Private ruling: Small business restructure
Date of advice: 20 March 2024
Published: 29 April 2024
Ruling period: Year ending 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Is the small business restructure roll‐over relief available to you in accordance with section 328‐430 of the Income Tax Assessment Act 1997 (ITAA1997) in relation to the proposed transaction? | A1: No.

Relevant facts and circumstances: Background You are an individual taxpayer. Individual 1 is your spouse. Individual 2 is your child. Individual 3 is your child's spouse. Trust A was settled on a specified date. The original trustees of Trust A were you and Individual 1. You were the original appointor. A Family Trust Election for Trust A was completed in respect of a specified year and Individual 2 was nominated as the specified individual. On a specified date you and Individual 1 retired as trustees of Trust A and subsequently Company A was appointed as trustee of Trust A. On DD MM YYYY you retired as appointor and Individual 2 and Individual 3 replaced you as joint appointors. The specified beneficiaries of Trust A are your and Individual 1's children. Company A is a private company incorporated on a specified date. You and Individual 1 acquired a specified number of shares in Company A on a specified date. On a specified date you and Individual 1 each transferred a specified number of shares to Individual 2 and Individual 3. You, Individual 1, Individual 2 and Individual 3 now each hold the same number of shares in Company A. You are all current Directors of Company A. Trust A operates a specified business. You own land collectively known as The Lands. The Lands are a specified number of hectares in size. You own a specified percentage of The Lands in your own right. The remainder of The Lands is owned by Trust B and this parcel of land was acquired at a specified date. It is a specified number of hectares in size and you estimate its value to be over $xxx. This land is not part of the proposed transfer and will remain held by Trust B. Within The Lands there are a number of distinct parcels of land utilised by you and Trust A to conduct various activities. Parcel A was acquired by you in a specified year. You use this land personally to conduct specified activities and it may be sold in the future to reduce specified debt. Parcel A is not part of the proposed transfer and you will continue to hold the land and conduct activities on this land in your own right. The other parcels were acquired by you in various percentages from various family members. You hold specified licences that have been issued by the relevant government department. Each licence is used in the business carried on by Trust A. You provided financial statements for Trust A for the year ended 30 June 20xx. Business Activities There are various specified activities conducted on The Lands subject to the proposed transfer. Trust A reports some income from the activities. You report income from the balance of activities. Your family has conducted specified activities on The Lands for a significant period of time. The activities have been conducted by various structures and entities throughout this time. On a specified date certain assets and liabilities were transferred to Trust A, such that Trust A operated the business in its own right. You have made The Lands available on an informal basis to the entity carrying on the business at any point in time. Currently this is the Trust A. During the period of ownership, The Lands have been used to produce income either directly or by a related entity. You are involved in the business as specified. Individual 2 is involved in the business as specified. You and Individual 1 live on the property. Over the past specified number of years Trust A has spent approximately $xxx on specified infrastructure. During the specified calendar year specified infrastructure was constructed. The cost of this development was funded from borrowings Trust A obtained from its financier, Lender 1. A significant portion of The Lands is utilised for activities conducted by you. The activities commenced approximately a specified number of years ago. The time commitment involved varies significantly from year to year, and day to day dependent on the activities and demands arising at any given point in time. Your key areas of the business are as specified. At this point in time there are no intentions to acquire further land. However, the Directors intend to continue to increase the area of certain activities. By doing so this will expand the specified activities of Trust A. Financing The current facility with Lender 1 is $xxx. The facility expires on a specified date. The security and guarantees currently held by Lender 1 to secure all of Trust A's obligations to Lender 1 were set out in a letter of offer on a specified date. Lender 1 has specified policies on the security it will accept against its facilities. Lender 1 has verbally indicated they will continue to provide a finance facility to Trust A for the operation of its business activities. Specified land titles held will not be required to be provided to Lender 1. At this point in time there are no other investments contemplated by you or Trust A that would require further financing from Lender 1. Proposed Transaction You will transfer specified parcels of The Lands and associated licences to 4 new discretionary trusts. There will be nil consideration for the transfer. The land will be split to reflect the suitability of the land used for different business activities. The transfer will be subject to the ongoing leasing of the specified land to Trust A and the continuation of the specified business by Trust A. The licences will be transferred to the relevant new land-owning trust dependent on their use. Each of the titles that constitute The Lands subject to the transfer will continue to be an active asset, used in the business conducted by Trust A, or in the business of the new land trust. Each business activity will continue to be operated on the same land as they currently are. Trust A will continue to operate the specified activities. The other specified activities will be conducted by the new relevant discretionary trust. Trust A is not transferring any of its assets as part of the restructure. The trustees of the 4 new discretionary trusts will be a new trustee company. You and Individual 2 will each be a director and will each hold 50% of the shares in the trustee company. The beneficiaries of the 4 new discretionary trusts will be named and will be relatives of you, including Individual 1, Individual 2 and Individual 3. The appointors of the 4 new discretionary trusts will be you and Individual 2 jointly. The 4 new discretionary trusts will not sell or dispose of any of the transferred assets for a minimum of 3 years following the transfer. There is no significant use or material private use of any significant assets being transferred. Each of the titles that constitute The Lands subject to transfer will continue to be used in the business conducted by the Trust A or in the business of the new land trust. The trustees of the 4 new discretionary trusts will: • Make a family trust election in which the specified test individual will be you; and • In the event the trust has a tax loss, or no net income for the year ended 30 June 20xx, make a nomination pursuant to section 152-78 in respect of you being controller of the trust for the income year The aggregated turnover for the purposes of Division 328 of the ITAA 1997 of the group (including Trust A and all other connected entities and affiliates) is more than $xxx but less than $xxx for the year ended 30 June 20xx. The aggregated turnover for the purposes of Division 328 of the ITAA 1997 of the 4 new discretionary trusts (including Trust A and all other connected entities and affiliates) will be more than $xxx but less than $xxx for the year ended 30 June 20xx. The trustees of the 4 new discretionary trusts will be Australian residents. You (transferor) and the 4 new discretionary trusts (transferees) will each choose to apply the small business restructure rollover (SBRR). Reasons for the Proposed Transaction Under the current structure, a specified percentage of The Lands is held in your personal name. Holding highly valuable, key business assets in the name of an individual is not best practice. There is no separate legal protection, meaning the entire land and your personal assets are at risk from a claim against the landholder. The activities carried out on The Lands pose various specified risks. It enables legal segregation of separate business activities and assets, and geographical specified businesses, reducing the contagion risk of litigation against one arm of the existing land assets owned by you from the others. Should one landowner (being one of the new discretionary trusts) be subject to a claim for damages, any claim will be limited to the assets of that land owning trust. Under the current ownership structure, all the lands would be exposed to any adverse damages claim. It enables more flexibility with capital and debt structuring. One of the objectives of the restructure is to allow for land security to be provided to a financier other than Lender 1. Under the current facility Lender 1 has effective control of all the land via a personal guarantee provided by you. This limits the borrowing capacity in your own name, and ability to take on different additional sources of finance. It also exposes your personal assets via the guarantee you must provide to the bank to maintain debt that has funded business use assets including the land. In addition, any finance sought from Lender 1 for specified activities is limited. This places a limitation on business growth and diversification for you, as you are unable to diversify your investments, through significant investment in businesses or assets outside the specified space. Lender 1 requires your personal guarantee as well as the security of the land held in your own name for the debt facility, Lender 1 is unwilling to "ringfence" security and limit the security held over a debt to particular assets held by a single individual/entity. The proposed transfer to a land ownership structure where the parcels of land are separated according to their activities will provide the opportunity for finance to be obtained for particular activities with the land on which those activities are carried out being offered as security, while the remained of the land assets stay outside the security net. This will also provide you with greater asset protection over your personal assets, as they will not be caught in the security net, and you will not have to be a guarantor over debt for the business in your own name.

Relevant legislative provisions: Income Tax Assessment Act 1997 subdivision 328-G | Income Tax Assessment Act 1997 section 328-430 | Income Tax Assessment Act 1997 s ubsection 328-430(1)

Reasons for decision: Summary: Subdivision 328-G allows for tax-neutral consequences for a small business that restructures the ownership of the assets of the business without changing their ultimate economic ownership. Subsection 328-430(1) outlines the conditions to be met for the roll-over relief to be available: a) The transfer of the asset is, or is part of, a genuine restructure of an ongoing business; and b) 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; and c) There is no material change in the ultimate economic ownership of the transferred asset; and d) The asset being transferred is an active asset of the relevant small business entity at the time of the transfer; and e) Both the transferor and each transferee are residents of Australia; and f) Both the transferor and each transferee choose to apply the roll-over. All conditions need to be met for the roll-over to be applied. | Detailed Reasoning - Genuine Restructure: Paragraph 328-430(1)(a) requires that the transaction is, or 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. Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters (LCR 2016/3) explains the meaning on the term 'genuine restructure of an ongoing business'. At paragraph 7 of LCR 2016/3 features indicative of a genuine restructure are provided as follows: • It is a bona fide commercial arrangement undertaken in a real and honest sense to o facilitate growth, innovation and diversification o adapt to changed conditions, or o 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: o continued use of the transferred assets as active assets of the business o continuity of employment of key personnel, and o 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. At paragraph 10 factors which tend to indicate that a restructure is not a 'genuine restructure of an ongoing business' include: • where the restructure is a preliminary step to facilitate the economic realisation of assets, or takes place in the course of a winding down to transfer wealth between generations • where the restructure effects an extraction of wealth from the assets of the business (including accumulated profits) for personal investment or consumption or otherwise designed for use outside of the business • where artificial losses are created or there is a bringing forward of their recognition • the restructure effects a permanent non-recognition of gain or the creation of artificial timing advantages, and/or • there are other tax outcomes that do not reflect economic reality. Example 1 of LCR 2016/3 provides an example of a genuine restructure for asset protection purposes. Example 1 in LCR 2016/3 (paragraph 17 to 23), involves an individual (Mark) who is expanding his sole trader bookkeeping business into the riskier operations of financial advice. After being sued by a client for negligent financial advice, Mark has decided he is not prepared to conduct his business on his own account. Mark is transferring assets from the original entity (himself) to quarantine his business from his personal assets. This is a benefit to Mark in terms of his ability to grow the riskier operations and enhance its profits. The restructure is a response to his business needs, facilitates further growth and is not unduly tax driven. The economic ownership of the business is maintained. Accordingly, the 'genuine restructure of an ongoing business' condition is satisfied. Example 6 in LCR 2016/3 (paragraph 53 to 59), provides one example of succession planning. As stated in paragraph 59 where the restructure is undertaken to facilitate an inter-generational transfer of wealth as opposed to a bona fide restructure od an ongoing business the rollover will not be available. | Detailed Reasoning - Application to your circumstances: Having regard to all of the facts and circumstances surrounding the proposed restructure and the factors that would indicate that a transaction is, or is part of, a 'genuine restructure of an ongoing business', it is considered that the proposed restructure is not a 'genuine restructure of an ongoing business' as contemplated by the legislation and does not satisfy the requirement in paragraph 328-430(1)(a). You have proposed to transfer a specified number of parcels of land and various licences held by yourself to four new discretionary trusts based on use of the land. You have stated the reasons for the transfer relate to risks to you as the landowner and to enable more flexibility with capital and debt structuring such as the ability to allow for land security to be provided to a financier other than Lender 1. Although both the lands in a specified business are subject to the same risk you are only proposing to transfer one of the parcels from your own name to a new discretionary trust. Parcel A land will stay in your name and would presumably still carry the risk of the land and the business being under your name. The business activities have been operating, via a separate entity, for a significant period of time and the circumstances can be distinguished from example 1 of LCR 2016/3 which considers asset protection. In the example, the business operator's restructure was in response to an emerging business need that occurred as a result of the expansion of their activities and enhance his profits. The catalyst for restructuring in the example is the business commencing riskier financial advice operations and the transaction allows the business operations to be separated from the individual's personal assets. In your case the specified activities on The Lands have been operating for over a specified number of years within your family. You have been involved in some capacity since at least a specified year and the business activities are currently conducted by a separate trust. Based on the information provided the restructure does not appear to be in response to business needs, a change in activities or any other specific happening. Further, in the current structure the business operations are already conducted by an entity separate to you as the land holder. Additionally, there have been a number of ownership changes during your involvement that could have facilitated the move into a different structure for "asset protection" purposes however this was not done. Similarly, the specified activities have been operated for a significant period of time and no evidence of any expansion or change in the operations has been provided. There are also assets held by the Trust A used in its business which would be directly at risk of any action however none of these assets are proposed to be transferred. In respect of financing, Lender 1 requires your personal guarantee as well as the security of the land held in your own name for the debt facility. Lender 1 is unwilling to "ringfence" security and limit the security held over a debt to particular assets held by a single individual/entity. You will still be required to provide personal guarantee and Lender 1 will still seek security of land or personal guarantees it considers necessary for any facility it provides. The land and specified rights owned by you, other than the specified lands, are already provided directly as security along with security and guarantees provided by entities other than Trust A. Simply transferring this land to another trust will not remove the current security conditions or the personal guarantee and will not alter the practices of Lender 1. Your own personal ability to borrow or invest in other activities are your own affairs and not that of the business. You also have not provided any evidence of any investments in serious contemplation, or contemplation at all requiring new finance outside of facilities provided by Lender 1. Therefore, at this stage any new financing arrangement is purely speculative and hypothetical. The specified lands are not impacted by the Lender 1 facility. The specified lands are not held as security and Lender 1 is not seeking the lands to be held as security. Additionally, the land currently held as security far exceeds the value of the current facility held by Lender 1 and as such the specified land is in no danger in respect of the Lender 1 facility. This land is free to provide as security in its own right for any new investment and does not need to be transferred to a separate trust to facilitate this. Additionally, there are clear elements of succession planning. This is evidenced by specified changes to Trust A and Company A. There has been no evidence provided of the restructure of the ongoing business being undertaken to facilitate growth, innovation and diversification, adapt to changed conditions, or reduce administrative burdens, compliance costs and/or cash flow impediments. Nor is there any evidence of restructuring the way in which the business is conducted. Further, the proposed restructure introduces additional costs and administrative complexities by adding more entities into the group structure. On the balance of the facts and circumstances, the proposed transfers are more of a generational transfer of control and wealth as opposed to a current business need. As provided in Example 6 of LCR 2016/3 where the transfer of assets is facilitating an inter-generational transfer of wealth as opposed to a bona fide restructure of an ongoing business the rollover will not be available. In the absence of other reasons, "asset protection" is not considered to deliver benefits in respect of, or to enhance, efficiency of the ongoing business. In the absence of specific diversification proposals or plans the ongoing business has in place, the proposed restructure does not demonstrate the contended efficiency benefits will arise. The proposed restructure will not change the type of entity in which the ongoing business is conducted and will not involve any changes to the way the ongoing business is conducted. As such, it is considered that the proposed restructure is not being undertaken to enhance the efficiency of the ongoing business. The Commissioner does not accept your contention that the proposed restructure is a genuine restructure of an ongoing business that is expected to deliver benefits to the business owners in respect to their efficient conduct of the business by providing greater asset protection. The facts and circumstances provided do not provide clear understanding of the commercial rational but rather being an initial step in a broader reorganisation of your affairs. As the Commissioner is of the opinion the "genuine" restructure condition as not been met the remaining conditions have not been considered and the rollover under section 328-430 will not be available.

Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.