Private ruling: Whether the proposed restructure would meet the conditions under the Small Business Restructure Rollover provisions
Date of advice: 18 January 2017
Published: June 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the Small Business restructure roll-over as outlined under section 328-430 of the Income Tax Assessment Act 1997 (ITAA 1997) be available to the partnership in relation to the proposed restructure from the partnership to a unit trust where one of the unit holders will be a discretionary trust with a family trust election in place? | A1: No

Relevant facts and circumstances: The partnership operates a business. The partnership has three equal partners, partner A, partner B and partner C. The business operated by the partnership currently deals with one large client which will only deal with one entity, which is currently the partnership. Both partner B and partner C wish to offer more products and services but not within the current partnership. Each partner wants to set up their own independent businesses which will offer more products and services to the proposed unit trust which will deal directly with the large client. The individual partners are proposing to change from operating the business through a partnership to a unit trust. Equal units will be distributed between partners A, B, and a family trust. The trustee of the family trust will be a company with partner C as the sole shareholder and director. Partner C will also be the appointer of the family trust. A family trust election will be put in place to ensure every beneficiary is a member of the family group. Partner C will be a member and the test individual of the family trust. The partnership and the proposed unit trust will meet the residency conditions and the conditions to be Small Business Entities (SBE).

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 328-430 | Income Tax Assessment Act 1997 Section 328-440

Reasons for decision: Summary: All the legislative references that follow are to the Income Tax Assessment Act 1997 . 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)). Where ownership passes to a discretionary trust, this requirement would generally not be able to be met. However, section 328-440 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. The partners intend to transfer all the partnership's business assets from the partnership into a unit trust. There are currently three equal partners and two of the three partners will receive equal units in the proposed unit trust. The other equal share of units will be transferred into a family trust of which the third partner will be the appointer and primary individual. The trustee of the family trust will be a company of which the third partner will be the only shareholder and director. The proposed restructure does not meet the normal ultimate economic ownership test in paragraph 328-430(1)(c). The ultimate economic ownership of two thirds of the partnership's assets would be retained by two partners as equal unit holders in the unit trust. However, the ultimate economic ownership of the remaining one third share in the partnership assets would not be retained by the third partner as the ultimate economic ownership will pass to the beneficiaries of the third partner's family trust. Therefore the proposed restructure would have to meet the alternative ultimate economic ownership test provided by section 328-440 in order for the restructure roll-over to be available. For section 328-440 to apply the business assets must be included in the property of the family trust either just before the transaction or just after it and that is not the case here. Before the transaction the business assets were included in the property of the partnership and just after the transaction the business assets will be included in the property of the proposed unit trust. It is noted that the family trust will wholly own a third share of the units in the proposed unit trust, and therefore it could be argued that in effect a third share in the business assets will form part of the property of the family trust. However, the wording in subparagraph 328-440(a)(ii) is very specific and we do not consider that it can be interpreted that broadly. After the restructure the business assets will be included in the property of the proposed unit trust rather than the family trust. It is the units in the unit trust that will be included in the property of the family trust and not the business assets. As subparagraph 328-440(a)(ii) will not be met, the restructure roll-over will not be available with respect to the proposed restructure.