Private ruling: Small business restructure rollover relief
Date of advice: 19 October 2020
Published: November 2020
Ruling period: Year ending 30 June 2021 | Year ending 30 June 2022 | Year ending 30 June 2023
Date scheme commenced: 1 July 2020

Ruling: Q1: Does the proposed transfer of land from the Family Trust to the New Family Trust qualify for roll-over relief under Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: 1. The taxpayer is a Family Trust that is a discretionary trust and owns land that is leased to the Partnership. 2. The Family Trust is a resident trust for capital gains tax (CGT) purposes. 3. The Partnership operates a business enterprise. 4. The Partnership interests are divided amongst family members who are beneficiaries of the Family Trust, with one individual having a 40% interest. The Proposed Transaction 5. The taxpayer proposes to transfer the land to a newly settled discretionary trust (the New Family Trust). 6. The New Family Trust will own the same parcel of land as the Family Trust. The New Family Trust will lease the land to the Partnership on the same terms as the Family Trust. 7. Each of the Family Trust and the New Family Trust will make a family trust election in accordance with Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936) nominating the test individual as the individual with the 40% interest in the Partnership. The following information was provided on 28 September 2020 in relation to the family trust election: Every individual with ultimate economic ownership of trust assets will be a member of the family group of the test individual specified in the Family Trust Elections before and after the transfer takes place. All of these individuals are members of the test individual's family as defined by section 272-95 of Schedule 2F of the Income Tax Assessment Act 1936 . 8. Following the transaction, for a period of at least three years: · there will be no change in ownership of the significant assets by the New Family Trust · those assets will be active assets, and · there will be no material or significant use of those assets for private purposes. 9. Following the proposed transfer of land, the Family Trust will own no assets and it will vest. 10. The proposed arrangement is being considered for the following reasons: · the Transferor Trust Deeds cannot be varied. · the Transferor Trust Deeds do not allow for, nor provide, any ability to appoint additional or substitute trustees, posing a risk to the continued operation of the enterprise in the event that the corporate trustee is unable to act for any reason. · the Transferor Trust Deeds do not allow for the role of appointor, creating risk management issues in relation to maintaining checks and balances over the trustee and the preservation of trust assets. · the Transferor Trust Deeds do not allow for the trustee to distribute any capital out of the trusts to any of the beneficiaries until the trust vests. This restricts future opportunities for the enterprise. 11. The individual with the 40% interest in the Partnership received just over 40% of the distributions from the Family Trust in the year ended 30 June 2019. 12. The 2020 income year accounts for the Partnership have not been completed yet, however, the sales turnover figure for the 2020 year was below $10 million. The 2021 turnover is estimated to be below $10 million.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 152-10(1A) | Income Tax Assessment Act 1997 Subsection 152-10(1AA) | Income Tax Assessment Act 1997 Paragraph 152-10(1A)(a) | Income Tax Assessment Act 1997 Paragraph 152-10(1A)(b) | Income Tax Assessment Act 1997 Paragraph 152-10(1A)(c) | Income Tax Assessment Act 1997 Paragraph 152-10(1A)(d) | Income Tax Assessment Act 1997 Paragraph 152-40(1)(a) | Income Tax Assessment Act 1997 Subparagraph 152-40(1)(a)(ii) | Income Tax Assessment Act 1997 Subparagraph 152-40(1)(a)(iii) | Income Tax Assessment Act 1997 Paragraph 152-40(1)(b) | Income Tax Assessment Act 1997 Subsection 328-110(1) | Income Tax Assessment Act 1997 Paragraph 328-110(1)(a) | Income Tax Assessment Act 1997 Paragraph 328-110(1)(b) | Income Tax Assessment Act 1997 Subsection 328-115(1) | Income Tax Assessment Act 1997 Subsection 328-115(2) | Income Tax Assessment Act 1997 Subsection 328-115(3) | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Subsection 328-125(1) | Income Tax Assessment Act 1997 Paragraph 328-125(1)(b) | Income Tax Assessment Act 1997 Subsection 328-125(2) | Income Tax Assessment Act 1997 Subparagraph 328-125(2)(a)(ii) | Income Tax Assessment Act 1997 Subsection 328-125(4) | Income Tax Assessment Act 1997 Subsection 328-125(5) | 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 Paragraph 328-430(1)(a) | Income Tax Assessment Act 1997 Paragraph 328-430(1)(b) | Income Tax Assessment Act 1997 Subparagraph 328-430(1)(b)(iii) | 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 Subparagraph 328-430(1)(d)(ii) | Income Tax Assessment Act 1997 Paragraph 328-430(1)(e) | Income Tax Assessment Act 1997 Paragraph 328-430(1)(f) | Income Tax Assessment Act 1997 Subsection 328-430(2) | Income Tax Assessment Act 1997 Section 328-435 | Income Tax Assessment Act 1997 Section 328-440 | Income Tax Assessment Act 1997 Subparagraph 328-440(a)(i) | Income Tax Assessment Act 1997 Subsection 328-440(b) | Income Tax Assessment Act 1997 Subsection 328-440(c) | Income Tax Assessment Act 1997 Section 328-445 | Income Tax Assessment Act 1997 Subsection 995-1(1) | Income Tax Assessment Act 1936 Section 272-70 of Schedule 2F | Income Tax Assessment Act 1936 Section 272-80 of Schedule 2F ATO view documents | Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters | Other references (non ATO view) | Explanatory Memorandum to the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 | Commissioner of Stamp Duties (NSW) v. Buckle (1998) 192 CLR 226 | Gartside v. Inland Revenue Commissioner [1968] AC 553 | Detailed reasoning | All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated. 1. Subdivision 328-G allows flexibility for owners of small business entities to restructure their businesses and the way their business assets are held while disregarding tax gains and losses that would otherwise arise. | 2. Section 328-430 discusses when a roll-over is available. There are six basic conditions in subsection 328-430(1) that must be satisfied, and they are as follows: | 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 | (f) 328-445 for an entity; and | (g) the transferor and each transferee choose to apply a roll-over under this Subdivision in relation to the assets transferred under the transaction. | Note: The roll-over of a depreciating asset transferred in the restructuring of a small business is addressed in item 8 of the table in subsection 40-340(1). | 3. The transferor is the Family Trust who will be transferring land to the transferee, the New Family Trust. | 4. In addition, subsection 328-430(2) provides that roll-over is not available under Subdivision 328-G if the transferor or any transferee is either an exempt entity or a complying superannuation entity. As all the parties to the Proposed Transaction are not either of these types of entities, subsection 328-430(2) does not apply. | 5. Each requirement in subsection 328-430(1) will now be considered in detail. | Paragraph 328-430(1)(a) - genuine restructure | 6. Paragraph 328-430(1)(a) requires that the transaction is, or is part of, a genuine restructure of an ongoing business. | 7. Whether a transaction is or is part of a 'genuine restructure of an ongoing business' is a question of fact that is determined having regard to all of the circumstances surrounding the restructure. | 8. Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters provides guidance on whether a transaction will be part of a 'genuine restructure of an ongoing business'. | 9. LCR 2016/3 states that 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. | 10. Paragraph 7 of LCR 2016/3 outlines the following features that indicate a transaction is, or is part of, a genuine restructure of an ongoing business: | · it is a bona fide commercial arrangement undertaken to facilitate growth, innovation and diversification, to adapt to changed conditions, or to reduce administrative burdens and compliance costs | · it is authentically restructuring the way the business is conducted, as opposed to a divestment or a preliminary step to facilitate the economic realisation of assets | · the economic ownership of the business and its restructured assets is maintained | · the small business owners continue to operate the business through a different legal structure, and | · it results in a structure likely to have been adopted had the small business owners obtained appropriate professional advice when setting up the business. | 11. However, the restructure of an ongoing business by a business owner is not genuine if it is done in the course of winding down to transfer wealth between generations or realising their ownership interests. A restructure is likely to not be a genuine restructure of an ongoing business if: | · it is a preliminary step to facilitate the economic realisation of assets, or takes place in the course of winding down to transfer wealth between generations | · it effects an extraction of wealth from the assets of the business for personal investment or consumption | · it creates artificial losses or brings forward their recognition | · it effects a permanent non-recognition of gain or creates artificial timing advantages, and/or | · there are other tax outcomes that do not reflect economic reality. | 12. The enterprise will continue to be carried on by the Partnership after the Proposed Transaction has been implemented. Whilst the ongoing business will continue, what has to be ascertained is whether the Proposed Transaction is a 'genuine restructure' of an ongoing business. | 13. You have stated that the main reason for implementing the Proposed Transaction is to provide the ultimate controllers of the land owned by the New Family Trust with a structure that ensures the ongoing viability of the enterprise without the restrictions inherent in the trust deed of the Family Trust. | 14. The Commissioner accepts the restrictions in the Transferor Trust Deeds will be removed under the Proposed Transaction. However, the ability to provide for an appointor role, power to vary the trust deeds, ability to replace the trustee or ability to unlock access to capital are not sufficient to be considered a 'genuine restructure' of the business. | Safe Harbour Rule 15. Subdivision 328-G contains a safe harbour rule that provides an alternative way to meet the 'genuine restructure of an ongoing business' condition. | 16. Section 328-435 states: | For the purposes of paragraph 328-430(1)(a) (but without limiting that paragraph), 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: | (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 significant assets for private purposes. | 17. Paragraph 78 of LCR 2016/3 states: | Where the safe harbour rule is satisfied, it is not necessary to consider whether the arrangement would otherwise be a 'genuine restructure of an ongoing business' under paragraph 328-430(1)(a). | 18. You have stated that following the transaction, for a period of at least three years: | · there will be no change in ownership of the significant assets by the New Family Trust | · those significant assets will be active assets, and | · there will be no material or significant use of those assets for private purposes. | 19. Based on your statements, the safe harbour rule in section 328-435 will be satisfied. Therefore, for the purposes of paragraph 328-430(1)(a), the Proposed Transaction will be treated as a genuine restructure of an ongoing business. | Paragraph 328-430(1)(b) - small business or related entity | 20. Paragraph 328-430(1)(b) requires both the transferor and the transferee to be one or more of the following entities in the income year the Proposed Transaction occurs: | (i) a small business entity | (ii) an affiliate of a small business entity | (iii) connected with a small business entity | (iv) a partner in a partnership that is a small business entity. | 21. As neither the Family Trust nor the New Family Trust are small business entities or partners in a partnership, the requirement in subparagraph 328-430(1)(b)(iii) will need to be satisfied. The Partnership must therefore be a small business entity and connected with the transferor and transferee. | Small business entity | 22. Subsection 328-110(1) provides that you are a small business entity for an income 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. | 23. The term 'business' is defined in subsection 995-1(1) to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee. | 24. The Partnership is conducting the business of an enterprise and would therefore satisfy the requirement in paragraph 328-110(1)(a). | 25. The next requirement is to determine if the aggregated turnover of the taxpayer is less than $10 million in the relevant income year. 'Aggregated turnover' for an income year is defined in subsection 328-115(1) as the sum of the relevant annual turnovers excluding any amounts covered by subsection (3). | 26. The 'relevant annual turnovers' are defined in subsection 328-115(2) as: | (a) your *annual turnover for the income year; and | (b) the annual turnover for the income year of any entity (a relevant entity ) that is *connected with you at any time during the income year; and | (c) the annual turnover for the income year of any entity (a relevant entity ) that is an *affiliate of yours at any time during the income year. | 27. The amounts excluded under subsection 328-115(3) are amounts derived from dealings between you and any entities that are connected with you or are your affiliates, or amounts derived from dealings between those entities. | 28. You advised that there are no entities connected or affiliated with the Partnership that generate income from business operations. | 29. The 2020 income year accounts for the Partnership have not yet been completed, however, the sales turnover figure for the 2020 year was below $10 million. The 2021 turnover is estimated to be below $10 million. Since these figures are less than $10 million, the requirement in paragraph 328-110(1)(b) will be satisfied. | 30. Since paragraphs 328-110(1)(a) and (b) are both satisfied, the Partnership is a small business entity in accordance with subsection 328-110(1). | Connected with a small business entity | 31. The final requirement is for the Family Trust and New Family Trust to prove that they are connected with the Partnership. [1] | 32. Subsection 328-125(1) states an entity is connected with another entity if: | (a) either entity controls the other entity in a way described in this section; or | (b) both entities are controlled in a way described in this section by the same third entity. | 33. In this case, the Family Trust and New Family Trust need to establish they are controlled by the same entity that controls the Partnership to satisfy paragraph 328-125(1)(b). | 34. There are two control tests in section 328-125 that apply depending on what type of entity is being tested. The first of these tests is set out in subsection 328-125(2) as follows: | Direct control of an entity other than a discretionary trust | An entity (the first entity ) controls another if the first entity, its *affiliates, or the first entity together with its affiliates: | (a) except if the other entity is a discretionary trust - own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage ) that is at least 40% of: | (i) any distribution of income by the other entity; or | (ii) if the other entity is a partnership - the net income of the partnership; or | (iii) any distribution of capital by the other entity; or | (b) if the other entity is a company - own, or have the right to acquire the 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. | 35. As an individual has an interest in the Partnership that carries the right to receive 40% of the net income of the Partnership, the individual will be taken to have direct control of the Partnership. [2] | 36. The second relevant control test is set out in subsection 328-125(4) as follows: | Direct control of a discretionary trust | (4) An entity (the first entity ) controls a discretionary trust for an income year if, for any of the 4 income years before that year: | (a) the trustee of the trust paid to, or applied for the benefit of: | (i) the first entity; or | (ii) any of the first entity's *affiliates; or | (iii) the first entity and any of its affiliates; | any of the income or capital of the trust; and | (b) the percentage (the control percentage ) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year. | (5) An entity does not control a discretionary trust because of subsection (4) if the entity is: | (a) an *exempt entity; or | (b) a *deductible gift recipient. | 37. The individual with the 40% interest in the Partnership is the 'first entity' referred to in subsection 328-125(4). For the 2019 income year the individual received a distribution of just over 40% of the Family Trust's income and 100% of the New Family Trust's income. As a result, that individual controls both of these trusts. Since subsection 328-125(5) is not applicable, subsection 328-125(4) is satisfied. | Conclusion | 38. The Partnership is controlled by an individual in accordance with subsection 328-125(2), and the Family Trust and New Family Trust are controlled by that same individual in accordance with subsection 328-125(4). Consequently, both trusts and the Partnership are controlled by the same third entity. Therefore, the Family Trust and New Family Trust are both connected with the Partnership via the operation of paragraph 328-125(1)(b). | 39. It has been established that the Partnership is a small business entity. Since the Partnership is connected with both the Family Trust (the transferor) and the New Family Trust (the transferee), paragraph 328-430(1)(b)(iii) is satisfied. That is, the transferor and the transferee to the Proposed Transaction are connected with an entity that is a small business entity. | Paragraph 328-430(1)(c) - ultimate economic owner | 40. Paragraph 328-430(1)(c) requires the transaction to not have the effect of materially changing which individual has, or which individuals have, the ultimate economic ownership of the assets. Additionally, where more than one individual holds the ultimate economic ownership of the asset, each individual's share of that ownership must not materially change. | 41. Where ownership passes to or from a discretionary trust, this requirement would generally not be able to be satisfied. Under ordinary legal concepts, a beneficiary of a discretionary trust is not entitled to income or capital of the trust until the trustee exercises their discretion to distribute income or to make an appointment of capital: Commissioner of Stamp Duties (NSW) v. Buckle (1998) 192 CLR 226. A beneficiary of a discretionary trust only has a right to require the trustee to consider whether or not to exercise their discretion. Instead, a beneficiary of a discretionary trust generally has a 'mere expectancy' in the income or capital of a trust and does not have an interest in possession: Gartside v. Inland Revenue Commissioner [1968] AC 553. | 42. However, section 328-440 contains an alternative ultimate economic ownership test for discretionary trusts. Section 328-440 states that for the purposes of paragraph | 43. 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 the requirements in that section are satisfied. | 44. Section 328-440 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 takes / 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 (within the meaning of Schedule 2F to the ITAA 1936) relating to the family trust. | 45. The phrase 'ultimate economic ownership' is not defined in the ITAA 1997. However, the Explanatory Memorandum to the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 (the EM) states: | 1.29 The ultimate economic owners of an asset at 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. | 46. The Family Trust is a non-fixed trust for the purposes of section 272-70 of Schedule 2F of the ITAA 1936 and will make a family trust election nominating a specified individual under section 272-80 of Schedule 2F to the ITAA 1936. As the assets are the property of the Family Trust immediately before the Proposed Transaction takes effect, this will satisfy the requirement in subparagraph 328-440(a)(i). | 47. Just before the transaction takes effect, the individuals who have the ultimate economic ownership of the assets of the Family Trust are the members of the family group. Just after the Proposed Transaction will take effect the same individuals will have the ultimate economic ownership of the land assets as family group members of the New Family Trust, thereby satisfying the requirements in paragraphs 328-440(b) and (c). | 48. Consequently, as the alternative ultimate economic ownership test under section 328-440 will be satisfied, this will satisfy the requirement in paragraph 328-430(1)(c). | Paragraph 328-430(1)(d) - active assets | 49. Paragraph 328-430(1)(d) requires the CGT asset 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 would be satisfied in that income year if paragraph 152-10(1AA)(b) were disregarded; or | (iii) if subparagraph (b)(iv) applies - an active asset and an interest in an asset of the partnership referred to in that subparagraph | 50. In this case, subparagraph 328-430(1)(b)(iii) applies, therefore the condition in subparagraph 328-430(1)(d)(ii) must be satisfied. To satisfy this condition, the land must be an active asset in relation to which subsection 152-10(1A) is be satisfied. | Active asset | 51. Paragraph 152-40(1)(a) provides that a tangible or intangible CGT asset is an active asset if you own the asset and it is used, or held ready for use, in a business carried on (whether alone or in partnership) by you, your affiliate or another entity that is connected with you. | 52. The asset being transferred by the taxpayer is land that is used by a connected entity (the Partnership) in the course of a carrying on the business. The land is therefore an active asset. | Subsection 152-10(1A) | 53. Subsection 152-10(1A) is 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 | (b) you do not carry on a business in the income year (other than in partnership) | (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 the 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. | 54. In this case the entity connected with the taxpayer is the Partnership. As the Partnership is a small business entity whose aggregated turnover in the previous income year was less than $10 million it will fall within the definition of a CGT small business entity in subsection 152-10(1AA). Therefore, the requirement in paragraph 152-10(1A)(a) will be satisfied. | 55. As the taxpayer does not carry on a business, the requirement in paragraph 152-10(1A)(b) will be satisfied. | 56. As the taxpayer does not carry on a business in partnership, the requirement in paragraph 152-10(1A)(c) will not be applicable. | 57. The Partnership is the entity referred to in paragraph 152-10(1A)(a) and will be carrying on the business using the land (the CGT asset) at the relevant time. Therefore, the requirement in paragraph 152-10(1A)(d) will be satisfied. | 58. The land is an active asset in relation to which subsection 152-10(1A) will be satisfied in the 2021 income year. Therefore, the requirement in subparagraph 328-430(1)(d)(ii) will be satisfied. | Paragraph 328-430(1)(e) - residency | 59. Paragraph 328-430(1)(e) requires both the transferor and the transferee to meet the residency requirements outlined in section 328-445. As the Family Trust and the New Family Trust are both Australian residents for tax purposes, the requirement in paragraph 328-430(1)(e) will be satisfied. | Paragraph 328-430(1)(f) - roll-over choice | 60. Paragraph 328-430(1)(f) requires both the transferor and the transferee to choose to apply the roll-over under Subdivision 328-G in relation to the assets transferred under the transaction. | 61. You have stated that both the Family Trust and the New Family Trust will choose to apply the roll-over in relation to the transfer of the land. Therefore, the requirement in paragraph 328-430(1)(f) will be satisfied. | Conclusion | 62. As each of the requirements in subsection 328-430(1) will be satisfied, the taxpayer is eligible to choose roll-over relief under Subdivision 328-G in relation to the Proposed Transaction. | [1] Subparagraph 328-430(1)(b)(iii) | [2] Subparagraph 328-125(2)(a)(ii)