Private ruling: Income Tax – Small Business Concessions – Restructure Roll-over
Date of advice: 25 August 2017
Published: December 2017
Ruling period: Year ending 30 June 2018 | Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will any dividends otherwise assessable to the Shareholders from the transfer of the land be disregarded in accordance with section 328-450 of the Income Tax Assessment Act 1997 ? | A1: Yes. | Q2: Will the transfer of the land assets not be regarded as capital proceeds for the purpose of CGT event C2 applying to the shareholders in accordance with section 328-450 of the Income Tax Assessment Act 1997 ? | A2: Yes. | Q3: Will the transfer of the land assets not be regarded as payments for the purposes of CGT event G1 applying to the shareholders in accordance with section 328-450 of the Income Tax Assessment Act 1997 ? | A3: Yes.

Relevant facts and circumstances: Company A owns two parcels of land. Both parcels of land were acquired after 19 September 1985. Company A owns both parcels of land; the land is used by a related Company B, in the course of carrying on a business. Company A and Company B are connected entities under section 328-125 of the Income Tax Assessment Act 1997 (ITAA 1997). The company is owned equally by the Individuals who acquired their shares in the company after 19 September 1985. The Individuals are connected with both Company A and Company B under section 328-125 of the ITAA 1997. This is because individuals run a business using the Company A and Company B. The Company A, Company B and the individuals are Australian tax residents. You will restructure the ownership of the land by transferring the land to the individuals. Company B will continue to use the land to carry on its business following the restructure. Both before and after the transfer the company and individuals are eligible to apply the small business concessions. The Company and each individual will make the choice to apply the rollover under Subdivision 328-G. The transfer of the land will result in a capital gain.

Relevant legislative provisions: Section 152-10 of the Income Tax Assessment Act 1997 | Section 328-430 of the Income Tax Assessment Act 1997 | Section 328-440 of the Income Tax Assessment Act 1997 | Section 328-450 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Subdivision 328-G allows flexibility for owners of small business entities to restructure their businesses and the way their business assets are held while disregarding tax gains and losses that would otherwise arise. Section 328-430 discusses when a roll-over is available. The six basic conditions which must be met for the application of the rollover concessions for the ‘Restructures of small businesses’ are contained in subsection 328-430(1) . This subsection states that: A roll-over under this Subdivision 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 (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. The ruling application contends, firstly, that the transaction meets the conditions contained in paragraphs (b) to (f) of subsection 328-430(1). Therefore, these conditions will be examined before any consideration of paragraph (a). ‘Connected with’ – paragraph (b) The ‘parties’ to which the ruling applies are Company A and the individuals, neither of these taxpayers are small business entities, however it is accepted that these individuals ‘control’ both Company A and Company B, and thus that Company A is ‘connected with’ a small business entity, being Company B. Accordingly the conditions of paragraph 328-430(1)(b) are met. Economic ownership – paragraph (c) As stated in the ATO’s advice at ato.gov.au: The ultimate economic owners of an asset are the individuals who, directly or indirectly own an asset. Where there is more than one individual with ultimate economic ownership, there is an additional requirement that each individual’s share of ultimate economic ownership be maintained. Under the proposed transaction, both parcels of land held by the company are intended to be transferred to the individuals. You have confirmed that each individual will hold a 50% interest in each parcel of land. Provided the individuals receive an equal interest in both parcels of land, this will not result in any change in the ultimate economic ownership of the land. Active asset – paragraph (d) On the basis of subsection 152-10(1A), an asset can be an ‘active asset’ even if it is not owned by a small business entity, provided that it is used by a small business entity with which the entity which owns the asset is connected. As stated above, it is considered that Company A is connected with Company B. In regards to the application of the roll-over provision, paragraph 1.17 of the Explanatory Memorandum to the Tax Laws Amendment (Small Business Restructure Roll-Over) Bill 2016 (EM) states that: Subdivision 328-G will provide an optional roll-over where a small business entity transfers an active asset of the business to another small business entity as part of a genuine business restructure, without changing the ultimate economic ownership of the asset. The roll-over may also be available for assets that are used by the small business entity but held by an entity connected with the small business entity, an entity for which the small business entity is an affiliate or, if the small business entity is a partnership, a partner of that partnership. It is accepted that: ● the land owned by Company A is an ‘active asset’, on the basis that it is used by Company B in their business; and ● Company A is connected with Company B. Residency requirement – paragraph (e) The entities meet the residency requirement, as Company A and the individuals are all Australian residents. Company B is also an Australian resident company. Choosing the rollover – Paragraph (f) Company A and the individual shareholders will apply the small business restructure rollover provisions. As all the above conditions have been met, we will consider whether the restructure will meet the condition in paragraph (a) which requires that the transaction is, or is a part of, a genuine restructure of an ongoing business. 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. The following features indicate that a transaction is, or is part of, a 'genuine restructure of an ongoing business': ● It is a bona fide commercial arrangement undertaken in a real and honest sense to: ● facilitate growth, innovation and diversification ● adapt to changed conditions, or ● reduce administrative burdens, compliance costs and/or cash flow impediments. ● It is authentically restructuring the way in which the business is conducted as opposed to a 'divestment' or preliminary step to facilitate the economic realisation of assets. ● The economic ownership of the business and its restructured assets is maintained. ● The small business owners continue to operate the business through a different legal structure. For example, there is: ● continued use of the transferred assets as active assets of the business ● continuity of employment of key personnel ● continuity of production, supplies, sales, or services. ● It results in a structure likely to have been adopted had the small business owners obtained appropriate professional advice when setting up the business. It is accepted that : ● the ownership of a non-income producing passive asset in a company structure entails or creates additional complexity, cost or ‘administrative burdens’; and ● the transfer of these assets from a company to individuals would provide ‘relief’ from such complexity, administrative burden or costs. The ruling application does not address whether the change in ownership of the land would: ● facilitate growth, innovation and diversification [;or] ● adapt to changed conditions…. However, it is not a requirement that the restructure meets all three of the listed criteria. Distributions of money or property to a shareholder may be assessable in full or in part as dividends pursuant to section 44 or Division 7A of the ITAA 1936. Pursuant to section 328-450: Except as provided by this Subdivision, a transfer of an asset has no direct consequences under the *income tax law if: (a) the transfer occurs under a transaction in relation to which section 328-430 applies; and (b) a roll-over under this Subdivision is available under that section in relation to the asset. Example: If the transfer were a transfer of the asset from a company to a shareholder, it would not be treated as a payment of a dividend under Division 7A of Part III of the Income Tax Assessment Act 1936 . To avoid doubt, this section does not affect the application of the *income tax law in relation to: (a) anything that happens in relation to the asset that does not directly relate to the transfer; or (b) the ownership of the asset at any time. As stated in the Explanatory Memorandum to the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016: 1.45 As with other roll-overs, the small business restructure roll-over is intended to be tax-neutral, in the sense that no income tax consequences arise from the transfer of the asset(s). This will provide small businesses with the flexibility to change their legal structure without the cash flow problems that may arise from realising an income tax liability on the transfer of assets to a different entity. [Schedule 1, item 1, section 328-450] 1.46 The roll-over can be used for transfers from and to a range of different entity types, and such transfers may trigger various provisions under the existing income tax law. For example a transfer of an asset by a company to a shareholder may be an assessable dividend under section 44 of the ITAA 1936 or Division 7A. 1.47 Section 328-450 ensures that there are tax neutral consequences for a transfer that qualifies for the roll-over, by 'switching off' the application of the existing income tax law. [Schedule 1, item 1, section 328-450] 1.48 This does not mean that the transfer is deemed not to happen, or that downstream income tax consequences of the transfer will also be 'switched off'. [Schedule 1, item 1, subsection 328-450(2)] 1.49 Nor will the amendments affect a tax liability arising under another Commonwealth taxing statute (for example fringe benefits tax or goods and services tax), or any liability for stamp duty under State legislation If the rollover should apply section 328-450 of the ITAA 1997 ensures that the transfer of any assets under the rollover should not affect the income tax positions of taxpayers in that no income tax consequences will arise from the transfer of the assets. 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. The operative provisions will apply so that no income tax consequences will arise from the transfer and therefore any gain arising under event C2 or G1 will be disregarded.