Private ruling: Small business restructure rollover
Date of advice: 1 December 2021
Published: March 2022
Date scheme commenced: 1 July 2021

Ruling: Q1: Is a roll-over available under section 328-430 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the proposed transfer of shares from the individuals to the Discretionary Trust? | A1: No. This private ruling applies for the following period: Year ending 30 June 2022

Relevant facts and circumstances: The individual and their spouse equally own company A. Since 2016, company A has only derived dividend income from company B. Dividends received by company A in the 2019-20 financial year were approximately $X. All dividends received were taxed and retained in company A. Company A has not paid any dividends to its shareholders since the 2016 financial year. Company B is the operating company and its current turnover is $X million. Company B has two shareholders, 55% of the shares are owned by company A and the remainder are owned by an unrelated person. The operating company's business expanded rapidly into the international market. This expansion has increased the risk to the directors. The individuals intend to transfer their shares in company A to their Discretionary Trust. The proposed transfer will provide asset protection benefits. The Discretionary Trust will make a family trust election in the 2021-22 financial year. The individual will be the specified in the family trust election.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 328-110(1) | Income Tax Assessment Act 1997 subsection 328-115(1) | Income Tax Assessment Act 1997 Subdivision 328-G | Income Tax Assessment Act 1997 section 328-430

Reasons for decision: Summary: Small business restructure roll-over The roll-over under Subdivision 328-G of the ITAA 1997 is designed to facilitate flexibility for owners of small business entities to restructure their business, and the way their business assets are held, while disregarding the tax gains and losses that would otherwise arise. To be eligible for the roll-over several conditions under section 328-430 of the ITAA 1997 must be satisfied. One of the conditions requires each party to the transfer be 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. | Detailed Reasoning - Small business entity: Under subsection 328-110(1) of the ITAA 1997 you are a small business entity for an income year if you carry on a business in the current year and one or both of the following applies: • 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 $10 million • your aggregated turnover for the current year is likely to be less than $10 million Under subsection 328-115(1) of the ITAA 1997 your aggregated turnover for an income year is the sum of your turnover and that of your affiliates and connected entities. | Detailed Reasoning - Connected entities: An entity controls a company if it or its affiliate (or all of them together) own, or have the right to acquire ownership of, equity interest in the company that give at least 40% of the voting power in the company. The meaning of an equity interest includes, but is not limited to, a share in a company. The control tests for the connected with rules are designed to look through business structures that include interposed entities. If an entity (the first entity) directly controls a second entity, and the second entity control (whether directly or indirectly) a third entity, the first entity is also taken to control the third entity. | Detailed Reasoning - Application to your circumstances: In this case the parties to the transfer are the individuals and the Discretionary Trust. The individuals each hold 50% of the shares in company A; therefore they both control company A. Company A holds 55% of the shares in company B; therefore company A controls company B. In accordance with the look through test the individuals are taken to control company B. As company B has a turnover of more than $10 million it cannot be considered a small business entity. As the parties to the transfer are not connected with an entity that is a small business entity the roll-over conditions cannot be satisfied. Therefore the roll-over under Subdivision 328-G of the ITAA 1997 cannot apply to the transfer of the shares from the individuals to the Discretionary Trust.