Private ruling: Income tax – small business restructure rollover
Date of advice: 3 August 2018
Published: September 2018
Ruling period: Year ending 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Will the transfer of farming assets to Company A satisfy the requirements of the Small Business Restructure Rollover in accordance with Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: Trust A is an established family trust that owns farm land and operates a farming business. Trust A has a turnover of less than $10 million. Individual A and Individual B have operated the farming business for a number of years which was previously operated by Individual A’s parents. Company X has been incorporated and the shareholder of this company is Trust B. The directors of the company are all beneficiaries of Trust A. Prior to the transfer a family trust election will be lodged that will nominate Individual A as the specified individual of Trust B. A trust election has been lodged nominating Individual A as the specified individual of Trust A. The trustee and primary beneficiaries of Trust B are Individual A and Individual B. Trust A will transfer the following assets to the company: ● Live stock ● Hay ● Plant, equipment and motor vehicles To fund the acquisition the trust will distribute a proportion of its 20XX profits to the new company. In the 20XX financial year the company will use the funds to acquire the new assets from Trust A. If the funds are insufficient to pay the full consideration the beneficiaries will contribute the additional funds to the company. You advised the reasons for undertaking the restructure are; ● To provide asset protection through the separation of land assets and farming operations ● To have the ability to retain profits from the farm operation and to reinvest these profits in the business. After the restructure Individual A and Individual B will continue to operate the business. They do not have the intention to divest any of their interests in the business in the next three years.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Subdivision 328-G | Income Tax Assessment Act 1997 Section 328-430 | Income Tax Assessment Act 1997 Section 328-440 | Income Tax Assessment Act 1997 Section 328-455

Reasons for decision: Summary: Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997) is intended to provide relief to small business entities restructuring their businesses. It does this via a rollover mechanism which acts to disregard tax gains and losses that would otherwise arise from transactions associated with the restructure. Section 328-430 of the ITAA 1997 discusses when a roll-over is available. There are six basic conditions which must be met for the application of the rollover concessions for the 'Restructures of small businesses' which are contained in subsection 328-430(1) of the ITAA 1997. This subsection states that: (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 (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). 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 of the circumstances surrounding the restructure. The Law Companion Guideline 2016/3 provides further guidance on whether a transaction will be part of a ‘genuine restructure of an ongoing business’. 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 going forward. It is a composite phrase emphasising that the SBRR is not available to small business owners who are restructuring in the course of winding down or realising their ownership interests. Application to your circumstances The restructure is undertaken primarily for asset protection purposes and to allow the business to retain profits in the company to reinvest in the business. Based on the reasons you have provided the Commissioner considers that the business is not restructuring in the course of winding down or realising its ownership interests. It is also evident that the restructure is not an artificial or inappropriately tax-driven scheme. The restructure could reasonably be expected to deliver benefits to the business going forward. Ultimate economic owner 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 that ultimate economic ownership must not be materially changed. It is the Commissioner’s view that a purely discretionary trust could not satisfy the ultimate economic ownership test without relying on the special rule in section 320-440. This is because the economic interests that the objects of such a trust have in an asset are not fixed in proportion, and would depend on the trustee exercising their discretion. For section 328-440 of the ITAA 1997 to apply the assets must be included in the property of a family trust either just before the transaction or just after it. In addition to this it is a requirement that 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 328-440(a) of the ITAA 1997 and every individual who, just after the transfer takes effect, has the ultimate economic ownership of the asset is a member of that family group. Application to your circumstances In this case the assets that are transferred are included in the property of a family trust just prior to the transfer and each individual who just before the transfer takes effect has the ultimate economic ownership of the assets is a member of the family group. We also confirmed that every member that will have ultimate economic ownership of the assets after the transfer is a member of the same family group. We consider that the ultimate economic ownership test is satisfied. Summary Based on the information provided it is considered that the proposed restructure meets the definition of a ‘genuine restructure of an ongoing business’ under paragraph 328-430(1)(a) of the ITAA 1997. Paragraph 328-430(1)(b) of the ITAA 1997 is satisfied as each party to the transfer is a small business entity or connected with a small business entity. In addition the business is not restructuring in the course of winding down or realising its ownership interests. It is also evident that the restructure is not an artificial or inappropriately tax-driven scheme and the restructure maintains ultimate economic ownership of the assets.