Private ruling: Is the transfer of class of assets by an entity to a new entity considered a genuine restructure of an on-going business
Date of advice: 12 August 2016
Published: September 2016
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the transfer of some assets held by an entity to a new entity be considered a genuine restructure of an on-going business under paragraph 328-430(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: Entity 1 currently owns 100% of entity 2. The two entities form the group. The group collectively owns and operates a business. Entity 1 currently owns all of a class of assets within the group. The group is seeking additional capital from third party investors to expand its operations into new markets. To present itself as an attractive investment for potential investors the group needs to restructure into a more appropriate structure for the continued operations of the group by ensuring that its assets are better protected from business risks. Entity 1 is an Australian resident and will be a small business entity (SBE) for the year ended 30 June 2017. Entity 1 intends to separate the ownership of a certain class of assets from the ownership of its operating entities in order to: (1) Obtain better asset protection over the class of assets used by the group; and (2) Facilitate raising capital from external investors by allowing them the choice to invest in the particular class of assets only, the business operations only, or both. This separation of ownership will be achieved by transferring the class of assets into a new entity (entity 3) that will be owned by the same owners and in the same proportions as the current ownership of entity 1. Entity 3 will lease the class of assets back to the group and derive income. Entity 3 will be an Australian resident and based on its projected turnover it will be a SBE for the year ended 30 June 2017.

Relevant legislative provisions: Paragraph 328-430(1)(a) of the Income Tax Assessment Act 1997

Reasons for decision: Summary: 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': It is a bona fide commercial arrangement undertaken in a real and honest sense to: facilitate growth, innovation and diversification adapt to changed conditions, or reduce administrative burdens, compliance costs and/or cash flow impediments. 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. 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. For example, there is: continued use of the transferred assets as active assets of the business continuity of employment of key personnel, and continuity of production, supplies, sales or services. 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'. In this case entity 1 intends to separate the ownership of a class of assets to a newly-formed entity. The ownership of entity 3 (the transferee) will be the same as the ownership of entity 1 (the transferor). It is clear that entity 1 is transferring the class of assets to the new entity to quarantine and protect a vital asset of the group, the class of assets. This will make the business a more attractive investment for potential investors which are being sought in order for the business to expand its operations into new markets. Restructuring in this way also assists in facilitating external investment by allowing investors the choice to invest in the class of assets only, the business operations only, or both. It is apparent that 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. It is therefore considered that the proposed restructure meets the definition of a 'genuine restructure of an ongoing business' under paragraph 328-430(1)(a) of the ITAA 1997.