Private ruling: CGT - small business roll-over
Date of advice: 23 January 2025
Published: 17 March 2025
Ruling period: Year ending 30 June 20YY | Year ending 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Will the proposed transfer of the Properties from Property 1 to Trust A and Trust B (proposed transaction 1) satisfy the alternative test in section 328-440 of the Income Tax Assessment Act 1997 (ITAA 1997) to meet the continuity of ultimate economic ownership requirement in paragraph 328-430(1)(c) of the ITAA 1997 for the small business restructure roll-over in Subdivision 328-G of the ITAA 1997? | A1: No. | Q2: Will the proposed transfer of the Property from Property 1 to New Trust (proposed transaction 2) satisfy the alternative test in section 328-440 of the ITAA 1997 to meet the continuity of ultimate economic ownership requirement in paragraph 328-430(1)(c) of the ITAA 1997 for the small business restructure roll-over in Subdivision 328-G of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: Property 1 (a company) owns 2 commercial properties (Properties). The directors of Property 1 are Individual A and Individual B. Individual B is also the Secretary. Property 1's shares are owned as follows: Table 1: Property 1's shares Entity % owned Individual A as trustee for Trust A XX Individual B as trustee for Trust B XX Trust A Trust A is a discretionary trust. Individual A is the trustee, appointor and specified beneficiary of Trust A. Trust A will make a family trust election (FTE) nominating Individual A as the specified individual for the purposes of Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936). Trust B Trust B is a discretionary trust. Individual B is the trustee, appointor and specified beneficiary of Trust B. Trust B will make a FTE nominating Individual A as the specified individual for the purposes of Schedule 2F of the ITAA 1936. New Trust (Transferee) A new trust (New Trust) is intended to be established with the following attributes: • the New Trust will have a corporate trustee, with Individual A and Individual B as shareholders and directors • the trust deed for the New Trust will name Individual A and Individual B as primary beneficiaries and appointors, and • the New Trust will make a FTE nominating Individual A as the specified individual for the purposes of Schedule 2F of the ITAA 1936 prior to the Transfer. Proposed transaction 1 Property 1 proposes to transfer the Properties to Trust A and Trust B (collectively the Transferees) in the same proportions as those trusts hold shares in Property 1. Proposed transaction 2 Property 1 proposes to transfer the Properties to the New Trust.

Relevant legislative provisions: Acts Interpretation Act 1901 section 2 | Acts Interpretation Act 1901 section 23 | Income Tax Assessment Act 1936 Schedule 2F | Income Tax Assessment Act 1936 section 272-90 | Income Tax Assessment Act 1997 Subdivision 328-G | Income Tax Assessment Act 1997 section 328-430 | Income Tax Assessment Act 1997 subsection 328-430(1) | Income Tax Assessment Act 1997 section 328-440

Reasons for decision: Summary: The proposed transfer of the Properties to New Trust (Proposed transaction 2) will satisfy the alternative test in section 328-440 of the ITAA 1997 to meet the continuity of ultimate economic ownership requirement in paragraph 328-430(1)(c) for the small business restructure roll-over in Subdivision 328-G. The proposed transfer of the Properties to Trust A and Trust B (proposed transaction 1) will not satisfy the alternative test as subparagraph 328-440(a)(ii) requires that the Properties be included in the property of a non-fixed trust just after the transaction takes effect and the Properties will be included in the property of two (multiple) non-fixed trusts. | Detailed Reasoning - Detailed reasoning: A roll-over under Subdivision 328-G of the ITAA 1997 is available in relation to an asset that, under a transaction, an entity (the transferor) transfers to one or more other entities if certain requirements are satisfied (subsection 328-430(1) of the ITAA 1997). One of these requirements is that the transaction must not materially change which individual has, or which individuals have, the ultimate economic ownership of the asset, and if there is more than one such individual - each such individual's share of that ultimate economic ownership (paragraph 328-430(1)(c) of the ITAA 1997). Ultimate economic ownership is not a defined term in the income tax law. The Explanatory Memorandum to the Tax Laws Amendment (Small Business Restructure Roll-over) Act 2016 explains that the ultimate economic owners of an asset are individuals who, directly or indirectly, beneficially own an asset. As the ultimate economic owners can only be individuals, a look through approach applies where a company, partnership or trust owns the asset. Under ordinary legal concepts, a beneficiary of a discretionary trust does not have a beneficial interest in any trust property prior to a distribution or appointment of income or capital by the trustee. The only right of a potential beneficiary of a discretionary trust is to insist on the due administration of the trust. In most cases the nature of a discretionary trust (particularly where there are multiple beneficiaries) will mean that it is not possible to determine the ultimate economic owner of its assets before or after they have been transferred and thereby to show that the ultimate economic ownership has not been materially changed. As such, a transfer of assets from or to a discretionary trust will generally not meet the requirements for ultimate economic ownership in paragraph 328-430(1)(c) of the ITAA 1997. Where it is not possible to demonstrate that ultimate economic ownership of the assets has been maintained, an alternative ultimate economic ownership test is available to discretionary trusts. | Detailed Reasoning - Ultimate economic ownership - discretionary trusts (alternative test): Section 328-440 of the ITAA 1997 contains an alternative ultimate economic ownership test for discretionary trusts. Section 328-440 of the ITAA 1997 states that for the purposes of paragraph 328-430(1)(c) of the ITAA 1997, 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 the requirements in that section are satisfied. Section 328-440 of the ITAA 1997 provides: 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; (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 in paragraph (a); 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. 'Family group' is defined in section 272-90 of the ITAA 1936 with reference to the individual specified in a FTE. Section 328-440 of the ITAA 1997 is satisfied if the assets are included in the property of a family trust (as defined in Schedule 2F to the ITAA 1936) either just before or just after the transaction took effect. Additionally, every individual who had the ultimate economic ownership of the asset just before and just after the transfer must be members of the family group (as defined in by Schedule 2F to the ITAA 1936) relating to the family trust. Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters at paragraph 108 - 109 describes that the alternative ultimate economic ownership test provides additional flexibility to small family businesses carried on through non-fixed trusts by allowing them to meet the requirement to maintain proportionate ultimate economic ownership of the transferred assets if the ultimate economic ownership of those assets remains within the family. The alternative test is only available when assets are included in the property of a non-fixed trust that is a family trust, that is, a non-fixed trust for which there is an FTE in force. | Detailed Reasoning - Application to your circumstances - proposed transaction 1: Proposed transaction 1 will transfer an asset from a company to two discretionary trusts, who have each made a FTE (nominating the same specified individual). As the Properties are owned by a company (Property 1) they will not be included in the property of a non-fixed trust that was a family trust just before proposed transaction 1 takes effect and therefore subparagraph 328-440(a)(i) of the ITAA 1997 will not be satisfied. As such, paragraph 328-440(a) will only be satisfied if the requirements of subparagraph 328-440(a)(ii), which requires that the Properties be included in the property of a non-fixed trust just after the transaction takes effect, are met. Subparagraph 328-440(a)(ii) of the ITAA 1997 has been written in the singular and we consider that section 23 of the Acts Interpretation Act 1901 (AIA) does not apply to pluralise the reference to a single non-fixed trust in subparagraph 328-440(a)(ii). Section 2 of the AIA outlines that the application of section 23 of the AIA to a provision of an Act is subject to a contrary intention. Paragraph 328-440(b) of the ITAA 1997 refers to 'the trust or trusts referred to in paragraph (a)' when referring to the family group. This references a single trust when either subparagraph 328-440(a)(i) or 328-440(a)(ii) is satisfied, and two trusts when both subparagraphs are satisfied. This specific wording, encompassing the singular and the plural, indicates that the term 'trust' within section 328-440 was intended to be a singular concept only. We consider that this language demonstrates that the provision was drafted with the singular and plural in mind and that this is a contrary intention that prevents the application of section 23 of the AIA. A similar conclusion that the AIA did not pluralise a term was reached by the Full Federal Court at paragraph 34 in Commissioner of Taxation v Landcom [2022] FCAFC 204 in relation to the application of section 23 of the AIA to a provision of the A New Tax System (Goods and Services Tax) Act 1999 . As a result, proposed transaction 1 will not satisfy the alternative test in section 328-440 of the ITAA 1997 to meet the continuity of ultimate economic ownership requirement in paragraph 328-430(1)(c) for the small business restructure roll-over in Subdivision 328-G. We acknowledge that the ordinary ultimate economic ownership test in paragraph 328-430(1)(c) of the ITAA 1997 can be satisfied in situations with multiple transferees where non-fixed trusts are not parties to the transaction. The alternative ultimate economic ownership test was enacted to extend the roll-over to non-fixed trusts that would otherwise not qualify for the roll-over. The fact that it is on more limited terms than the ordinary ultimate economic ownership test is not contradictory to or inconsistent with the intent in subsection 328-430(1). | Detailed Reasoning - Application to your circumstances - proposed transaction 2: Proposed transaction 2 will transfer an asset from a company to a newly established discretionary trust that has made a FTE. As outlined above, as the Properties are owned by a company (Property 1) subparagraph 328-440(a)(i) of the ITAA 1997 will not be satisfied. However, subparagraph 328-440(a)(ii) will be satisfied, as just after the proposed transaction takes effect, the Properties will be included in the property of a non-fixed trust that is a family trust. As the Properties are owned by a company with two discretionary trust shareholders, the individuals with ultimate economic ownership of the Properties just before the proposed transfer will be the individual beneficiaries of the two discretionary trusts and the individual ultimate economic owners of any non-individual beneficiaries of the two trusts. The family group of New Trust just before the proposed transfer will include all the individual beneficiaries of Trust A, all the individual beneficiaries of Trust B, all the individuals who have ultimate economic ownership of any non-individual beneficiaries of Trust A, and all the individuals who have ultimate economic ownership of any non-individual beneficiaries of Trust B. As all these individuals will be members of the family group relating to New Trust paragraph 328-440(b) of the ITAA 1997 will be satisfied. The individuals with ultimate economic ownership just after the proposed transfer takes effect will be the individual beneficiaries of New Trust plus any other individuals who hold the ultimate economic ownership of the ownership interests of any non-individual beneficiaries of New Trust. The family group of New Trust will, just after the proposed transfer, include all the individual beneficiaries of New Trust and all the individuals who have ultimate economic ownership of any non-individual beneficiaries of New Trust. As all these individuals are members of that same family group paragraph 328-440(c) of the ITAA 1997 will be satisfied. As a result, proposed transaction 2 will satisfy the alternative test in section 328-440 of the ITAA 1997 to meet the continuity of ultimate economic ownership requirement in paragraph 328-430(1)(c) for the small business restructure roll-over in Subdivision 328-G.

Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.