Private ruling: Small business restructure rollover.
Date of advice: 5 March 2019
Published: May 2019
Ruling period: Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021
Date scheme commenced: 1 July 2018

Ruling: Q1: Will the proposed restructure be a ‘genuine restructure of an ongoing business’ under paragraph 328-430(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Will the safe harbour rule in section 328-435 ITAA 1997 apply? | A2: Yes, provided all the requirements of section 328-435 continue to be met for the three years following the restructure.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. 1. You operate a business as a sole trader. 2. The original advice given to you when establishing your business was to use a discretionary trust structure. You chose not to do this. 3. You are now considering restructuring by transferring your business assets to a discretionary trust. 4. You are considering this restructure for asset protection purposes and to avoid liability issues, due to purchasing a main residence in your name and that of your spouse. 5. You have advised that you are quite conservative and wish to protect your non-business assets as much as possible. 6. The sole trader operation is currently a small business entity with a turnover of less than $10 million dollars annually and you expect it to continue to be a small business entity after the transfer. 7. You intend continuing to operate the business through the Trust (which was established by deed) after the transfer. 8. The Trust has a corporate Trustee. 9. You are the director of the Trustee company and the shareholder is your spouse. 10. The primary beneficiaries of the Trust are you and your spouse. 11. You and your spouse are residents of Australia. 12. You have confirmed that you will amend the trust deed to ensure only members of the family group will be entitled to share in the capital of the trust. 13. No family trust election currently exists. However, prior to the restructure, a family trust election will be made nominating you as the test individual. 14. Last year, you were approached by a business broker after two separate parties enquired about possible investment options. The offers were not accepted, as a sale price could not be agreed upon. 15. Should a potential buyer offer the right price, you would consider selling. However, you are not actively seeking to sell the business. 16. You have two assets that are currently being depreciated. 17. You have an intangible asset. 18. The transferor and the transferee will choose to apply the rollover.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 328-G | Income Tax Assessment Act 1997 Subsection 328-430(1) | Income Tax Assessment Act 1997 Subsection 40-340(1) | Income Tax Assessment Act 1997 Section 328-435 | Income Tax Assessment Act 1997 Paragraph 328-430(1)(a) | Income Tax Assessment Act 1997 Section 328-110 | Income Tax Assessment Act 1997 Section 328-440 | Income Tax Assessment Act 1997 Subsection 152-40(1) | Income Tax Assessment Act 1997 Paragraph 152-40(1)(b) | Income Tax Assessment Act 1997 Paragraph 328-430(1)(c) | Income Tax Assessment Act 1936 Schedule 2F | Income Tax Assessment Act 1936 Section 272-75

Reasons for decision: Summary: The small business restructure rollover in Subdivision 328-G allows small businesses to transfer active assets from one entity (the transferor) to one or more other entities (transferees), on or after 1 July 2016, without incurring an income tax liability. Subsection 328-430(1) provides that roll-over relief is available if the following conditions are met: 1. the transfer of the asset is, or is part of, a genuine restructure of an ongoing business; 2. each party to the transfer is either a small business entity (or affiliate of, or connected with a small business entity) or a partner in a partnership that is a small business entity; 3. there is no material change in the ultimate economic ownership of the transferred asset; 4. the asset being transferred is a CGT asset (other than a depreciating asset) that is an active asset, and for a partnership, is also an interest in an asset of the partnership; 5. both the transferor and each transferee are residents of Australia; and 6. both the transferor and each transferee choose to apply the roll-over. While a depreciating asset is excluded from being an eligible asset, roll-over relief is effectively provided for such assets under item 8 of the table in subsection 40-340(1). | Detailed Reasoning - Discussion of relevant considerations: 1. Genuine restructure Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters (LCR 2016/3) explains that whether a transaction is or is part of a ‘genuine restructure’ will be a question of fact, determined having regard to all of the circumstances surrounding the restructure. In particular, the following features are indicative of a genuine restructure: ● 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, and - 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. However, as discussed in LCR 2016/3, a transaction that is a part of a process of winding down or realising ownership interests in the assets is not considered by the Commissioner to be a genuine business restructure. Section 328-435 provides a safe harbour rule whereby, a transaction will be, or will be part of, a genuine restructure if, for a period of three years after the transaction occurs: ● There is no change in ultimate economic ownership of any of the significant assets of the business that were transferred under the transaction; and ● Those significant assets continue to be active assets; and ● There is no significant or material use of those significant assets for private purposes. In circumstances where the safe harbour rule is satisfied, it is not necessary to consider whether the restructure would otherwise be a ‘genuine restructure of an ongoing business’ under paragraph 328-430(1)(a). 2. Small business entity An entity is a small business entity if it carries on business and its aggregated turnover for the previous income year is less than $10 million or is likely to be less than $10 million for the current income year (section 328-110 of the ITAA 1997). 3. Ultimate economic ownership Ordinarily, a discretionary trust will not satisfy the ultimate economic ownership test because the economic interests that the objects of such a trust have in the trust’s assets are not fixed in proportion, and depend on the exercise of the trustee’s discretion. However, section 328-440 provides an alternative ultimate economic ownership test for discretionary trusts. Section 328-440 will be satisfied if every individual who had ultimate economic ownership of the transferred asset before the transfer, and every individual who has ultimate economic ownership of the transferred asset after the transfer must be members of the same family group (within the meaning of Schedule 2F of the ITAA 1936) relating to the family trust (as defined section 272-75 of Schedule 2F of the ITAA 1936). 4. Active asset A CGT asset (whether a tangible or intangible asset) is an active asset at a time if, at that time, you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by you, an affiliate of yours, or by another entity that is connected with you (subsection 152-40(1) of the ITAA 1997). While a depreciating asset is excluded from being an eligible asset, roll-over relief is effectively provided, with a balancing adjustment for such assets transferred under a small business restructure, under item 8 of the table in subsection 40-340(1). 5. Residency Both the transferor and each transferee must be residents of Australia. 6. Choose to apply the relief Both the transferor and each transferee must choose to apply the roll-over. | Detailed Reasoning - Application to your circumstances: Genuine restructure You have stated that you are considering this restructure for asset protection purposes and to avoid liability issues, due to purchasing a main residence in your name and that of your spouse. However, standard industry liability insurance for a business might be expected to provide similar protection. Further, this type of insurance might be desirable even after the proposed restructure. You have also advised that you have received two offers to buy the business, which you have not accepted because you couldn’t agree on a price. Further, you have advised that, although you are not actively seeking a sale of the business, should a suitable offer be made, you may consider selling in the future. You may therefore be characterised at the present time as a willing seller at the right price. This in companion with the multiple offers already received means future offers and a sale in the short to medium term are in reasonable contemplation. For these reasons, the Commissioner considers there is too much doubt to conclude what is proposed meets the statutory test of a “genuine restructure”. It is a realistic possibility that the restructure is a preliminary step in the economic realisation of your business. However, if for the three years following the restructure, all the requirements of section 328-435 are met, the safe harbour rule in that section will apply and you and the trust can choose to apply the small business restructure roll-over relief of subdivision 328-G. That is, for a three year period following the transfer of the assets: ● there must be no changes to the ultimate economic ownership of the significant assets of the business (including any changes to the trust deed that results in the introduction of new capital beneficiaries that are outside the family group), ● the significant assets of the business remain active assets, and ● there is no significant or material use of those significant assets for private purposes. Ultimate economic ownership Just before the transaction takes place, you will be the sole owner of the business assets. Just after the transaction takes place the Trust will be the owner of the assets. The beneficiaries of the trust are yourself and your spouse. A family trust election will be in place nominating you as the test individual. You have confirmed that you will amend the trust deed to ensure only members of the family group will be entitled to share in the capital of the trust. As the capital beneficiaries will be part of the family group, the alternative ultimate economic ownership test in section 328-440 will be satisfied. Active assets The only asset of the business to be transferred that is not a depreciating asset is goodwill. This is an intangible asset that is inherently connected with the business, and therefore will be an active asset under paragraph 152-40(1)(b). Other conditions You are currently a ‘small business entity’ and expect to remain so after the restructure. You and the Trust are residents and you and the Trust will choose to apply the rollover.