Private ruling: Income tax ~ Capital gains tax ~ Restructure Roll-over ~Subdivision 328-G ~Genuine restructure of an ongoing business
Date of advice: 27 September 2017
Published: February 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the roll-over outlined under section 328-430 of the Income Tax Assessment Act 1997 (ITAA1997) be available in relation to the transfer of business assets of the company to a wholly owned subsidiary company where there will be no change in shareholding in the new company within a 3 year period from the date of the rollover transaction? | A1: Yes. | Q2: Will the roll-over outlined under section 328-430 of the ITAA1997 be available in relation to the transfer of business assets of the company to a wholly owned subsidiary company where there is a minor change in the shareholding in the new company within a 3 year period from the date of the rollover transaction by way of transfer of a small proportion of equity from the existing shareholders of the company to existing key employees subject to performance? | A2: Yes. | Q3: Will the roll-over outlined under section 328-430 of the ITAA1997 be available in relation to the transfer of business assets of the company to a wholly owned subsidiary company where there is a minor change in the shareholding in the new company within a 3 year period from the date of the rollover transaction by way of issuing a small proportion of new shares to existing key employees subject to performance? | A3: Yes.

Relevant facts and circumstances: A company was incorporated in 1990s. The company is resident for Australian tax purposes. The company provides servicing to its clients. The company‘s annual turnover is less than $2 Million The company holds the following passive assets: ● listed shares on the ASX ● managed investments ● commercial property. The company also holds fixed assets, plant and goodwill. The company will transfer its fixed assets, plant and goodwill (the business assets) of the business to a new wholly owned subsidiary company (Sub Co). Both the company and Sub Co will choose to apply the rollover relief under paragraph 328-430(1)(f) of the ITAA 1997. The shareholder of Sub Co will be the company. Sub Co is resident for Australian tax purposes. Sub Co will operate from the same business premises and conduct its business of providing services in the same manner as the company. Person A will continue as the managing director and principal advisor of Sub Co and is not intending to retire in the near future. All employees of the company will continue their employment in the business of Sub Co. The company is seeking to restructure its business structure for the following reasons: ● To quarantine the passive investment assets from the business assets to pursue an option for the employees to acquire equity in the business. ● For asset protection purposes so the long term passive investments owned by the company are not exposed to the same business risks as the company. ● To facilitate growth in its business in the future by providing tangible incentives to its key employees such as minor shareholding of not more than XX% within the first three years in Sub Co, so as to able to retain its current employees. ● To ensure the current key employees continue to service the growing client base of the business. ● To reduce the risk of highly skilled, qualified and experienced employee of the company setting up their own business in competition.

Relevant legislative provisions: Income Tax Assessment Act 1997 Paragraph 328-430(1)(a) | Income Tax Assessment Act 1997 Paragraph 328-430(1)(a) | Income Tax Assessment Act 1997 Paragraph 328-430(1)(b) | Income Tax Assessment Act 1997 Paragraph 328-430(1)(c) | Income Tax Assessment Act 1997 Paragraph 328-430(1)(d) | Income Tax Assessment Act 1997 Paragraph 328-430(1)(e) | Income Tax Assessment Act 1997 Paragraph 328-430(1)(f)

Reasons for decision: Summary: All the legislative references that follow refer to the Income Tax Assessment Act 1997 . A small business restructure roll-over (SBRR) 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 roll-over under this subdivision in relation to the assets transferred under the transaction. 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': 1. It is a bona fide commercial arrangement undertaken in a real and honest sense to: i. facilitate growth, innovation and diversification ii. adapt to changed conditions, or iii. reduce administrative burdens, compliance costs and/or cash flow impediments. 2. 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. 3. The economic ownership of the business and its restructured assets is maintained. 4. The small business owners continue to operate the business through a different legal structure. For example, there is: i. continued use of the transferred assets as active assets of the business ii. continuity of employment of key personnel, and iii. continuity of production, supplies, sales or services. 5. 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’. Further, LCG 2016/3 provides examples of situations where a genuine restructure of an ongoing business are undertaken for reasons of asset protection and retaining of essential employees (refer to paragraphs 16 to 23 and 24 to 29 of examples 1 and 2 respectively of the LCG 2016/3). | Detailed Reasoning - Application to the company’s circumstances: In this case, the company intends to separate the ownership of the company’s active assets to Sub Co. The ultimate economic owners of Sub Co (the transferee) will be the same as the owners of the company (the transferor). We acknowledge your contentions in respect of the quarantining of the passive investment assets from the business assets are for asset protection. However, in this case as business assets are still held within a company before and after the restructure they would still be exposed to the same business risks. However, from the information provided the primary purpose of the proposed restructure of transferring the company’s active assets to Sub Co is to facilitate the growth in its business by providing tangible incentives in the future to retain its highly skilled, qualified and experienced employees. In addition, the proposed restructure is to assist in servicing the growing client base of the business and to enhance business performance and enable the business to adapt to changing conditions in its market place in order to increase productivity and profit. Further, 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. While under the proposed restructure the business cannot access the safe harbour rule in section 328-435 as the business is considering issuing new shares or transferring minor shareholdings of their existing shareholder to its key employees within a three year period after the date of the proposed restructure, this does not in itself affect the transaction as part of ‘genuine restructure of an ongoing business’ Accordingly, based on the information provided it is considered that the proposed restructure meets the definition of a ‘genuine restructure of an ongoing business’ under paragraph 328-430(1)(a).