Private ruling: Capital gains tax - small business restructure rollover
Date of advice: 7 July 2017
Published: November 2017
Ruling period: The year ended 30 June 2017.
Date scheme commenced: 2014.

Ruling: Q1: Will the roll-over outlined under section 328-430 of the Income Tax Assessment Act 1997 (ITAA 1997) be available in relation to the proposed restructure and transfer of assets? | A1: No.

Relevant facts and circumstances: Company A is a software developer. The sole shareholder in Company A is Person A. Details of the proposed transfer of business assets are detailed in a Uniform Contract for Sale of Business. Under a restructure proposal all the business assets, excluding the cash assets of Company A will be transferred to Company B. The assets to be transferred are accounts receivables, plant and equipment, and software. The depreciable assets have been written down to zero and the costs of developing the software have been written off. The software is an intangible asset that is used to derive royalties and has been developed and improved by Company A. The original ownership of the copyright software in the company was through the development activities of Person A. The software has undergone a number of upgrades over time. All the shares in Company A will be held non-beneficially by Company C as trustee for a discretionary trust (the Trust). Person A and their family members are beneficiaries to the Trust, while Person A will be the primary individual specified in the family trust election. The purpose of the restructure will: ● provide asset protection from potential creditors of Person A by separating ownership of assets from Person A; and ● make provision for the family of Person A, as income can be distributed to family members by the family trust. Both Company A and Company B are Australian residents. Both Company A and Company B will choose to apply the rollover in relation to the assets transferred under the proposed transaction. Both Company A and Company B meet the small business entity test as the annual turnover of each company is less than $2 million. Company A currently has no assets and no liabilities and has never traded.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 328-G. | Income Tax Assessment Act 1997 Section 328-110 | Income Tax Assessment Act 1997 Subdivision 152-A.

Reasons for decision: Summary: 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. 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 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. Person A is currently the ultimate economic owner of the assets as the sole shareholder in Company A. The proposal requires the transfer of the asset(s) to Company B, in which Company C as trustee for the Trust will be sole shareholder. The shares in the company will all owned by the Trust. The proposed restructure would not meet the normal ultimate economic ownership test in paragraph 328-430(1)(c) of the ITAA 1997 as you are the individual who currently has the sole ultimate economic ownership in the business assets but after the restructure this would not be the case as the ultimate economic ownership would rest with all the beneficiaries of the family trust. That is, the ultimate economic ownership of the assets will not be maintained. Therefore the proposed restructure would have to meet the alternative ultimate economic ownership test provided by section 328-440 of the ITAA 1997 in order for the restructure roll-over to be available. For section 328-440 of the ITAA 1997 to apply the 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 assets were included as Company A’s assets (with Person A as sole shareholder of the company), and just after the transaction the assets will be included in the property of Company B. It is noted that the Trust wholly owns Company B, and therefore it could be argued that in effect the assets will form part of the property of the family trust. However, the wording in subparagraph 328-440(a)(ii) of the ITAA 1997 is very specific and we do not consider that it can be interpreted that broadly. After the restructure the assets will be included in the property of Company B rather than the Trust. It is the shares in the company that will be included in the property of the Trust. As subparagraph 328-440(a)(ii) of the ITAA 1997 will not be met, the restructure roll-over will not be available with respect to the proposed restructure. Furthermore, we note, that where succussion planning or the making of provision for family members are involved, it would not be considered a genuine restructure of an ongoing business, and the restructure roll-over will not be available.