Private ruling: Small business restructure rollover
Date of advice: 17 July 2018
Published: September 2018
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the transfer of shares held by you in the company to a newly settled discretionary trust satisfy the requirements of the Small Business Restructure Rollover in accordance with Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: You are the sole shareholder of the one ordinary share in the company. You have no children. The company was incorporated in early 20XX. The ordinary share held by you will be transferred to a newly settled discretionary trust (the trust) for its cost, $X. The trust will have a new company as its trustee. You will be the sole director of the trustee company. The trust will have you as a beneficiary. A family trust election will be made, with you as the specified individual. The company has a turnover of less than $10 million. The reason for the proposed restructure is to provide asset protection, flexibility, growth and to ensure a sustainable structure for rapid growth. The company has significant cash assets. One of your goals is for the company to purchase a property. This restructure would potentially separate the business risk and the proposed property and any future assets. All relevant entities involved in the potential restructure are Australian residents. You do not carry on a business.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 328-G | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 108-5(1) | Income Tax Assessment Act 1997 Section 328-125

Reasons for decision: Summary: Subdivision 328-G of the ITAA 1997 allows flexibility for owners of small business entities to restructure their businesses and the way their business assets are held while disregarding tax gains and losses that would otherwise arise. Section 328-430 of the ITAA 1997 discusses when a roll-over is available. There are six basic conditions which must be met for the application of the rollover concessions for the 'Restructures of small businesses' which are contained in subsection 328-430(1)of the ITAA 1997 . This subsection states that: A roll-over under this Subdivision 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 each transferee meet the residency requirement in section 328-445 for an entity; and (f) the transferor and each transferee choose to apply a roll-over under this Subdivision in relation to the assets transferred under the transaction. Genuine Restructure 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. The Law Companion guideline 2016/3 provides further guidance on whether a transaction will be part of a “genuine restructure of an ongoing business”, 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 going forward. It is a composite phrase emphasising that the SBRR is not available to small business owners who are restructuring in the course of winding down or realising their ownership interests. You advised the purpose of the restructure is to: ● Provide asset protection by separating the business risk from any future assets. Small Business entity Section 328-125 of the ITAA 1997 meaning of connected with an entity, provides guidance for direct control of a discretionary trust. Section 328-125(3) of the ITAA 1997 states that an entity controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its *affiliates, or the first entity together with its affiliates. Ultimate economic owner One of the other tests which must be met is the ultimate economic ownership test - paragraph 328-430(1)(c) of the ITAA 1997. The transfer must not have the effect of “materially changing” the ultimate economic ownership of the transferred assets. Where there is more than one ultimate economic owner, each individual share of the share of that ultimate economic ownership must not be materially changed. A transfer of assets from or to a discretionary trust will generally not meet the requirements for ultimate economic ownership. Eligible Assets Section 328-430(1)(d)(ii) of the ITAA 1997 is met if the CGT asset at the time the transfer takes effect is an active asset in relation to which subsection 152-10(1A) ITAA 1997 is satisfied in that income year. Section 152-10(1A) of the ITAA 1997 is satisfied in relation to the CGT asset in the income year if: a) your affiliate or an entity that is connected with you, is a CGT small business entity for the income year; and b) you do not carry on a business in the income year (other than in partnership); and c) if you carry on a business in partnership – the CGT asset is not an interest in an asset of the partnership; and d) in any case – the CGT small business entity referred to in paragraph (a) is the entity that, at the time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(B)) in relation to the CGT asset. In this case you are connected to the company which is a small business entity for the income year so (a) is satisfied. You do not carry on a business or carry on a business in partnership, so (b) and (c) are satisfied. With regards to (d), this is not satisfied. While the CGT small business entity referred to in paragraph (a) is the entity that, at the time in the income year, carries on the business, the CGT asset, being the shares, is not being and cannot be used in the business being carried on. Subparagraph 328-430(1)(d)(ii) of the ITAA 1997 is therefore not met. In your case the Commissioner has found that the shares would not constitute an active asset for the purposes of subdivision 328-G of the ITAA 1997. Therefore it is considered that the proposed restructure does not meet the requirements of section 328-430 of the ITAA 1997.