Private ruling: Small business restructure rollover
Date of advice: 3 February 2021
Published: March 2021
Ruling period: Year ending 30 June 2021
Date scheme commenced: 1 July 2020

Ruling: Q1: Does the proposed transfer of land from the individual Taxpayer to a new discretionary trust qualify for relief under subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The Taxpayer is an individual who does not carry on a business. The Taxpayer owns land. The land is used by a discretionary trust (Trading Trust) to conduct business. The Trading Trust is a small business entity. The Taxpayer controls the Trading Trust. The Trading Trust has a family election in place. The Taxpayer intends to transfer the land to a new discretionary trust (Holding Trust). The Taxpayer will control the Holding Trust. The Holding Trust will not conduct any other activities apart from holding the land. The Holding Trust will have a family trust election in place. All entities party to the restructure are Australian Residents for tax purposes. Both the transferor and each transferee will choose to apply the rollover in relation to the assets transferred under the transactions. The business will continue after the transfer of the land and there is no intention to wind up the business. The restructure is being undertaken for asset protection purposes.

Relevant legislative provisions: Division 271 of the Income Tax Assessment Act 1936 | Subdivision 272-D of the Income Tax Assessment Act 1936 Subsection 152-10(1A) of the Income Tax Assessment Act 1997 | Paragraphs 152-10(1A)(a) of the Income Tax Assessment Act 1997 | Paragraphs 152-10(1A)(b) of the Income Tax Assessment Act 1997 | Paragraphs 152-10(1A)(d) of the Income Tax Assessment Act 1997 | Subdivision 328-G of the Income Tax Assessment Act 1997 Section 328-110 of the Income Tax Assessment Act 1997 | Section 328-125 of the Income Tax Assessment Act 1997 | Subsection 328-125(3) of the Income Tax Assessment Act 1997 | Section 328-430 of the Income Tax Assessment Act 1997 | Paragraph 328-430(1)(a) of the Income Tax Assessment Act 1997 | Subparagraph 328-430(1)(b)(iii) of the Income Tax Assessment Act 1997 | Paragraph 328-430(1)(c) of the Income Tax Assessment Act 1997 | Subparagraph 328-430(1)(d)(ii) of the Income Tax Assessment Act 1997 | Paragraph 328-430(1)(e) of the Income Tax Assessment Act 1997 | Paragraph 328-430(1)(f) of the Income Tax Assessment Act 1997 Subsection 328-430(2) of the Income Tax Assessment Act 1997 | Section 328-440 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: The proposed transfer of land from the Taxpayer to the proposed Holding Trust satisfies the requirements to access the rollover under Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997) and is available to the parties of the transfer. | Detailed Reasoning - Detailed reasoning: The rollover 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 rollover several conditions under section 328-430 of the ITAA 1997 must be satisfied. | Detailed Reasoning - Genuine restructure - 328-430(1)(a) of the ITAA 1997: Paragraph 328-430(1)(a) of the ITAA 1997 requires that the transaction is, or is 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) provides guidance on whether a transaction will be part of a 'genuine restructure of an ongoing business'. LCR 2016/3 states that 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. Paragraph 7 of LCR 2016/3 outlines the following features that indicate a transaction is, or is part of, a genuine restructure of an ongoing business: • it is a bona fide commercial arrangement undertaken to facilitate growth, innovation and diversification, to adapt to changed conditions, or to reduce administrative burdens and compliance costs • it is authentically restructuring the way the business is conducted, as opposed to a divestment or a 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, and • it results in a structure likely to have been adopted had the small business owners obtained appropriate professional advice when setting up the business. However, the restructure of an ongoing business by a business owner is not genuine if it is done in the course of winding down to transfer wealth between generations or realising their ownership interests. A restructure is likely to not be a genuine restructure of an ongoing business if: • it is a preliminary step to facilitate the economic realisation of assets, or takes place in the course of winding down to transfer wealth between generations • it effects an extraction of wealth from the assets of the business for personal investment or consumption • it creates artificial losses or brings forward their recognition • it effects a permanent non-recognition of gain or creates artificial timing advantages, and/or • there are other tax outcomes that do not reflect economic reality. The transaction is a genuine restructure. As such, s328-430(1)(a) of the ITAA 1997 is satisfied. | Detailed Reasoning - Small business entities, affiliates or connected entities - 328-430(1)(b) of the ITAA 1997: Subparagraph 328-430(1)(b)(iii) of the ITAA 1997 requires each party to the transfer to be connected with a small business entity for that income year. The Trading Trust is a small business entity under section 328-110 of the ITAA 1997. The Taxpayer and the Trading Trust are connected to the Trading Trust which is a small business entity. Therefore, subparagraph 328-430(1)(b)(iii) of the ITAA 1997 is satisfied. | Detailed Reasoning - Ultimate economic ownership - 328-430(1)(c) of the ITAA 1997: Paragraph 328-430(1)(c) of the ITAA 1997 requires that the transaction does not materially change the ultimate economic ownership of the asset. The ultimate economic ownership does not change as a result of the transfer. Section 328-440 of the ITAA 1997 is satisfied, and consequently paragraph 328-430(1)(c) of the ITAA 1997 is also satisfied. | Detailed Reasoning - Active asset - 328-430(1)(d) of the ITAA 1997: As subparagraph 328-430(1)(b)(iii) of the ITAA 1997 applies, subparagraph 328-430(1)(d)(ii) of the ITAA 1997 requires that the asset be an active asset that satisfies subsection 152-10(1A) of the ITAA 1997 in that income year. Subsection 152-10(1A) of the ITAA 1997 is satisfied and consequently subparagraph 328-430(1)(d)(ii) of the ITAA 1997 is also satisfied. | Detailed Reasoning - Residency requirements - 328-430(1)(e) of the ITAA 1997: Paragraph 328-430(1)(e) of the ITAA 1997 requires each party to the transfer to meet the residency requirements under section 328-445 of the ITAA 1997. The individual is an Australian resident, and the trusts are resident trusts for CGT purposes, satisfying section 328-445 of the ITAA 1997 and subsequently paragraph 328-430(1)(e) of the ITAA 1997. | Detailed Reasoning - Applying the rollover - 328-430(1)(f) of the ITAA 1997: Paragraph 328-430(1)(f) of the ITAA 1997 requires each party to the transfer to apply the rollover in relation to the asset. All parties have chosen to apply the rollover, therefore satisfying this section. | Detailed Reasoning - Exclusion from rollover - 328-430(2) of the ITAA 1997: No entities are exempt entities or complying superannuation funds and as such, the rollover is available to them in accordance with subsection 328-430(2) of the ITAA 1997. | Detailed Reasoning - Conclusion: The proposed transfer of land from the Taxpayer to the Holding Trust satisfies the requirements to be eligible for the small business restructure rollover under Subdivision 328-G of the ITAA 1997.