Private ruling: Is the roll-over outlined under section 328-430 of the Income Tax Assessment Act 1997 available to you
Date of advice: 20 September 2016
Published: November 2016
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the roll-over outlined under section 328-430 of the Income Tax Assessment Act 1997 (ITAA 1997) be available in relation to the proposed restructure from a sole trader to a company which is wholly owned by a family trust? | A1: No.

Relevant facts and circumstances: You operate a business as a sole trader. The business meets the conditions to be a Small Business Entity (SBE). In order to reduce the risk of liability, to provide asset protection, to improve the business operations and to provide a more relevant structure for future business operations you are intending to change your business structure from a sole trader to a company by transferring the business assets to the company. Once the company is operating it will be conducting the business using the same premises, equipment, employees and suppliers. The proposed company will meet the conditions to be a SBE. The only shareholder of the company will be a discretionary (family) trust. A family trust election will be put in place to ensure every beneficiary is a member of the family group. You will be a member and the test individual of the family trust. You and the proposed company are Australian residents.

Relevant legislative provisions: 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 . For the restructure roll-over provided for by Subdivision 328-G to be available, there is a requirement that the restructure does not have the effect of materially changing which individual has, or which individuals have, the ultimate economic ownership of the business assets (paragraph 328-430(1)(c)). Where ownership passes to a discretionary trust, this requirement would generally not be able to be met. However, section 328-440 contains an alternative ultimate economic ownership test for discretionary trusts. It states: | Detailed Reasoning - Section 328-440 Ultimate economic ownership - discretionary trusts: For the purposes of paragraph 328-430(1)(c), 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; or (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 above; 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. You are currently the economic owner of all the assets in the business. You intend to transfer all the assets into a company. All the company's shares will be owned by your family trust. That is, you are intending to change your business structure from a sole trader to a company that is wholly owned by your family trust. The proposed restructure would not meet the normal ultimate economic ownership test in paragraph 328-430(1)(c) as you are the individual who currently has the sole ultimate economic ownership in the business assets but after the restructure this would not be the case as the ultimate economic ownership would rest with all the beneficiaries of the family trust. That is, the ultimate economic ownership of the assets will not be maintained. Therefore the proposed restructure would have to meet the alternative ultimate economic ownership test provided by section 328-440 in order for the restructure roll-over to be available. For section 328-440 to apply the assets must be included in the property of the family trust either just before the transaction or just after it and that is not the case here. Before the transaction the assets were included in your property and just after the transaction the assets will be included in the property of the company. It is noted that the family trust will wholly own the company, and therefore it could be argued that in effect the assets will form part of the property of the family trust. However, the wording in subparagraph 328-440(a)(ii) is very specific and we do not consider that it can be interpreted that broadly. After the restructure the assets will be included in the property of the company rather than the family trust. It is the shares in the company that will be included in the property of the family trust. As subparagraph 328-440(a)(ii) will not be met, the restructure roll-over will not be available with respect to the proposed restructure.