transferred to the V Trust. The asset (X) will be used in the same way in the same business - it is just the ownership of the asset that is changing. We consider that this change in ownership will not result in any material business efficiency gains in regard to the use of the asset.

Small business entity (SBE) or connected with a SBE - paragraph 328-430(1)(b) of ITAA 1997

The requirement in paragraph 328-430(1)(b) of ITAA 1997 will be met if:

a)    P is a SBE

b)    the V Trust is 'connected with' a SBE (being, P).

Small Business Entity

P is a SBE within the meaning of subsection 328-110(1) of ITAA 1997 as:

a) it carries on a business in the current year (20AC income year), and

b) it carried on this business in the previous year (20AB year) and its aggregated turnover for the previous year was less than $10 million.

Connected with

The V Trust and P are connected entities pursuant to subsection 328-125(3) of ITAA 1997, as P controls the V Trust (as the sole directors of the V Trustee, are also the sole directors of P) and therefore are able to influence how the V Trust operates.

Therefore, as P is a SBE and the V Trust is connected with P, paragraph 328-430(1)(b) of ITAA 1997 is satisfied.

Ultimate economic ownership - paragraph 328-430(1)(c) of ITAA 1997

For paragraph 328-430(1)(c) of ITAA 1997 to be met according to the terms of section 328-440 of ITAA 1997:

a)    X must be included in the property of the V Trust after it was transferred to the V Trust, and

b)    the same individuals who had ultimate economic ownership of X before its transfer must be a member of the 'family group' of the V Trust (within the meaning of that term in Schedule 2F of ITAA 1936), and

c)    every individual who has the ultimate economic ownership of X must also be a member of the V Trust's 'family group' (within the meaning of that term in Schedule 2F of ITAA 1936).

According to subsection 272-90(2) and subsection 272-95(1) of ITAA 1936, Q and R are members of each other's 'family group'.

X was owned by P before it was transferred to the V Trust. As Q and R are the sole shareholders of P, they hold the ultimate economic ownership of X before it was transferred to the V Trust.

After it was transferred, X is included in the property of the V Trust. As Q and R are still members of each other's (same) family group after X was transferred to the V Trust, they continue to hold the ultimate economic ownership of X.

As X was included in the property of the V Trust after it was transferred, and as the same individuals (Q and R) who had ultimate economic ownership of X before its transfer were the members of the same 'family group' of the V Trust as after its transfer, section 328-440 of ITAA 1997 is satisfied.

Therefore, 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.

CGT asset & active asset - paragraph 328-430(1)(d) of ITAA 1997

Paragraph 328-430(1)(d)(i) of ITAA 1997

For paragraph 328-430(1)(d)(i) of ITAA 1997 to be satisfied by P, the X premises must be a 'CGT asset' and an 'active asset' of P at the time that X was transferred.

CGT asset

X is a 'CGT asset' as defined in subsection 108-5(1) of the ITAA 1997.

Active asset

X is also an 'active asset' within the meaning of that term in subsection 152-40(1) of the ITAA 1997 (as it was a CGT asset owned by P that was used in the course of P carrying on its business).

Therefore, X is a CGT asset and an active asset of P's at the time it was transferred.

Paragraph 328-430(1)(d)(ii) of ITAA 1997

For paragraph 328-430(1)(d)(ii) of ITAA 1997 to be satisfied by the V Trust, X must be an active asset in relation to which subsection 152-10(1A) of ITAA 1997 is satisfied, at the time that X was transferred.

Subsection 152-10(1A) of ITAA 1997 is met by the V Trust for the 2021 income year, as:

a)    P is a CGT small business entity

b)    the V Trust did not carry on a business, and

c)    P carried on the relevant business.

Therefore, as X is used by P in its business and section 152-10(1A) is met, paragraph 328-430(1)(d)(ii) of ITAA 1997 is satisfied.

Australian residency - paragraph 328-430(1)(e) of ITAA 1997

Section 328-445 of ITAA 1997 sets out the residency requirements that must be satisfied in relation to paragraph 328-430(1)(e) of ITAA 1997.

Pursuant to section 328-445 of ITAA 1997:

a) P is an Australian resident (as it is a company incorporated in Australia pursuant to subsection 6(1) of the ITAA 1936)

b) the V Trust is a resident trust for CGT purposes as its V Trustee is an Australian resident (pursuant to subsection 995-1(1) of the ITAA 1997).

Therefore, paragraph 328-430(1)(e) of ITAA 1997 is satisfied.

Choice to apply SBRR - paragraph 328-430(1)(f) of ITAA 1997

Both P and the V Trust have chosen to apply the rollover under Subdivision 328-G of the ITAA 1997.