Private ruling: Small business rollover relief – ultimat e economic ownership
Date of advice: 24 October 2018
Published: December 2018
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the proposed transaction meet the requirement of the ultimate economic ownership of the assets being maintained under paragraph 328-430(1)(c) and section 328-440 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: Company X carries on a business for Australian income tax purposes. The shareholders of Company X are: a) Individual A; and b) Trustee X as trustee for Trust A. Each Ordinary share carries equal rights to voting, capital and income. Trust A is a Non-Fixed Trust Company X proposes to transfer the business to a new Non-Fixed Trust (Trust B). The intention of the restructure is due to the current structure’s insufficient asset protection from the risks associated with the business. The applicant advises that if advice had been obtained at the time of establishing the business structure, the proposed trust structure would have been implemented. Prior to the transfer of the business, Trust A will make a Family Trust Election nominating Individual A as the test individual. Upon the creation of Trust B, Trust B will make a Family Trust Election nominating Individual A as the test individual. The beneficiaries of Trust B will be limited to members of the Individual A’s Family Group within the meaning of Schedule 2F of the Income Tax Assessment Act 1936. After the transaction, Company X will not carry on any business activities. Company X wishes to avail itself of the Small Business Rollover Relief under Subdivision 328-G of the ITAA 1997. Company X requests the Commissioner to consider only whether the requirement of ‘Ultimate Economic Ownership’ of Small Business Rollover Relief under paragraph 328-430(1)(c) will be met.

Relevant legislative provisions: Subdivision 328-G of the ITAA 1997 | paragraph 328-430(1)(c) of the ITAA 1997 | section 328-440 of the ITAA 1997

Reasons for decision: Summary: The proposed restructure will result in the ultimate economic ownership of the assets being maintained for the purposes of paragraph 328-430(1)(c) and section 328-440 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subdivision 328-G of the ITAA 1997 provides tax-neutral consequences for a small business entity that restructures the ownership of the assets of the business, without changing the ultimate economic ownership of the assets. | Detailed Reasoning - Ultimate economic ownership – discretionary trusts: For the restructure roll-over provided for by Subdivision 328-G to be available, there is a requirement that the restructure does not have the effect of materially changing which individual has, or which individuals have, the ultimate economic ownership of the business assets (paragraph 328-430(1)(c) of the ITAA 1997). Where ownership passes to or from a discretionary trust, this requirement would generally not be able to be met. However, section 328-440 of the ITAA 1997 contains an alternative ultimate economic ownership test for discretionary trusts. It states: | Detailed Reasoning - Section 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; or (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 above; 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. For the case of Company X, both Trust A and Trust B will make a Family Trust Election naming Individual A as the specified individual. As subsection 328-440(a) is an ‘either or both’ test, it is enough that Company X satisfies paragraph 328-440(a)(ii) of the ITAA 1997. Just after the transaction takes effect, the assets of Company X will be held by Trust B. Provided that the two trusts each make the proposed Family Trust Elections, subsection 328-440(a) will be satisfied. Before the transfer, individuals holding ultimate economic ownership of the assets will only include Individual A and the beneficiaries of Trust A, which will only include the members of Individual A’s family group. There will be no beneficiaries outside the family group capable of holding the ultimate economic ownership of the assets. Hence, subsection 328-440(b) of the ITAA 1997 is satisfied. Subsection 328-440(c) of the ITAA 1997 will also be satisfied as the ultimate economic ownership of the asset remains with those individuals within the family group. The explanatory memorandum of the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 provides: 1.29 To be eligible for the roll-over the transaction must not have the effect of changing the ultimate economic ownership of transferred assets in a material way. The ultimate economic owners of an asset are the individuals who, directly or indirectly, beneficially own an asset. 1.30 Ultimate economic ownership of an asset can only be held by natural persons. Therefore, where a company, partnership or trust owns an asset it will be the natural person owners of the interests in these interposed entities that will ultimately benefit economically from that asset. For Company X’s case, we have considered the natural persons who will ultimately benefit economically from the assets in the transfer from Company X to Trust B. These natural persons remain Individual A and the members of the Individual A’s family group.