Private ruling: Whether the company is entitled to the Small Business Restructure Roll-over relief
Date of advice: 4 April 2017
Published: August 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 be available to the company in relation to the proposed restructure from the one company to two companies? | A1: No.

Relevant facts and circumstances: The company invests in equities in publicly listed companies, securities and cash. The company is currently owned by two shareholders who hold an equal number of shares each. The ownership of the company has changed from where it had a single objective to now where it has two individual owners who have quite different objectives and outlooks on what direction the company should take. The two shareholders are related and both over the age of 60. The two shareholders are proposing to create a second company (company B) (and possibly company C if the original company needs to be wound up) and make an in specie transfer of half of the assets (and associated franking credits etc.) into the new company or companies.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 328-110 | Income Tax Assessment Act 1997 Section 328-430 | Income Tax Assessment Act 1936 Section 6(1)

Reasons for decision: Summary: All the legislative references that follow are to the Income Tax Assessment Act 1997 unless stated otherwise. 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. Subsection 328-430(1) states 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. Section 328-110 provides the meaning of small business entity. It states you are a small business entity for an income year (the current year) if: (a) you carry on a business in the current year; (b) one or both of the following applies: (i) you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $2 million; (ii) your aggregated turnover for the current year is likely to be less than $2 million. Passive income is defined under section 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) as: (a) dividends and non-share dividends paid to the taxpayer (b) unit trust dividends (c) a distribution treated as a dividend under s47, i.e. a distribution made by a liquidator in the course of winding up a company (d) deemed dividends under s47A (i.e. distributions of controlled foreign company (CFC) income to an associated entity), former s 108 (i.e. private company loans, etc., to an associated person) or Div 7A (i.e. private company distributions to a shareholder or a shareholder's associate) (e) interest income (f) annuities (g) rental income. Rent is defined in s317 as any consideration paid or given by a lessee under a lease and includes consideration (whether paid or given by a lessee or another person) in the nature of rental consideration (h) royalties (i) consideration received by a taxpayer for the assignment in whole or in part of any copyright, patent, design, trade mark or other similar property or right (j) any profits or gains of a capital nature that accrued to the taxpayer (k) passive commodity gains, and (l) amounts included in the taxpayer's assessable income under the following provisions: ● s102AAZD (attributable income of a non-resident trust estate) ● s456 (attributable income of a CFC) ● s457 (attributable income arising from a change in the country of residence of a CFC) ● s459A which acts as an anti-avoidance provision for s456 to 459 so that attribution of income under those provisions is not avoided by using interposed entities, or ● former s 529 which, prior to the 2010/11 income year, provided for foreign investment fund (FIF) income of a FIF or FLP to be included in assessable income. The current assets of the company are equities in publicly listed companies, securities and cash. There is no evidence to suggest that anything more than mere investing which is a passive activity is being carried on. Rewards from investing such as dividends and interest are considered passive income. As the only income received by the company is passive income it is considered that the company is not carrying on a business. In addition, there is an issue regarding succession planning. Currently the company is owned by two related equal shareholders. It has been stated that the operation of the company would become difficult if either one of the shareholders passes away or becomes incapacitated as this may involve many more additional families becoming involved in the operation. The split from one company owned by the shareholders to two companies each of which would be owned by one of them has been proposed to mitigate potential problems which may occur should one of the shareholders pass away or become incapacitated. This proposal could be seen as succession planning in that the two shareholders are over 60 years of age. The Law Companion Guidelines LCG 2016/3 discuss what is a genuine restructure of an ongoing business for the purposes of the Small Business Restructure Roll-over. It states that succession planning is not considered a genuine restructure of an ongoing business. Although the 'genuine restructure' issue may be arguable, it is clear that the company makes investments from which it receives passive income rather than carrying on a business. As it is not carrying on a business the company is not a small business entity. Therefore the company does not qualify for the Small Business Restructure Roll-over.