Private ruling: Transfer of property
Date of advice: 21 June 2016
Published: August 2016
Ruling period: Income year ending 30 June 20yy | Income year ending 30 June 20zz
Date scheme commenced: Income year commencing 1 July 20xx

Ruling: A5: Yes. Part IVA will not apply to the scheme which is the subject of this Ruling Application.

Relevant facts and circumstances: Current Structure The Owner owns 100 per cent of all ordinary shares issued in the capital of the Company. The Company was incorporated on XXXX. The Company owns and operates a business ('Business'). The Company also offers 'Design Services'. The Company has operated the Business since the date of its incorporation. The value of the total Business Assets of the Company is below $6 million. The Company wishes to restructure its Business so that it can separate the risks associated with the operation of its Business from the ownership of its Business Assets. Circumstances of the Owner The Owner is, and has always been, the sole owner of ordinary shares in the capital of the Company, as well as the sole director and secretary of the Company. The Owner is currently under 55 years of age. Restructure of the Business of the Company The Company will restructure its Business by establishing a separate operating entity and asset holding entity for the continued operation of its Business so that the Company becomes a passive investment vehicle. To achieve this, it is intended that the following steps be implemented. 1. The Company will subscribe for ordinary units, in a newly-established wholly owned unit trust ('Unit Trust') for a total consideration of $X ('Initial Unit Subscription'). 2. After the Initial Unit Subscription, the Company will enter into a sale of business and assets agreement with the Unit Trust for the sale of all its Business Assets to the Unit Trust ('Sale Agreement'). 3. The Owner will establish a new discretionary trust of which they and entities associated with them (including the Company and the Unit Trust) will be beneficiaries ('Discretionary Trust'). 4. The Discretionary Trust will enter into a business licence agreement ('Business Licence') with the Unit Trust so that Discretionary Trust can operate the Services while the Unit Trust operates the Business. Small Business Capital Gains Tax Concessions The Company has reviewed the net value of CGT assets owned by the Company, the Owner, and all other affiliates of, and entities connected with, the Company and any entities connected with the affiliates of the Company (excluding all the assets specified in subsections 152-20(2), (2A) and (4) of the ITAA97), and the net value of CGT assets owned by them and all other relevant entities for the purposes of section 152-15 of the ITAA97 does not exceed $6 million. On the assumption that CGT event A1 occurs as a result of the Company's disposal of its goodwill to the Unit Trust, the cost base of that goodwill is nil, and the portion of consideration attributed to the goodwill is $X and this is the market value of the goodwill, then the disposal of the Company's goodwill will result in a $X capital gain ('Capital Gain'). The Company will apply the Small Business Retirement Exemption contained in Subdivision 152-D of the ITAA97 to disregard $xxx,xxx of the $X Capital Gain if it is eligible for that Small Business Retirement Exemption. On the assumption that the Company is eligible to apply the Small Business Retirement Exemption, then the $X Capital Gain will be reduced to $X ('Capital Gain'). Neither the Owner nor the Company have previously elected to apply the Small Business Retirement Exemption contained in Subdivision 152-D of the ITAA97. The Company will apply the Small Business Rollover contained in Subdivision 152-E of the ITAA97 to disregard the remaining $X Capital Gain. The Company will then subscribe for ordinary units in the Unit Trust for a total price of $X so that CGT event J5 does not occur. The business rationale for the Company as sole unitholder acquiring the additional units in the Unit Trust with a value equal to the remaining capital gain is to ensure the Unit trust is properly capitalised to run and buy more equipment if and when required. Additional units may be purchased if the Unit Trust needs further capitalisation. Additional information There is no intention to borrow funds from any third parties to finance the restructure. The Company does not intend to sell any of the units it initially acquires under the restructure in the next X years.

Relevant legislative provisions: Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 Section 177A | Income Tax Assessment Act 1936 subsection 177A(1) | Income Tax Assessment Act 1936 Section 177C | Income Tax Assessment Act 1936 S ection 177CB | Income Tax Assessment Act 1936 Section 177D | Income Tax Assessment Act 1936 Section 177F | Income Tax Assessment Act 1997 Section 104-197 | Income Tax Assessment Act 1997 subsection 104-197(2) | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1997 Subdivision 152-E | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 subparagraph 152-10(1)(c) | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-50 | Income Tax Assessment Act 1997 Section 152-55 | Income Tax Assessment Act 1997 Section 152-60 | Income Tax Assessment Act 1997 Section 152-65 | Income Tax Assessment Act 1997 Section 152-325 | Income Tax Assessment Act 1997 subsection 152-325(4) | Income Tax Assessment Act 1997 subsection 152-325(7) | Income Tax Assessment Act 1997 Section 152-410 | Income Tax Assessment Act 1997 Section 152-415

Reasons for decision: Detailed Reasoning - Questions 1, 2, 3 and 4: Basic conditions Section 152-10 of the Income Tax Assessment Act 1997 ( ITAA97) provides that a capital gain that you (in this case, the Company) make may be reduced or disregarded if the basic conditions are satisfied for the gain. The basic conditions are: • A CGT event happens in relation to a CGT asset of the Company in an income year. • The event would (apart from this concession) have resulted in the gain. • At least one of the conditions listed in subparagraph 152-10(1)(c) of the ITAA97 is satisfied; in your case, the maximum net asset value test found in section 152-15 of the ITAA97 is satisfied. • The CGT asset satisfies the active asset test found in section 152-35 of the ITAA97. The Company satisfies the basic conditions as follows: • CGT event A1 occurs on the sale of the business. • The sale would result in a capital gain but for these concessions. • The Company satisfies the maximum net asset value test in section 152-15 ITAA97 given that the net value of the CGT assets of the Company does not exceed $6 million. • The capital gain arises from the sale of the goodwill being an active asset of the Company Small Business Retirement Exemption Section 152-305(2) of the ITAA97 provides that a company or trust can disregard all or part of a capital gain if: • the Basic Conditions in Subdivision 152-A of the ITAA97 are satisfied for the gain • the entity (i.e. the company or trust) satisfies the 'significant individual test' contained in section 152-50 of the ITAA97 • the company or trust conditions in section 152-325 of the ITAA97 are satisfied. The basic conditions are satisfied as discussed above. Significant individual test Section 152-50 of the ITAA97 provides that an entity (in this case, the Company) satisfies the 'significant individual test' if the entity had at least one 'significant individual' just before the CGT event. Section 152-55 of the ITAA97 provides that an individual is a 'significant individual' in a company or trust if, at that time, the individual has a 'small business participation percentage' in the company or trust of at least 20 percent. Section 152-65 of the ITAA97 defines an entity's 'small business participation percentage' in another entity (in this case, the Owner's 'small business participation percentage' in the Company) to be a percentage that is the sum of all the entity's direct and indirect small business participation percentages in that other entity. A 'direct small business participation percentage' includes the percentage of shares that an entity holds in a company which entitles that shareholder to voting power, dividends or capital distributions. The significant individuals test is satisfied because the Owner, as the sole owner of the shares in the capital of the Company since the Company was incorporated, has a 'direct small business participation percentage' of 100 percent in the Company. The Owner will continue to be the sole owner of ordinary shares in the capital of the Company immediately before the Sale Agreement is executed. Company and trust conditions Section 152-325 of the ITAA97 provides that a company or trust must make a payment (being the amount of the capital gain which is disregarded in applying the Small Business Retirement Exemption contained in Subdivision 152-D of the ITAA97) to at least one of its CGT concession stakeholders if it makes a choice to disregard the capital gain. Subsection 152-325(7) of the ITAA97 requires the company to make the payment to the CGT concession stakeholder's complying superannuation fund if that CGT concession stakeholder is under 55 years of age just before the time the payment is made; and the company or trust must notify the fund at the time the contribution is made that the contribution is a small business retirement exemption payment. The company and trust conditions are satisfied because: • The Owner is a 'CGT concession stakeholder' of the Company (as defined in section 152-60 of the ITAA97) because he is a 'significant individual' of the Company. • The Company will pay $xxx,xxx to the complying superannuation fund of which the Owner is a member on or before 30 June of the income year in which the Sale Agreement is executed ('Retirement Exemption Payment'), and • the Company will notify that superannuation fund that the Retirement Exemption Payment is made pursuant to the Small Business Retirement Exemption contained in Subdivision 152-D of the ITAA97. Therefore the Company will satisfy the conditions in Section 152-305(2) of the ITAA97 to disregard all or part of a capital gain using the Small Business Retirement Exemption. Small Business Rollover Subdivision 152-E of the ITAA97 contains the Small Business Rollover which allows all or part of a capital gain to be disregarded where the Basic Conditions in Subdivision 152-A of the ITAA97 are satisfied (Section 152-410 of the ITAA97). If the Small Business Rollover is chosen, then all or part of the capital gain to which Division 152 of the ITAA97 applies can be disregarded (Section 152-415 of the ITAA97). The basic conditions are satisfied as discussed above. The Small Business Rollover exemption can apply to reduce the remainder of the CGT gain made on the sale of the business to the Unit Trust to nil. CGT event J5 If you choose the Small Business Rollover exemption but do not acquire a replacement asset by the end of the replacement asset period, or the replacement asset does not satisfy the conditions set out in subsection 104-197(2) CGT event J5 (as contained in section 104-197 of the ITAA97) will occur. Subsection 104-197(2) of the ITAA97 provides that the replacement asset must be an active asset, and if the active asset is a share in a company or an interest in a trust, then either that person or their connected entity must be a CGT concession stakeholder in the company or trust, or CGT concession stakeholders in the company or trust must have a small business participation percentage in that entity of at least 90 percent. Based on the facts presented, the Company will choose to apply the Small Business Rollover to disregard the remaining $X Capital Gain after the Small Business Retirement Exemption has been applied. CGT event J5 will not occur given that the Company will incur expenditure to acquire replacement assets, being ordinary units in the Unit Trust of which it will be the sole ordinary unitholder (and therefore the sole CGT concession stakeholder) within the required replacement asset period. | Detailed Reasoning - Question 5: Part IVA Part IVA of the Income Tax Assessment Act 1936 (ITAA1936) will apply where the following requirements are satisfied: • there is a scheme as defined in section 177A of the ITAA 1936; • a taxpayer has obtained, or would but for section 177F of the ITAA 1936 obtain, a tax benefit as defined in section 177C of the ITAA 1936 in connection with the scheme; and • having regard to the eight factors specified in section 177D of the ITAA 1936, it would be concluded that the main or dominant purpose of entering into the scheme was to obtain the tax benefit in connection with the scheme. The application of Part IVA to any particular scheme depends on a careful weighing of all the relevant facts and surrounding circumstances of each case. The fact that you are dealing with related entities does not of itself compel the application of Part IVA, particularly where it is found that you are dealing with each other at arm's length. Whether you are dealing with each other at arm's length, as parties would normally do, so that the outcome of your dealings is a matter of real bargaining is a question of fact. It is possible for Part IVA to apply notwithstanding that the dominant purpose of obtaining the tax benefit was consistent with the pursuit of commercial gain. Furthermore, the fact that a particular course of action is both 'tax driven' and bears the character of a rational commercial decision does not determine whether a person has entered into or carried out a scheme for the dominant purpose of enabling the taxpayer to obtain a tax benefit: FC of T v Spotless Services Ltd (1996) 186 CLR 404 at 416; 141 ALR 92 at 98; 96 ATC 5201 at 5206; 34 ATR 183 at 188. This is made clear in Federal Commissioner of Taxation v. Hart [2004] HCA 26; 217 CLR 216; 206 ALR 207; 2004 ATC 4599; 55 ATR 712 at {16} per Gleeson CJ and McHugh J: Even so, the transaction may take such a form that there is a particular scheme in respect of which a conclusion of the kind described in s 177D is required, even though the particular scheme also advances a wider commercial objective. And at [64] per Gummow and Hayne JJ: But so too, as was held in Spotless, there is a false dichotomy between a "rational commercial decision" and the "obtaining of a tax benefit as 'the dominant purpose of the taxpayers in making the investment'". Pointing to the "commercial end" of the scheme reveals the adoption of the same, or at least a substantially similar, false dichotomy. The presence of a discernible commercial end does not determine the answer to the question posed by s177D. Is there a scheme The breadth of the definition of 'scheme' in section 177A of the ITAA 1936 has been judicially noted: British American Tobacco Australia Services Ltd v. Federal Commissioner of Taxation [2010] FCAFC 130; (2010) 189 FCR 151 at [30]. It includes any 'scheme, plan, proposal, action, course of conduct, or course of action'. Steps 1 through to 4 under the heading 'Restructure of the Business of the Company' in the facts and circumstances above clearly constitute a scheme within the meaning of subsection 177A(1) of the ITAA 1936. Is there a tax benefit Under section 177C a tax benefit received in relation to a scheme is any of the following: a. an amount not being included in assessable income b. a deduction being allowable c. a capital loss being incurred d. a foreign income tax offset being allowable e. an exploration credit being issued, or f. the taxpayer not being liable to pay withholding tax. Section 177CB provides the basis for identifying the tax benefit broadly as postulating: a. what would have happened but for the scheme based solely on the events and circumstances that actually happened or existed, other than those that form part of the scheme; or b. what might reasonably be expected to have happened if the scheme had not been entered into or carried out, having regard to the substance of the scheme. The Commissioner accepts that there are a number of ways of doing a transaction or organising your affairs. In this matter, the Commissioner accepts that there is no tax benefit as defined in section 177C, having regard to an alternate postulate and the scheme as set out in steps 1 through to 4 under the heading 'Restructure of the Business of the Company' in the facts and circumstances above. Therefore Part IVA will not apply to the scheme which is the subject of this Ruling Application.

Questions and answers: 1. Are the basic conditions to apply the CGT small business concessions satisfied? | 2. Can the Small Business Retirement Exemption be applied to reduce the gain by $xxx,xxx made on the sale of the business to the Unit Trust? | 3. Can the Small Business Rollover be applied to reduce the remainder of the CGT gain made on the sale of the business to the Unit Trust to nil? | 4. Will CGT event J5 happen on the CGT gain rolled over with the Small Business Rollover? | 5. Does the Commissioner agree that he will not make a determination to apply Part IVA of the Income Tax Assessment Act 1936 ?