Private ruling: Small business restructure roll-over
Date of advice: 13 June 2017
Published: October 2017
Ruling period: 1 July 2017 to 20 June 2018

Ruling: Q1: Will the XYZ Trust meet all conditions outlined under the Small Business Restructure Roll-over provisions (Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)) in relation to the proposed restructure? | A1: No. As the XYZ Trust is not a small business entity for the year ended 30 June 2017, it does not meet the basic conditions for restructure roll-over relief under Subdivision 328-G of the ITAA 1997.

Relevant facts and circumstances: (as per the ruling request) A and B are operating a business via a discretionary trust vehicle – the XYZ Trust. The business meets the Small Business Entity provisions for the 2018 financial year as the business turnover is less than $25 million. The clients also meet the net asset value test of less than $6 million. A and B are currently separated, however not legally divorced. A and B want to continue running their business together, however they would like to change the structure, as now A has a new partner. A and B are considering rolling the current business structure into a company. The shareholders of the new company would be each of A and B’s new discretionary trust. This will enable protection of each of their 50% share in the business and they both then have the capacity to distribute their share of income to respective trust beneficiaries. The XYZ Trust does not have a Family Trust Election in place and the appointers of the trust are A and B jointly. The Trustee of the XYZ Trust is a corporate trustee, owned 50/50 by A and B. If A and B were to put a Family Trust Election in place making A the specified individual, when they complete the rollover, to keep control A would need to be the specified beneficiary on both the new discretionary trusts that become the shareholders. This would not be ideal for B, as it will limit their ability to distribute to a new partner and their families. A and B would like to consider using the Small Business Restructure Rollover provisions to ignore the capital gain on the transfer of the business to a new company, with two discretionary trusts as the shareholder. However they fail the ultimate economic ownership test as they cannot establish economic ownership before or after the event.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 328-C | Section 328-110 | Subdivision 328-G | Section 328-425 | Section 328-430 | Section 328-435 | Section 328-440 | Section 328-445 | Section 328-450 | Section 328-455 | Section 328-460 | Section 328-465 | Section 328-470 | Section 328-475

Reasons for decision: Summary: A restructure roll-over under Subdivision 328-G 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 (a) 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 (a) 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 (iii) if subparagraph (b)(iv) applies—an active asset and an interest in an asset of the partnership referred to in that subparagraph; and (a) the transferor and the transferee meet the residency requirements in section 328-445 for an entity; and (b) the transferor and the transferee choose to apply a roll-over under this subdivision in relation to the assets transferred under the transaction. Under paragraph 328-430(1)(b)(i) of the ITAA 1997 each entity which is a party to the transfer must be a “small business entity” The meaning of the expression “small business entity” is set out in section 328-110 of the ITAA 1997: SECTION 328-110 Meaning of small business entity | Detailed Reasoning - General rule: based on aggregated turnover worked out as at the beginning of the current income year: 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; (ii) your aggregated turnover for the current year is likely to be less than $10 million. The income tax return for the XYZ Trust shows that for the year ended 30 June 2016 the business income of the trust was over $10 million. As the aggregated turnover in the previous year exceeds $10 million, the trust is not a small business entity and is therefore not eligible for the small business restructure roll-over. Please note that the $25 million turnover for the 2017/2018 year relates to a cut in the corporate tax rate to 27.5% for businesses with an aggregated turnover of less than $25 million – refer Treasury Laws Amendment (Enterprise Tax Plan) Act 2017 (Act No 41 of 2017). The $6 million maximum net asset value test is only relevant for the Small Business Capital Gains Tax Concessions in Division 152 of the ITAA 1997. | Detailed Reasoning - Other matters – ultimate economic ownership: One of the other tests which must be met is the ultimate economic ownership test - paragraph 328-430(1)(c) of the ITAA 1997. The transfer must not have the effect of “materially changing” the ultimate economic ownership of the transferred assets. Where there is more than one ultimate economic owner, each individual share of the share of that ultimate economic ownership must not be materially changed. A transfer of assets from or to a discretionary trust will generally not meet the requirements for ultimate economic ownership. Under section 328-440 of the ITAA 1997 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. In your ruling application you acknowledge that the trust would fail the ultimate economic ownership test as the XYZ Trust does not currently have a Family Trust Election (FTE) in place and under the proposed restructure it would be impractical to have two FTEs in place. You have therefore asked if the Commissioner would allow the restructure to take place, notwithstanding that the conditions in section 328-440 of the ITAA 1997 are not satisfied. There is no provision in Subdivision 328-G of the ITAA 1997 which gives the Commissioner a discretion to ignore certain conditions for restructure roll-over relief. As the ultimate economic ownership test is not satisfied the proposed restructure would not be eligible for roll-over relief even if the trust meets the small business entity test.