Private ruling: Small business restructure rollover provisions
Date of advice: 10 July 2017
Published: October 2017
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the company meet all conditions outlined under the small business restructure rollover provisions (Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)) in relation to the proposed transfer of shares held on the Australian stock exchange to a Unit Trust? | A1: No

Relevant facts and circumstances: The company operates an unlisted private investment company The company has issued XXXXX A class shares to various shareholding entities. The company has issued XXXXX B class shares to various shareholding entities. The company’s aggregate turnover is less than $2 million. The company owns the following assets: ● cash held in a number of bank accounts ● shares held on the Australian stock exchange (ASX). The company undertakes the buying and selling of shares for both short and long terms gains. The company does not provide any services to any other entities or to the general public. The company wishes to operate it investment activities though a Unit Trust where all the units held in the Unit Trust are held in the same proportion as the shareholdings in the company. The company is seeking to restructure its business structure into a Unit Trust as it better fits its business as the structure will provide more adequate asset protection and allow for the efficient distribution of profits. Both the company and the proposed Unit Trust will be small business entities (SBE) as outlined under section 328-110 of the ITAA 1997 in the year in which the transfer of the business assets of the company will take place. The company and the proposed Unit Trust will meet the residency requirements as outlined under section 328-445 of the ITAA 1997. Both the company and the Unit Trust will choose to apply the rollover relief under subdivision 328-G of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 328-430 | Income Tax Assessment Act 1997 section 328-440 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 subsection 152-40(1) | Income Tax Assessment Act 1997 subsection 152-40(4) | Income Tax Assessment Act 1997 subparagraph 152-40(4)(b)(i) | Income Tax Assessment Act 1997 subparagraph 152-40(4)(b)(ii)

Reasons for decision: Summary: All the legislative references that follow refer to the Income Tax Assessment Act 1997 . A restructure rollover 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 rollover under this subdivision in relation to the assets transferred under the transaction. For the purpose of the small business restructure rollover (SBRR) provisions, one of the tests which must be met is the active asset test; that is, the asset being transferred must be a CGT asset that is an active asset (section 152-40) Subparagraph 152-40(4)(b)(i) specifically states that the following CGT assets cannot be active assets; (b) shares in a company, other than: (i) shares in a widely held company that are covered by subsection (3), (3A) or (3B) and held by a CGT concession stakeholder of the company; and This above legislation is supported by the comments noted in the Capital gains tax concessions for small business 2016 (available at ato.gov.au ) where it states that 'the following CGT assets cannot be active assets (even if they are used, or held ready for use, in the course of carrying on a business): 'shares and trust interests in widely-held entities, unless held by a CGT concession stakeholder in the widely-held entity.’ | Detailed Reasoning - Application to the company’s circumstances: As noted above, for the SBRR to apply the asset being transferred must be a CGT asset that is an active asset. In this case, the relevant CGT asset is a share; that is, those shares held by the individual shareholders of the company and the ASX shares held ready for use, in the course of carrying on the company’s business. We acknowledge your views that the ASX shares held are part of the inventories of the company’s investment and trading activities. However, the ASX shares themselves cannot be active assets unless they are held by a CGT concession stakeholder (subparagraph 152-40(4)(b)(i)) as noted above. In this case, the company cannot be a CGT concession stakeholder in respect of the shares traded or invested on the ASX. Accordingly, the ASX shares fall within the exception under subparagraph 152-40(4)(b)(i) and are not considered to the active assets. As subparagraph 328-430(1)(d)(i) has not been met, we have not given consideration to other criteria set out in section 328-430 of the ITAA 1997. Accordingly, the restructure rollover will not be available with respect to the proposed transfer of the ASX shares as part of the proposed business restructure.