Private ruling: Small business restructure roll-over - Ultimate economic ownership test
Date of advice: 13 March 2026
Published: 11 May 2026
Ruling period: Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the requirement in paragraph 328-430(1)(c) of the Income Tax Assessment Act 1997 be satisfied in respect of the proposed restructure of the partnership and its business? | A1: No

Relevant facts and circumstances: The partners (Partners) in the Partnership propose restructuring the business conducted by the Partnership by transferring assets to a newly established company (NewCo). The proposed sole shareholder of NewCo will be a newly established discretionary trust (NewTrust). NewTrust will be discretionary as to both capital and income of the trust. The Partners will be the named beneficiary of NewTrust and other potential beneficiaries will include entities such as members of the named beneficiaries' families and other related entities. The trustee for NewTrust will make a family trust election (FTE) in accordance with Schedule 2F of the Income Tax Assessment Act 1936 , if necessary. The FTE would specify one of the Partners as the individual whose family group is to be taken into account in relation to the election.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 328-G | section 328-430 | paragraph 328-430(1)(c) | section 328-440 | subparagraph 328-440(a)(ii)

Reasons for decision: Detailed Reasoning - Detailed reasoning: Paragraph 328-430(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) provides one of the requirements to be satisfied to be eligible for the small business restructure roll-over in Subdivision 328-G. The roll-over is available in relation to an asset that, under a transaction, an entity (the transferor ) transfers to one or more other entities ( transferees ) if all the requirements set out in section 328-430 are met. Paragraph 328-430(1)(c) of the ITAA 1997 requires that 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. The phrase 'ultimate economic ownership' is not defined in the ITAA 1997. However, paragraphs 1.29 and 1.30 of the Explanatory Memorandum to the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 assist in explaining the meaning of the phrase, as follows: 1.29 The ultimate economic owners of an asset are the individuals who, directly or indirectly, beneficially own an asset. 1.30 Ultimate economic ownership of an asset can only be held by natural persons. Therefore, where a company, partnership or trust owns an asset it will be the natural person owners of the interests in these interposed entities that will ultimately benefit economically from that asset. Where ownership of the relevant assets passes to or from a discretionary trust, the requirement in paragraph 328-430(1)(c) of the ITAA 1997 would generally not be able to be met. Under ordinary legal concepts, a beneficiary of a discretionary trust is not entitled to income or capital of the trust until the trustee exercises their discretion to distribute income or to make an appointment of capital: Commissioner of Stamp Duties (NSW) v. Buckle (1998) 192 CLR 226 (Buckle). A beneficiary of a discretionary trust only has a right to require the trustee to consider whether or not to exercise their discretion. Instead, a beneficiary of a discretionary trust generally has a 'mere expectancy' in the income or capital of a trust and does not have an interest in possession: Gartside v. Inland Revenue Commissioner [1968] AC 553 (Gartside). Section 328-440 of the ITAA 1997 provides an alternative ultimate economic ownership test that provides additional flexibility to small family businesses that are carried on through, or transferred to, non-fixed trusts, as follows: 328-440 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; (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 in paragraph (a); 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. Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters , among other things, provides examples involving the alternative ultimate economic ownership test in paragraph 328-430(1)(c). Example 12 of LCR 2016/3 is as follows: | Detailed Reasoning - Example 12: Alternative ultimate economic ownership test: Facts 103. Victoria and Elizabeth are two unrelated individuals operating a business in partnership. 104. Each of Victoria and Elizabeth is a beneficiary of a different discretionary trust. The trustees of these unrelated trusts have been making income and capital distributions to various other beneficiaries for many years. 105. The partners wish to dissolve the partnership and transfer all of the relevant business assets to a newly-incorporated company Newco. The shares in Newco are held by the trustees of the discretionary trusts. Relevant considerations 106. The SBRR is restricted to circumstances where there has not been a material change in the ultimate economic ownership of assets as a result of the transfer of the assets. 107. A transfer of assets from or to a discretionary trust will generally not meet the requirements for ultimate economic ownership on their facts. Where it is not possible to demonstrate that ultimate economic ownership of the assets has been maintained, an alternative ultimate economic ownership test is available. 11 108. The alternative ultimate economic ownership test provides additional flexibility to small family businesses carried on through non-fixed trusts by allowing them to meet the requirement to maintain proportionate ultimate economic ownership of the transferred assets if the ultimate economic ownership of those assets remains within the family. 109. The alternative test is only available when assets are included in the property of a non-fixed trust that is a family trust 12 , that is, a non-fixed trust for which there is a family trust election in force. 110. The transfer of business assets to Newco does not result in the inclusion of assets in the property of either trust. The assets of Newco are not affected by any obligation of either Trustee and these assets are not trust property. Conclusion 111. The alternative test is not available in respect of the transaction and the SBRR is not available for Victoria and Elizabeth to restructure in this way. Relevant footnotes: [11] Paragraph 328-430(1)(c) and section 328-440. [12] Refer to requirements in paragraph 328-440(a). As proposed, the assets of the Partnership will be transferred to a newly incorporated company (NewCo). NewCo will be owned by a new discretionary trust (NewTrust), which will be discretionary as to both income and capital of the trust. Applying Buckle and Gartside (discussed above), the beneficiaries of NewTrust will not have an interest in possession in the transferred assets. The beneficiaries of NewTrust will not beneficially own the assets, either directly or indirectly as required by paragraph 328-430(1)(c) of the ITAA 1997. As such, the ultimate economic ownership of the assets cannot be determined. However, it is necessary to consider whether the alternative ultimate economic ownership test can apply to satisfy the requirement. Just after the proposed transfer takes effect, the transferred assets will not be included in the property of NewTrust as required by subparagraph 328-440(a)(ii) of the ITAA 1997. As shown in Example 12 in LCR 2016/3, this means that the alternative ultimate economic ownership test will not apply in respect of the assets transferred to NewCo. This would be the case whether or not the trustees for NewTrust make a family trust election in respect of the trust. Consequently, it is considered that the requirement in paragraph 328-430(1)(c) of the Income Tax Assessment Act 1997 will not be satisfied in respect of the proposed restructure of the Partnership and the transfer of its assets.