Private ruling: CGT- Restructure Rollover -Subdivision 328-G –Genuine restructure of a business
Published: March 2018
Ruling period: 1 July 2016 to 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the Small Business Restructure Roll-over contained in Subdivision 328-G of the Income Tax Assessment Act 1997 be available to Entity A and Entity B in relation to the business restructure from Entity A to Entity B? | A1: Yes

Relevant facts and circumstances: Entity A carried on a business (the Business). The owners of Entity A were Entity F and Entity E. It was desired by the owners of Entity A to restructure the Business. The primary objectives of the restructure were: ● Facilitate capital raising for the Business to fund the next growth cycle of the Business ● Move to a structure which is more suitable for establishing an employee share scheme The assets used in the course of carrying on the Business were transferred from Entity A to Entity B. Entity B is a company. The Business assets were at all material times (and continue to be) used in carrying on the business. The owners of Entity B are Entity F and Entity E in the same proportions of their ownership of Entity A. The restructure has provided a contemporary structure that enables the Business to adapt to changed conditions in order to increase productivity and profit. The restructure was completed by the parties on XX/XX/2017. Entity A’s annual turnover is less than $10 Million and it was an Australian resident for tax purposes in the 2016-17 financial year. Entity B’s annual turnover is less than $10 Million and it was an Australian resident for tax purposes in the 2016-17 financial year. Both Entity A and Entity B will choose to apply the restructure rollover under paragraph 328- 430(1)(f).

Relevant legislative provisions: Income Tax Assessment Act 1997 Paragraph 328-430(1)(a), | Income Tax Assessment Act 1997 Paragraph 328-430(1)(b), | Income Tax Assessment Act 1997 Paragraph 328-430(1)(c), | Income Tax Assessment Act 1997 Paragraph 328-430(1)(d), | Income Tax Assessment Act 1997 Paragraph 328-430(1)(e) and | Income Tax Assessment Act 1997 Paragraph 328-430(1)(f).

Reasons for decision: Summary: All the legislative references that follow refer to the Income Tax Assessment Act 1997 . A small business restructure roll-over (SBRR) under Subdivision 328-G 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 the transferee meet the residency requirements in section 328-445 for an entity; and (f) the transferor and the transferee choose to apply a roll-over under this subdivision in relation to the assets transferred under the transaction. Paragraph 328-430(1)(a) of the ITAA 1997 states a 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 the transaction is, or is a part of, a genuine restructure of an ongoing business. The Law Companion Guidelines LCG 2016/3 explains the meaning of the term ‘genuine restructure of an ongoing business’. Paragraph 6 states a 'genuine restructure of an ongoing business' is one that could be reasonably expected to deliver benefits to small business owners in respect of their efficient conduct of the business. It can encompass a restructure of the way in which business assets are held where that structure is likely to have been adopted had the business owners obtained appropriate professional advice when setting up the business. However, it is a composite phrase emphasising that the Small Business Restructure Roll-over (SBRR) is not available to small business owners who are restructuring in the course of winding down or realising their ownership interests. Paragraph 7 states the following features indicate that a transaction is, or is part of, a 'genuine restructure of an ongoing business': 1. It is a bona fide commercial arrangement undertaken in a real and honest sense to: i. facilitate growth, innovation and diversification ii. adapt to changed conditions, or iii. reduce administrative burdens, compliance costs and/or cash flow impediments. 2. 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. 3. The economic ownership of the business and its restructured assets is maintained. 4. The small business owners continue to operate the business through a different legal structure. For example, there is: i. continued use of the transferred assets as active assets of the business ii. continuity of employment of key personnel, and iii. continuity of production, supplies, sales or services. 5. It results in a structure likely to have been adopted had the small business owners obtained appropriate professional advice when setting up the business. Paragraph 11 states the SBRR contemplates restructures to or from more than one entity. Accordingly, there may be circumstances where not all business assets that are necessary for the continued operation of an ‘ongoing business’ are transferred. For example, small business owners may decide to transfer plant and equipment to a new entity, but leave real property in the original entity. On its own, this is not a factor that is inconsistent with the conclusion that a restructure is a ‘genuine restructure of an ongoing business’. Further, LCG 2016/3 provides examples of situations where a genuine restructure of an ongoing business are undertaken for reasons of asset protection and retaining of essential employees (refer to paragraphs 16 to 23 and 24 to 29 of examples 1 and 2 respectively of the LCG 2016/3). | Detailed Reasoning - Application to Entity A and Entity B circumstances: In this case, the purpose of the restructure was to move the Business to a new structure to facilitate capital raising for the Business. The restructure will also enable Entity B to establish employee share schemes. The Business assets were owned by Entity A, and therefore ultimately owned Entity F and Entity E. The restructure was designed to reflect the original ownership of Entity A. The ultimate economic owners of Entity B mirror the previous ultimate economic owners of Entity A. Further, the business 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. Accordingly, based on the information provided it is considered that the restructure meets the definition of a ‘genuine restructure of an ongoing business’ under paragraph 328-430(1)(a).

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions.