Private ruling: Small business restructure roll-over
Date of advice: 15 June 2018
Published: August 2018
Ruling period: Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Will the Small Business Restructure Roll-over as outlined under subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997) be available to the individual and company in relation to the proposed restructure? | A1: Yes.

Relevant facts and circumstances: The individual began the business as a sole trader in XXXX and over time acquired a client base. The business is carried on by Company A. Company A was established in XXXX. Company A provides services to the public. The individual is the sole director and shareholder of Company A. Since XXXX all new clients of the business have been owned by Company A. Company A owns all the assets required to carry on the business and employs all staff. The individual is the current authorised representative for Company A. It is proposed that the business be restructured by transferring the client base of the individual and Company A to the Trust. A family trust election will be made for the purposes of Schedule 2F of the Income Tax Assessment Act 1936 nominating the individual as the specified individual. The individual is the primary beneficiary and the appointer. The individual and Company A are seeking to restructure the business structure into a non-fixed trust for the following reasons: ● Facilitate business growth and reduce administrative burdens. ● Simplify business affairs due to consolidating two client base owners into one. ● Provide more adequate asset protection. Under the restructure proposal all the business assets of the individual and Company A, will be transferred to the Trust. No consideration will be provided on the transfer of the assets. The aggregated turnover for the entities is less than $XX million. The individual does not carry on a business. The individual and Company A meet the residency requirements as outlined under section 328-445 of the ITAA 1997. Both the individual and Company A choose to apply the rollover relief under subdivision 328-G of the ITAA 1997.

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

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. There are six basic conditions which must be met for the application of the rollover concessions for the 'Restructures of small businesses' which 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. | Detailed Reasoning - Genuine Restructure: You have advised that the individual and Company A are seeking to restructure its business structure into a non-fixed trust for the following reasons: ● Facilitate business growth and reduce administrative burdens. ● Simplify business affairs due to consolidating two client base owners into one. ● Provide more adequate asset protection. In your case, we have considered that the above reasons for undertaking the restructure meet the requirements of a genuine restructure of an ongoing business under paragraph 328-430(1)(a) of the ITAA 1997. | Detailed Reasoning - Small Business entity: For the purposes of paragraph 328-110 ( 1)(a) of the ITAA 1997 Company A is considered to be a small business entity and subparagraph 328-430(1)(b)(i) of the ITAA 1997 is satisfied, as it is a small business entity for the income year during which the transfer will occur. Further the individual is not considered to be a small business entity, however it is accepted that the individual controls Company A and receives 100% of the distributions, accordingly the individual is connected with the small business entity for the income year. Accordingly the conditions of subsection 328-430(1)(b) are met. | Detailed Reasoning - Ultimate economic ownership test: One of the other tests which must be met is the ultimate economic ownership test - paragraph 328-430(1)(c) of the ITAA 1997. 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. A transfer of assets from or to a discretionary trust will generally not meet the requirements for ultimate economic ownership. It is the Commissioner’s view that a purely discretionary trust could not satisfy the ultimate economic ownership test without relying on the special rule in section 320-440 of the ITAA 1997. This is because the economic interests that the objects of such a trust have in an asset are not fixed in proportion, and would depend on the trustee exercising their discretion. For section 328-440 of the ITAA 1997 to apply the assets must be included in the property of a family trust either just before the transaction or just after it. In this case just after the transaction occurs the property will be included in a family trust therefore you have met the condition of maintaining ultimate economic ownership. Just prior to the transfer Company A is the ultimate economic owner of the assets and this is maintained after the assets are transferred to the Trust. | Detailed Reasoning - Active Assets: Finally, for the purposes of subsection 328-430(1)(d) we accept the CGT asset is an active asset of the company. In regards to the individual it is accepted that the active asset is used by a connected entity, being Company A, this meets the requirements of section 152-10(1A). In your case the Commissioner has found that the transfer of the business assets from the individual and Company A to the Trust is not restructuring in the course of winding down or realising its ownership interests. It is also evident that the restructure is not an artificial or inappropriately tax-driven scheme. It is considered that the proposed restructure meets the requirements of a genuine restructure of an ongoing business under section 328-430 of the ITAA 1997.