Private ruling: Small Business Rollover Relief
Date of advice: 7 August 2018
Published: September 2018
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020
Date scheme commenced: Not yet commenced

Ruling: Q1: Does the proposed restructure result in the ultimate economic ownership of the assets being maintained for the purposes of subsection 328-430(1)(c) of the Income Tax Assessment Act 1997 (ITAA 97)? | A1: Yes | Q2: Assuming that the answer to Question 1 is favourable, will small business restructure rollover relief under subdivision 328-G of the ITAA 97 apply to the proposed restructure to deem there to be no direct income tax consequences? | A2: Yes

Relevant facts and circumstances: BP Working Trust BP Working Trust (BPWT) has carried on a business for Australian income tax purposes for the past 20 years. BPWT carries on a business as ‘BP Works’. BP Works commenced in 199A. BJP Pty Ltd (BJP) is the current trustee for BPWT. BJP is an Australian resident for income tax purposes. BPWT has made a family trust election (FTE) naming Mr BP as the specified individual. BPWT, its affiliates and connected entities have an aggregate turnover of less than $10 million for the 20XX financial year. BJ Pink Ptd Ltd BJ Pink Pty Ltd is an Australian propriety company with two shareholders: a) Mr Tom Smith ATF BJ Pink Trust – 99% b) Mr BP BJ Pink Trust has made an FTE naming Mr BP as the specified individual. Proposed Restructure The proposed restructure involves transferring the practice carried on by BPWT to a newly incorporated entity (NewCo) owned by BJ Pink Pty Ltd. The primary asset of BPWT to be subject to the proposed restructure is the goodwill of the practice. The proposed restructure is anticipated to be undertaken in the 20XX income year. Carrying on a business through a trust has created a number of unnecessary complexities and limitations to the growth of BPWT. This has resulted in the desire to restructure the business into a company. The structural change into a corporate structure will allow for substantial growth as the investment and working capital requirements will be easier to manage. The following steps are proposed to be undertaken in order to give effect to the proposed restructure: Step 1: BJ Pink Pty Ltd will incorporate NewCo as a wholly owned subsidiary Step 2: BJ Pink Pty Ltd will fund NewCo by way of debt or equity Step 3: NewCo will purchase the CGT assets associated with the business of BPWT for their current market values. Step 4: BPWT and NewCo will both choose to obtain Small Business Restructure Rollover under subdivision 328-G of the ITAA 97.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 108-5 | section 152-40 | subdivision 328-G | section 328-110 | subsection 328-430(c) | section 328-435 | section 328-440 | section 328-445 | Income Tax Assessment Act 1936 section 95(2)

Reasons for decision: Summary: The proposed restructure will result in the ultimate economic ownership of the assets being maintained for the purposes of subsection 328-430(1)(c) of the ITAA 97. | Detailed Reasoning - Detailed reasoning: Subdivision 328-G of the ITAA 97 provides tax-neutral consequences for a small business entity that restructures the ownership of the assets of the business, without changing the ultimate economic ownership of the assets. Ultimate economic ownership – discretionary trusts For the restructure roll-over provided for by Subdivision 328-G to be available, there is a requirement that the restructure does not have the effect of materially changing which individual has, or which individuals have, the ultimate economic ownership of the business assets (paragraph 328-430(1)(c) of the ITAA 97). Where ownership passes to or from a discretionary trust, this requirement would generally not be able to be met. However, section 328-440 of the ITAA 97 contains an alternative ultimate economic ownership test for discretionary trusts. It states: | Detailed Reasoning - Section 328-440 Ultimate economic ownership – discretionary trusts: For the purposes of paragraph 328-430(1)(c), a transaction does not have the effect of changing the ultimate economic ownership of an asset, or any individual’s share of that ultimate economic ownership, if: (a) either or both of the following applies: (i) just before the transaction took effect, the asset was included in the property of a non-fixed trust that was a family trust; or (ii) just after the transaction takes effect, the asset is included in the property of a non-fixed trust that is a family trust; and (b) 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 above; and (c) every individual who, just after the transfer takes effect, has the ultimate economic ownership of the asset is a member of that family group. Just before the transaction takes effect the assets are held by BPWT, a family trust. As subsection 328-440(a) of the ITAA 97 is an ‘either or both’ test, it is enough that the taxpayer satisfies paragraph 328-440(a)(i) of the ITAA 97. Before the transfer, every individual holding ultimate economic ownership of the assets, subject to the transfer, was a member of the BPWT family group with Mr BP as the specified individual. There are no beneficiaries outside this group capable of holding the ultimate economic ownership of the assets. Hence, subsection 328-440(b) of the ITAA 97 is satisfied. Subsection 328-440(c) of the ITAA 97 is also satisfied as the ultimate economic ownership of the asset remains with those individuals within the family group. The explanatory memorandum (EM) of the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 provides: 1.29 To be eligible for the roll-over the transaction must not have the effect of changing the ultimate economic ownership of transferred assets in a material way. The ultimate economic owners of an asset are the individuals who, directly or indirectly, beneficially own an asset. 1.30 Ultimate economic ownership of an asset can only be held by natural persons. Therefore, where a company, partnership or trust owns an asset it will be the natural person owners of the interests in these interposed entities that will ultimately benefit economically from that asset. In this case, even though the asset is transferred to NewCo, we look through to the natural persons who will ultimately benefit economically from the asset. These natural persons remain Mr BP and the individual members of the family group. We note that this outcome is the same even though, after the transfer, Mr BP will hold a 1% share in BJP Pty Ltd in his individual capacity. | Summary: The small business restructure rollover relief under subdivision 328-G of the ITAA 97 will be available to the proposed restructure. | Detailed Reasoning - Detailed reasoning: Small Business Restructure Roll-over provides optional rollover relief for the transfer of assets as part of a change of legal structure without a change in the ultimate legal ownership of the assets pursuant to Subdivision 328-G of the ITAA 97. The roll-over relief is available for gains and losses that arise on the transfer of CGT assets, trading stock, revenue assets and depreciating assets. In order to be eligible for the roll-over the following requirements under section 328-430 of the ITAA 97 must be satisfied: 328-430(1) 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. | Detailed Reasoning - Genuine Restructure: The Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters 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. BPWT currently carries on a business. The limitations of carrying on the business in the current structure include: ● Inability to retain profit: BPWT is required to distribute its profit to its beneficiaries, making it difficult to retain working capital to grow the business; ● Financing: obtaining debt financing through a discretionary trust entails additional requirements, lenders are hesitant to issue loans as trust relationships are inherently complex and loan security requirements are more onerous; ● Investment: Operating as a family trust limits who can invest in the business as it is limited to the members of the family group. Transferring the assets into a company structure will overcome these limitations; it will facilitate growth of the business and reduce administrative burdens. As the reasons BPWT will undertake the restructure are consistent with the features listed in paragraph 7 of LCR 2016/3, it is considered that the transaction is part of a genuine restructure of an on-going business. Safe Harbour Rule A safe harbour rule is provided at section 328-435 of the ITAA 97 with regard to the transaction being a genuine restructure. 328-435 …a transaction is, or is part of, a genuine restructure of an on-going business if, in the 3 year period after the transaction takes effect: (a) There is no change in ultimate economic ownership of any of the significant assets of the business (other than trading stock) that were transferred under the transaction; and (b) Those significant assets continue to be active assets; and (c) There is no significant or material use of those assets for private purposes. At this time, BPWT and NewCo intend to meet these criteria. Assuming these three criteria are satisfied in the three years after the transaction takes effect, BPWT and NewCo would satisfy the ‘genuine restructure’ requirement by using the safe harbour rule, irrespective of whether paragraph 328-430(1)(a) of the ITAA 97 is satisfied. | Detailed Reasoning - Parties to the transfer: Paragraph 328-430(1)(b) of the ITAA 97 lists four criteria, both parties to the transfer must meet at least one of these criteria to be eligible for roll-over relief. Entities must be a Small Business Entity (SBE), an affiliate of an SBE, connected to an SBE or a partner in a partnership that is an SBE. Section 328-110 of the ITAA 97 gives the meaning of SBE. 328-110 …You are a small business entity for an income year (the current year) if: (a) You carry on a business in the current year; and (b) One or both of the following applies: (i) You carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million; (ii) Your aggregated turnover for the current year is likely to be less than $10 million. According to calculations provided to the Commissioner, BPWT had an aggregated turnover of $X for the 20XX-YY income year. Accordingly, BPWT would be considered a small business entity in the 20YY-ZZ income year under section 328-110 of the ITAA 1997. Note: If assets are transferred in the 20ZZ-AA income year the relevant aggregated turnover will be the 20YY-ZZ income year. Once the assets are transferred to NewCo it will carry on the business, previously carried on by BPWT. As NewCo is not yet carrying on a business, subparagraph 328-110(1)(b)(ii) of the ITAA 97 may apply. You have indicated it is anticipated to have a turnover of less than $10 million in the 20ZZ year. If the assets are transferred in the 20ZZ-AA income year, that will be the relevant year for the purposes of subparagraph 328-110(1)(b)(ii) of the ITAA 97. Given both BPWT and NewCo are SBEs, subparagraph 328-430(1)(b)(i) of the ITAA 97 is satisfied. | Detailed Reasoning - Ultimate Economic Ownership: Refer to Question 1. | Detailed Reasoning - CGT Assets: To be eligible for small business restructure roll-over an asset transferred must be a CGT asset, other than a depreciating asset, at the time of the transfer. CGT assets are defined in section 108-5 of the ITAA 1997 to include any kind of property or a legal or equitable right that is not property. Subsection 108-5(2)(b) of the ITAA 97 specifically lists goodwill as a CGT asset. Given that subparagraph 328-430(1)(b)(i) of the ITAA 97 applies in these circumstances, subparagraph 328-430(1)(d)(i) of the ITAA 97 must be satisfied, that is the assets must be active assets. Active asset is defined in section 152-40 of the ITAA 97 as: 152-40(1) A CGT asset is an active asset at a time if, at that time: (a) You own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by: (i) you; or (ii) your affiliate; or (iii) another entity that is connected with you; or (b) if the asset is an intangible asset – you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you. The active assets BPWT intends to transfer to NewCo will meet the requirements of subparagraph 328-430(1)(b)(i) of the ITAA 97. It is noted that depreciating assets are specifically excluded in this provision. | Detailed Reasoning - Residency: Both the transferor and transferee of the assets must meet the residency requirements for an entity in section 328-445 of the ITAA 97. 328-445 For the purposes of paragraph 328-430(1)(e), the residency requirement for an entity is that: (a) if the entity is an individual or a company--the entity is an Australian resident; or (b) if the entity is a trust--it is a * resident trust for CGT purposes; or (c) if the entity is a partnership (other than a * corporate limited partnership)--at least one of the partners is an Australian resident; or (d) if the entity is a corporate limited partnership--it is, under section 94T of the Income Tax Assessment Act 1936, a resident for the purposes of the * income tax law. The transferor of the assets is a discretionary trust and hence must be a resident for CGT purposes. According to section 95(2) of the ITAA 36, trusts are considered Australian residents for an income year if a trustee of the trust estate was a resident at any time during the income year, or the central management and control of the trust estate was in Australia at any time during the income year. BJP Pty Ltd, the trustee of BPWT, was incorporated in Australia and is considered a resident for tax purposes. Hence, BPWT is a resident trust for CGT purposes and meets the residency requirements of section 328-445 of the ITAA 97. The transferee of the assets is a company. NewCo will be incorporated in Australia and will be considered an Australian resident for tax purposes. The requirements for roll-over relief in paragraph 328-430(1)(e) of the ITAA 97 will be satisfied. | Detailed Reasoning - Rollover Election: Small Business Rollover Relief is optional for complying entities. For the relief to take effect both the transferor and transferee must elect to apply the rollover. Both BPWT and NewCo intend to make this election when the transfer takes effect. | Detailed Reasoning - Conclusion: As both entities will meet the requirements of section 328-430 of the ITAA 1997 in relation to the proposed transfer, the Small Business Rollover Relief can be applied.