Private ruling: Whether the entity is entitled to use Small Business Restructure Roll-over
Published: September 2017
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the entity 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 | Q2: As the entity does not meet either ultimate economic ownership test, is it entitled to treat each of the two family trusts as single notional entities as outlined under section 165-207 of the ITAA 1997 for the purposes of the ultimate economic ownership tests? | A2: No

Relevant facts and circumstances: The entity operates a business. The entity has two shareholders, being two family trusts. Both trusts own the shares in the entity in equal proportion. The entity owns both the business, including business assets and a number of freehold properties. One property is used in the business but represents an investment in real property that is expected to increase in value over time. Another property is used to generate rental returns. The owners of the entity are concerned that the mixing of business assets and real property investments constitutes an unnecessary asset risk as the underlying business carries an elevated level of commercial and liability risk. As a result of this risk the owners of the entity are proposing to transfer its business assets to a new company (Newco). If the properties were to be transferred to Newco it would attract a significant stamp duty liability so it is proposed that those properties will remain in the entity. It is also proposed that Newco will have the same two shareholders as the entity. Both the entity and Newco will be small business entities (SBE) as outlined under section 328-110 of the ITAA 1997 in the year in which the transfer of the business assets of the entity will take place. The entity and the proposed company, Newco will meet the residency requirements as outlined under section 328-445 of the ITAA 1997. All business assets currently owned by the entity which will be transferred to Newco which are CGT assets will be active assets as outlined under section 152-40 of the ITAA 1997. Both the entity and Newco will choose to apply the rollover relief under subdivision 328-G of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 165-207 | Income Tax Assessment Act 1997 Section 328-430 | Income Tax Assessment Act 1997 Section 328-440

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 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 the transferee meet the residency requirements in section 328-445 for an entity; and f. the transferor and the transferee choose to apply a roll-over under this subdivision in relation to the assets transferred under the transaction. One of the tests which must be met is the ultimate economic ownership test. 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. Currently the business assets are owned by the entity. Two family trusts are equal shareholders in the entity. Both trusts have family trust elections in place. The owners of the entity are proposing to transfer all business assets from the entity to Newco. A transfer of assets from or to a discretionary trust will generally not meet the requirements for ultimate economic ownership. One exception to this rule is example 4 of Law Companion Guidelines 2016/3 (LCG 2016/3). In that example Trent is a cabinet maker who runs a business in a complicated legal structure where the active assets are held in a company and a trustee of a discretionary trust is the sole shareholder of the company. Trent is the sole director of the company and also the primary individual specified in the family trust election in respect of the trust. When Trent established his business, his accountant thought this structure was suitable for Trent's current and future circumstances. However, Trent has no family members and he finds his yearly accountant fees are significant relative to his modest income. Given the type of work Trent does, and his client base, he provides personal guarantees for all his work. The active assets held by the company are transferred to Trent and the SBRR is claimed. The trust vests in the manner contemplated by its deed, and the company is wound up. The asset protection features of Trent's existing structure are minimal given Trent's practice and the commercial need to provide personal guarantees. Any benefits it offers can be seen to be outweighed by the costs and administrative complexity involved in dealing with his business affairs. Trent has no family and a modest income. The legal structure he has is not fit for his purposes and there are many disadvantages to running his business through such a complex structure. Trent has achieved significant benefits to the ongoing efficient conduct of his business. On the evidence, the restructure has relieved Trent from additional outlays, and administrative and compliance burdens in running his business, and is a 'genuine restructure of an ongoing business'. Note that in this example, Trent has no family members and this is significant for concluding that the ultimate economic ownership of the business is in fact maintained. Generally, the presence of a discretionary trust will mean that to access the SBRR an alternative ultimate economic ownership test must be considered. In the case outlined above, the individual Trent, is the only beneficiary in the family trust. After the transfer of the assets of which he alone is the beneficial owner, he remains the only beneficial owner, therefore in that rare occurrence the ultimate economic ownership has been maintained without having to resort to the alternative test under section 328-440. In this case as there is more than one beneficiary in both family trusts which are shareholders in the entity, the ultimate economic ownership of the business assets has not been maintained under section 328-430, we must therefore look at the alternative test under section 328-440. Under section 328-440 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 this case both before and after the proposed transaction will take place the business assets will not be included in the property of a non-fixed trust therefore the alternative economic ownership test will not been passed. As neither the ultimate economic ownership test nor the alternative ultimate economic ownership test have been met, we have not considered whether any of the other conditions under section 328-430 will be met Section 165-207 provides that, where a relevant continuity of ownership test (COT) interest (voting power, rights to dividends or capital distributions) is held by the trustee of a family trust, the trustee is treated as owning the interests as a “single notional entity” for COT purposes. The concept of a “single notional entity”, which is contained under section 165-207, only applies for COT purposes under Division 165 and cannot be used for any other purpose. Subdivision 328-G does not include a section which allows for the concept of a “single notional entity” as outlined under section 165-207, therefore the two trusts cannot be treated as “single notional entities” for SBRR purposes.

Reasons for decision: All the legislative references that follow refer to the Income Tax Assessment Act 1997 .