Private ruling: Small business restructure roll-over
Date of advice: 23 November 2023
Published: 15 January 2024
Ruling period: Year ending 30 June 2024
Date scheme commenced: 1 July 2023

Ruling: Q1: Will the proposed transfer of the Asset from Entity Y to the Z 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: Entity Y owns an Asset used by X Trust in its business. It is proposed to transfer the Asset held by Entity Y to the Z Trust. The proposed restructure is a commercial arrangement that will facilitate growth of the business. The transfer is not a preliminary step to facilitate an economic realisation, or disposal of the Asset, or succession planning. A family trust election (FTE) will be made for the transfer year. The X Trust is a small business entity (SBE) as its aggregate turnover is under $10m for the relevant years.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 152-10(1A) | Income Tax Assessment Act 1997 subsection 152-40(1) | Income Tax Assessment Act 1997 section 328-110 | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 section 328-430 | Income Tax Assessment Act 1997 section 328-440 | Income Tax Assessment Act 1997 section 328-445 | Income Tax Assessment Act 1997 section 328-450

Reasons for decision: Summary: The proposed transfer will meet the requirements under Subdivision 328-G of the ITAA 1997 to qualify for CGT small business restructure roll-over. | Detailed Reasoning - Detailed reasoning: The CGT small business restructure roll-over in Subdivision 328-G of the ITAA 1997 allows small businesses to transfer active assets from one entity (the transferor) to one or more other entities (transferees), on or after 1 July 2016, without incurring an income tax liability. Subsection 328-430(1) of the ITAA 1997 provides that roll-over relief is available if the following conditions are met: 1. The transfer of the asset is, or is part of, a genuine restructure of an ongoing business (paragraph 328-430(1)(a)). 2. Each party to the transfer is either a small business entity (or affiliate of or connected with a small business entity), or a partner in a partnership that is a small business entity (paragraph 328-430(1)(b)). 3. There is no material change in the ultimate economic ownership of the transferred asset (paragraph 328-430(1)(c)). 4. The asset being transferred is an active asset (paragraph 328-430(1)(d)). 5. Both the transferor and each transferee are residents of Australia (paragraph 328-430(1)(e)). 6. Both the transferor and each transferee choose to apply the roll-over (paragraph 328-430(1)(f)) | Detailed Reasoning - Condition 1. Genuine restructure: Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an on-going business and related matters explains that whether a transaction is or is part of a 'genuine restructure' will be a question of fact, determined having regard to all of the circumstances surrounding the restructure. In particular, the following features are indicative of a genuine restructure: • It is a bona fide commercial arrangement undertaken in a real and honest sense to: o facilitate growth, innovation and diversification o adapt to changed conditions, or o reduce administrative burdens, compliance costs and/or cash flow impediments. • 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. • 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. For example, there is: o continued use of the transferred assets as active assets of the business, o continuity of employment of key personnel, and o continuity of production, supplies, sales or services. • It results in a structure likely to have been adopted had the small business owners obtained appropriate professional advice when setting up the business. In this case, the transfer is not associated with an economic realisation or disposal of the Asset, or succession planning. As the transfer of the Asset will allow the business to grow, the Commissioner considers the restructure is a 'genuine restructure of an ongoing business' business for the purposes of paragraph 328-430(1)(a) of the ITAA 1997. | Detailed Reasoning - Condition 2. The small business entity condition: Paragraph 328-430(1)(b) of the ITAA 1997 requires that each party to the transfer is an entity to which one or more of the following applies: (i) it is a SBE for the income year during which the transfer occurred (ii) it has an affiliate that is a SBE for that income year (iii) it is connected with an entity that is a SBE for that income year (iv) it is a partner in a partnership that is a SBE for that income year An entity is 'connected with' another entity pursuant to paragraph 328-125(1)(a) of the ITAA 1997 if either entity controls the other in a way described in section 328-125, or under paragraph 328-125(1)(b) if both entities are controlled in a way described in this section by the same third entity. | Detailed Reasoning - Application to your circumstances: The relevant parties to the proposed transfer are the Entity Y as the transferor of the Asset, and Z Trust as the transferee. Both the transferor and the transferees will each need to meet one of the tests listed in paragraph 328-430(1)(b) of the ITAA 1997 in the income year the proposed transfer occurs. As both Entity Y and Z Trust will be not carrying on a business, they require an entity that is a SBE to be an affiliate or connected to them for that income year. The X Trust is undertaking the business activities in the transfer year. X Trust meets the SBE requirements under section 328-110 of the ITAA 1997, given their aggregated income is under $10 million per year. They are relevant entity to consider for the purposes of applying the roll-over tests in paragraph 328-430(1)(b) of the ITAA 1997. Entity Y, Z Trust and X Trust are all connected under section 328-125 of the ITAA 1997 for the relevant income year. As subparagraph 328-430(1)(b)(iii) of the ITAA 1997 applies, the requirement under paragraph 328-430(1)(b) is satisfied for the transferor and transferee. | Detailed Reasoning - Condition 3: Ultimate economic ownership: The transfer must not have the effect of materially changing the ultimate economic ownership of the transferred assets (subparagraph 328-430(1)(c)(i)) of the ITAA 1997. Where there is more than one ultimate economic owner, each individual share of that ultimate economic ownership must not be materially changed (subparagraph 328-430(1)(c)(ii)). 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. As such, beneficiaries of a discretionary trust cannot have ultimate economic ownership of the assets held by the trust. However, section 328-440 of the ITAA 1997 contains an alternative ultimate economic ownership test for discretionary trusts for the purposes of paragraph 328-430(1)(c). Section 328-440 will be satisfied if: (a) either or both: (i) just before the transaction transferring the assets 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) just before the transfer took effect, every individual who had the ultimate economic ownership of the asset was a member of the family group (within the meaning of Sch 2F to the ITAA 1936 relating to the trust or trusts referred to in para (a), and (c) just after the transfer takes effect, every individual who has the ultimate economic ownership of the asset is a member of that family group. Section 328-440 of the ITAA 1997 is satisfied by the proposed transaction as: • just after the transaction, the asset is included in the property of the Z Trust, which is a non-fixed family trust, and • every individual who had the ultimate economic ownership of the asset before the transfer is a member of the family group (within the meaning of Schedule 2F to the ITAA 1936) relating to the family trust, and • every individual who, just after the transfer takes effect, will have the ultimate economic ownership of the asset will be a member of the same family group. As section 328-440 of the ITAA 1997 is satisfied, paragraph 328-430(1)(c) of the ITAA 1997 is also satisfied under the proposed arrangement. | Detailed Reasoning - Condition 4: Active assets: The requirement in paragraph 328-430(1)(d) of the ITAA 1997 requires the asset to be a CGT asset that is, at the time the transfer takes effect, an active asset. As Entity Y and Z Trust will be entities to which subparagraph 328-430(1)(b)(iii) of the ITAA 1997 applies, the requirement under subparagraph 328-430(1)(d)(ii) must be satisfied. Subparagraph 328-430(1)(d)(ii) of the ITAA 1997 states: 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 ... Subsection 152-10(1A) of the ITAA 1997 will be satisfied in relation to the Asset in the income year in which the transaction will occur. As subsection 152-10(1A) of the ITAA 1997 is satisfied, for the purposes of the roll-over requirements paragraph 328-430(1)(d) of the ITAA 1997 is satisfied. | Detailed Reasoning - Condition 5. Residency: The residency requirements under section 328-445 of the ITAA 1997 and paragraph 328-430(1)(e) will be satisfied. | Detailed Reasoning - Condition 6. Roll-over choice: The requirement under paragraph 328-430(1)(f) of the ITAA 1997 will be satisfied. | Detailed Reasoning - Consequences of the roll-over: Section 328-450 of the ITAA 1997 provides that if the transfer of an asset occurs under a transaction to which section 328-430 applies, the transfer of the asset has no direct consequences under the income tax law. | Detailed Reasoning - Conclusion: As each of the requirements under subsection 328-430(1) of the ITAA 1997 will be satisfied, Entity Y and Z Trust will be eligible to choose roll-over relief under Subdivision 328-G in relation to the proposed transfer.