Private ruling: Small Business Restructure Roll-over
Date of advice: 11 December 2019
Published: February 2020
Ruling period: Year ending 30 June 2020 | Year ending 30 June 2021
Date scheme commenced: 1 July 2019

Ruling: Q1: Does the proposed transfer of land from the individual taxpayer to new discretionary trusts qualify for relief under subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Does the land retain its pre-CGT status post transfer subdivision 328-G of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: You do not carry on a business individually but do operate a business in a partnership. You own land. You acquired the land prior to 20 September 1985. The land has been used in a partnership primary production business since the date of purchase. The business carried on by the partnership is solely for the benefit of the partners and their respective families. The partnership is financially dependent on the land and the partners are financially dependent on the partnership business and act in concert to ensure that the partnership is run in such a way as to meet financial requirements. You also use other land in the partnership business. There is no formal lease in place in respect to the use of the land by the partnership due to the close intertwined relationship between you and the partnership. The aggregated turnover for the partnership is less than $2 million for the current and foreseeable future financial years. Each block of land will be transferred to a new discretionary trust, each with a separate corporate trustee. You will be a shareholder in each of the corporate trustees. Each new discretionary trust will have a family trust election in place with you as the specified individual. You will be an appointor of the discretionary trusts. You are separating the land for asset protection and to ensure that only one piece of land is used as security for any loans that the partnership gets for business purposes. The restructure will allow you to borrow funds, while protecting your assets, in order to expand your business in various ways such as doing activities off farm and expanding the primary production activities with the help of the next generation coming through. You will be a primary beneficiary of each of the new discretionary trusts. All entities party to the restructure are Australian Residents for tax purposes. The land will continue to be used by associated entities in the carrying on of the primary production business activities. The transferor and the transferees will choose to apply the roll-over in relation to the assets transferred under the transactions. You will not be passing control or ownership of the land to anyone else in the foreseeable future.

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

Reasons for decision: Summary: You satisfy the requirements for the small business restructure roll-over. The proposed transfer of the land from you to three new discretionary trust will qualify for roll-over relief under Subdivision 328-G of the ITAA 1997. The land will retain its pre-CGT status following the proposed transfer. | Detailed Reasoning - Question 1: The small business restructure roll-over in 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. For the roll-over to be available the requirements set out in subsection 328-430(1) of the ITAA 1997 must be met. Subsection 328-430(1) provides: 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 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. Law Companion Ruling 2016/3 explains the meaning of the term '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 are transferring the land for asset protection purposes and to ensure that only one piece of land is used as security for any loans that the partnership gets for business purposes. The restructure will allow you to borrow funds, while protecting your assets, in order to expand your business in various ways such as doing activities off farm and expanding the primary production activities with the help of the next generation coming through. The transfer of the land to the trustees is not considered restructuring in the course of winding down or realising your ownership interests. It is also considered that the restructure is not an artificial or inappropriately tax-driven scheme. Accordingly, the 'genuine restructure of an ongoing business' requirement in paragraph 328-430(1)(a) of the ITAA 1997 is satisfied. Connected with an entity that is small business entity Section 328-125 of the ITAA 1997 provides the meaning of connected with an entity. An entity is connected with another entity if both entities are controlled in a way described in this section by the same third entity (paragraph 328-125(1)(b)). In your case, as you and your child have a XX% interest in the partnership you each control the partnership. Therefore the partnership is connected with each partner, and you and your child are each connected with the partnership. 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 (subsection 328-125(3) of the ITAA 1997). You are transferring the land to the new discretionary trusts as well as being a shareholder in the corporate trustees. You will also be an appointor and primary beneficiary of each of the discretionary trusts. You are considered to have sufficient influence over the trustee of each of the trusts such that you will control them. As you control the partnership and each of the discretionary trusts the discretionary trusts are connected with the partnership (a small business entity). As such, subparagraph 328-430(1)(b)(iii) of the ITAA 1997 will be satisfied as the transferor (you) and the transferee (the new discretionary trusts) will be connected with an entity that is a small business entity (the partnership). Ultimate Economic Owner One of the other requirements which must be satisfied 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. It is the Commissioner's view that a purely discretionary trust could not satisfy the ultimate economic ownership test without relying on the special rule in section 320-440 of the ITAA 1997. This is because the economic interests that the objects of such a trust have in an asset are not fixed in proportion, and would depend on the trustee exercising their discretion. For section 328-440 of the ITAA 1997 to apply the assets (the land) must be included in the property of a family trust either just before the transaction or just after it (paragraph 328-440(a)). In addition to this 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 and every individual who, just after the transfer takes effect, has the ultimate economic ownership of the asset is a member of that family group. In this case a family trust election will be in place just after the transactions for the respective trust(s) with you as the specified primary individual. Therefore just after the transaction takes effect, the assets (the land) will be included in the property of a non-fixed trust that is a family trust. As paragraphs 328-440(b) and (c) of the ITAA 1997 and subparagraph 328-440(a)(ii) will be satisfied, paragraph 328-430(1)(c) will also be satisfied. Eligible Assets Subparagraph 328-430(1)(d)(ii) of the ITAA 1997 is satisfied if the CGT asset (the land) at the time the transfer takes effect, is an active asset in relation to which subsection 152-10(1A) of the ITAA 1997 is satisfied in that income year. Subsection 152-10(1A) of the ITAA 1997 is satisfied in relation to the land 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 e) 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 partnership 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 also satisfied as 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. Subparagraph 328-430(1)(d)(ii) of the ITAA 1997 is therefore satisfied. Residency requirement Paragraph 328-430(1)(e) of the ITAA 1997 requires that each party to the transfer meets the residency requirement. In this case as you and the discretionary trusts are Australian residents for tax purposes this requirement is satisfied. Both the transferor and each transferee to choose to apply a roll-over Paragraph 328-430(1)(f) requires the transferor and each transferee to choose to apply a roll-over under this Subdivision in relation to the assets transferred under the transaction. This requirement will be satisfied as you and the trusts will choose to apply the roll-over. Subsection 328-430(2) is also satisfied as no party to the transfer is an exempt entity or complying superannuation entity. Conclusion In your case the Commissioner has found that the transfer of the land to the trusts is not restructuring in the course of winding down or realising its ownership interests. It is also considered that the restructure is not an artificial or inappropriately tax-driven scheme. As such, it is considered that the proposed restructure satisfies the requirements in subsection 328-430(1) of the ITAA 1997. | Detailed Reasoning - Question 2: Section 328-460 of the ITAA 1997 outlines the effect of small business restructures on acquisition times of pre-CGT assets. For the purposes of applying subsection 328-455(1) to the asset as a CGT asset (other than a revenue asset) that is a pre-CGT asset, a transferee is taken to have acquired the asset before 20 September 1985. In this case the assets were acquired by you before 20 September 1985 and as such will maintain their pre-CGT status in the transferee(s) hands.