Private ruling: Small business restructure rollover
Date of advice: 4 July 2017
Published: November 2017
Ruling period: Year ended 30 June 20ZZ
Date scheme commenced: 1 July 20YY

Ruling: Q1: Does the proposed transfer of assets from company A to individual A qualify for relief under subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Does the proposed transfer of assets from company B to individual B qualify for relief under subdivision 328-G of the ITAA 1997? | A2: Yes. | Q3: Does the proposed transfer of assets from company C to individual C and individual D qualify for relief under subdivision 328-G of the ITAA 1997? | A3: Yes. | Q4: Do the proposed transfers, or the proposed variation to the shares constitute a scheme to which Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies? | A4: No. | Q5: Does the fact that company A elected to apply the consolidation rules deny access to subdivision 328-G of the ITAA 1997? | A5: No.

Relevant facts and circumstances: The company is a multi-generational company relating to a family. As a result of the death of certain individuals and succession planning the company utilised the consolidation procedures and various subsidiaries were established. The rights attached to shares were varied and each class of shares provides special rights in relation to each subsidiary. Since 200X the structure has remained in place with: ● The assets of company A being used in the business of a Family Trust (controlled by individual A and their spouse) ● Since 1 July 20XX individual B has used the assets of company B in their business ● Since 1 July 20XX individual C and D have allowed a partnership use of the assets of company C The Family Trust carries on a business. Its aggregated turnover for the year ended 30 June 20YY was under $2 million. Individual B carries on a business. Their aggregated turnover for the year ended 30 June 20YY was under $2 million. The partnership, of which individual C is a partner, carries on a business. Its aggregated turnover for the year ended 30 June 20YY was under $2 million. Another partnership, of which individual D is a partner, carries on a business. Its aggregated turnover for the year ended 30 June 20YY will be under $2 million. The assets of company A will be transferred to individual A. The assets of company B will be transferred to individual B. The assets of company C will be transferred to individual C and D. The assets will continue to be used by the businesses of the transferees in the same way as they were used by those businesses before the transfer.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 152-10(1A) | Income Tax Assessment Act 1997 Subdivision 328-G | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 section 974-70 | Income Tax Assessment Act 1936 Part IVA

Reasons for decision: Detailed Reasoning - Questions 1, 2 and 3: Subdivision 328-G of the ITAA 1997 proves 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. 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. Subsection 152-10(1A) of the ITAA 1997 states that: The conditions in this subsection are 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 a 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. Genuine restructure Law Companion Guidelines 2016/3 set out the commissioner’s view on what constitutes a genuine restructure of an ongoing business. Paragraph 6 states that to be genuine it must be so that it could be reasonably be expected to deliver benefits to small business owners in respect of their efficient conduct of the business. Connected with The meaning of a connected entity is defined under section 328-125 of the ITAA 1997 which states as follows: An entity is connected with another entity if: (a) either entity controls the other entity in the way described in this section; or (b) both entities are controlled in a way described in this section by the same third entity. With regard to companies, you may establish control via either the right to distribution control rule (paragraph 328-125(2)(a) of the ITAA 1997) or the voting power control rule (paragraph 328-125(2)(b) of the ITAA 1997). Paragraph 328-125(2)(a) of the ITAA 1997 provides that you control a company if you, your affiliates, or you together with your affiliates beneficially own, or have the right to acquire the beneficial ownership of, interests in the company that carry between them the right to receive a percentage (the control percentage ) that is at least 40% of any distribution of income or capital by the company. Paragraph 328-125(2)(b) of the ITAA 1997 provides that you control a company if you, your affiliates, or you together with your affiliates 'beneficially own, or have the right to acquire the beneficial ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage ) that is at least 40% of the voting power in the company’. Equity interest An equity interest is given meaning by section 974-70 which states that: A scheme gives rise to an equity interest in a company if, when the scheme comes into existence: (a) The scheme satisfies the equity test in subsection 974-75(1) in relation to the company because of the existence of an interest; and (b) The interest is not characterised as, and does not form part of a larger interest that is characterised as, a debt interest in the company, or a connected entity of the company, under Subdivision 974-B. The equity tests in section 974-75(1) are: A scheme satisfies the equity test in this subsection in relation to a company if it gives rise to an interest set out in the following table: | Detailed Reasoning - Interest: 1 An interest in the company as a member or stockholder of the company. .......... 2 An interest that carries a right to a variable or fixed return from the company if either the right itself, or the amount of the return, is in substance or effect *contingent on aspects of the economic performance (whether past, current or future) of: (a) the company; or (b) a part of the company's activities; or (c) a connected entity of the company or a part of the activities of a connected entity of the company. The return may be a return of an amount invested in the interest. .......... 3 An interest that carries a right to a variable or fixed return from the company if either the right itself, or the amount of the return, is at the discretion of: (a) the company; or (b) a connected entity of the company. The return may be a return of an amount invested in the interest. .......... 4 An interest issued by the company that: (a) gives its holder (or a connected entity of the holder) a right to be issued with an equity interest in the company or a *connected entity of the company; or (b) is an interest that will, or may, convert into an equity interest in the company or a connected entity of the company. Affiliate An affiliate is, according to section 328-130 of the ITAA 1997, an individual or a company who acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company. Subsection 152-47(1) of the ITAA 1997 applies if one entity (the asset owner) owns a CGT asset and either the asset is used (or held ready for use) in the course of carrying on a business in an income year by another entity (the business entity) or the asset is inherently connected with a business that is carried on in an income year by another entity. Under subsection 152-47(2) of the ITAA 1997, in determining whether the business entity is an affiliate of, or is connected with, the asset owner, a spouse or child of the individual is taken to be an affiliate of an individual. If an entity is an affiliate of another entity as a result of subsection 152-47(2) of the ITAA 1997, then the spouse or child is, in addition, taken to be an affiliate of the individual for the purposes of section 328-125 of the ITAA 1997. Active asset The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997. Under subsection 152-40(1) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997. Safe harbour rule For the purposes of paragraph 328-430(1)(a) of the ITAA 1997 a transaction is, or is a part of, a genuine restructure of an ongoing business if, in the 3 year period after the transaction takes effect: ● 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 ● those significant assets continue to be active assets; and ● there is no significant or material use of those significant assets for private purposes. | Detailed Reasoning - Application to your circumstances: Transfer of assets held by company A to individual A In this case we accept that individual A controls the company as the shares they holds provide them with more than 40% of the voting power. The company owns 100% of the shares in company A; therefore individual A controls company A. Individual A also controls the Family Trust. The Family Trust is a small business entity that uses the assets of individual A to operate its business. As a result of the relationships described above, we accept that the company, individual A, company A and the Family Trust are connected entities. We accept that the transfer of assets between company A and individual A will not have the effect of materially changing the ultimate economic ownership of the assets. Further the assets transferred will continue to be used in the course of carrying on a business by the Family Trust. Therefore, we accept that the conditions of the restructure rollover have been satisfied. Transfer of assets held by company B to individual B Individual B’s shares in the company do not provide them more than 40% of the voting power of all shares issued in the company. Individual B’s shares carry 100% of the rights in respect of the shares held by the company in company B. Individual B is purported to hold an equity interest in company B exceeding 40% pursuant to the equity tests in section 974-75(1) item 2, 3 and 4. Individual B, as the holder of the shares, is entitled to all dividends paid by company B (item 2), as well as the capital on winding up of company B (item 3). The rights attached to the shares held by individual B also confer the power, pursuant to the rights described in the company Resolution Schedule, to cause the company to transfer its shares in company B to individual B (item 4). We are prepared to accept that while individual B has no direct control of the company, because of the rights attached to the shares they holds in the company, and as a result of the equity arrangement described above, individual B has indirect control of company B. Individual B operates a business as a sole trader and has a turnover of less than $2 million. The business operation uses the assets held by company B. We accept that the transfer of assets between company B and individual B will not have the effect of materially changing the ultimate economic ownership of the assets. Further the assets transferred will continue to be used in the course of carrying on a business by individual B. Therefore, we are prepared to accept that the conditions of the restructure rollover have been satisfied Company C, individual C, individual D and the partnerships. We accept that individual C and D control company C based on the above discussion however they each hold 50% of the voting power. One partnership operates a business using the assets held by company C. As individual C has a 50% interest in the partnership they controls the partnership. Further as both company C and the partnership are controlled by individual C they are connected entities. Further as individual D has a 50% interest in the other partnership they control this partnership. Further as both company C and the other partnership are controlled by individual D they are connected entities. We accept that the transfer of assets between company C and individual C and D will not have the effect of materially changing the ultimate economic ownership of the assets. The assets will also continue to be used in the course of carrying on a business by the partnership Therefore, we are prepared to accept that the conditions of the restructure rollover have been satisfied. | Detailed Reasoning - Question 4: Part IVA of the ITAA 1936 is a general anti-avoidance provision. It gives the Commissioner the discretion to cancel a 'tax benefit' that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. In order for Part IVA of the ITAA 1936 to apply, the following requirements must be satisfied: ● there must be a scheme as defined by section 177A of the ITAA 1936, ● there must be a tax benefit obtained in connection with the scheme, as defined by section 177C of the ITAA 1936, and ● the scheme must be one to which Part IVA applies, as determined by section 177D of the ITAA 1936, where it would be objectively concluded that the taxpayer (or any other person involved in the scheme) had the sole or dominant purpose of entering into the scheme to obtain the tax benefit. While an arrangement existed from which a tax benefit may accrue, it is accepted the dominant purpose of the arrangement was not to gain that benefit such that Part IVA would apply. | Detailed Reasoning - Question 5: The restructure rollover does not exclude consolidated entities.