Law Companion Ruling LCR 2016/2
Date of effect: 1 July 2016

What this ruling is about: 1. This Ruling explains the income tax consequences and adjustments that occur when the transferor and transferee choose to apply the Small Business Restructure Roll-over (SBRR) in Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997). [1] 2. The Ruling applies only where the requirements for the SBRR set out in section 328-430 are satisfied. We recommend reading this Ruling together with Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters.


Ruling: 1. This Ruling explains the income tax consequences and adjustments that occur when the transferor and transferee choose to apply the Small Business Restructure Roll-over (SBRR) in Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997). [1] 2. The Ruling applies only where the requirements for the SBRR set out in section 328-430 are satisfied. We recommend reading this Ruling together with Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters.

Examples: Example 1: Restructure from company to discretionary trust Facts 6. Pep and Sally, a married couple, are the directors and shareholders in Vitamin Pty Ltd, which has issued two shares for total contributed capital of $100. Each share has a cost base of $50. Vitamin Pty Ltd carries on a naturopathy business. 7. As at 1 January 2017, the active assets of the company are: 8. The liabilities of the company, arising from a debt for unpaid income tax and trade creditors, total $24,000. 9. A new discretionary trust, the P&S Trust, is settled and family trust election is made with Pep as the primary individual. [3] 10. On 1 January 2017, Pep and Sally cause Vitamin Pty Ltd to transfer all [4] of its assets (except petty cash [4A] ) to the trustee of the P&S Trust (the trustee) in consideration for the trustee undertaking to discharge Vitamin Pty Ltd's liabilities. The company and the trustee choose to apply the SBRR. No direct income tax consequences from the transfer of assets 11. Under the SBRR, a transfer of an asset has no direct income tax consequences, except as provided for under Subdivision 328-G. [5] Related roll-over relief for depreciating assets is available under section 40-340. Most importantly, this means: 12. Vitamin Pty Ltd recognises any tax liability that may arise under another Commonwealth taxing statute (for example, fringe benefit tax or goods and services tax) or any liability for stamp duty under State legislation. Setting the tax values of the transferred assets in the hands of the transferee 13. The income tax law applies as if the transfer takes place for the asset's roll-over cost. [7] 14. The small consulting room is a CGT asset that is not a depreciating asset, revenue asset, or trading stock of Vitamin Pty Ltd. 15. The goodwill is a CGT asset that is not a depreciating asset, revenue asset or trading stock of Vitamin Pty Ltd. 16. The pill press is a CGT asset that is a depreciating asset. 17. The homeopathic pills are trading stock. Acquisition times in the hands of the transferee are set 18. The general CGT acquisition rules apply [14] , to determine whether any future capital gain made from a transferred asset is discounted under Subdivision 115-A (the general 50% CGT discount). 19. Following the transfer of assets to the trustee of the P&S trust, a property investor makes an attractive offer to the trustee for the consulting room. 20. On 30 September 2017, the trustee enters into an agreement for the sale of the consulting room. The trustee disposes of the room and CGT event A1 happens on 30 September 2017. 21. The trustee is treated as having acquired the CGT asset at the time of the SBRR transfer, on 1 January 2017. 22. The trustee is not entitled to access the 50% general CGT discount on disposal, as the trustee acquired the asset less than a year before the CGT event causing this gain. 23. However, for the purpose of determining eligibility for the 15 year CGT exemption for small businesses, the transferee will be taken as having acquired the asset when the transferor acquired it. [16] 23A. If Pep and Sally transferred their shares in Vitamin Pty Ltd to the trustee of the newly established P&S Trust, Pep and Sally would not be able to choose to apply the SBRR for those shares [16A] | Example 2: Restructure from partnership to company - cost base of shares Facts 24. Leon and Michelle carry on a car and tyre services business in a partnership. 25. The active assets of the business are a small suburban garage and goodwill. In 1980, Leon and Michelle acquired the real property (garage) for $80,000, a pre-CGT asset. After 19 September 1985, additional capital expenditure of $40,000 has been outlaid in relation to the garage as an improvement (and is a separate CGT asset [17] ). 26. The liabilities of the business are provisions for employee entitlements totalling $20,000. 27. They decide to incorporate a new company, LM Services Pty Ltd, and subscribe for 100 original shares with a cost base of $1 each. They maintain the same proportionate ownership. 28. Leon and Michelle transfer all the assets to LM Services Pty Ltd. The company gives the following as consideration for the transfer of the assets: 29. Both the partnership and LM Services Pty Ltd elect for the SBRR to apply. Tax values of any membership interests issued for the transfer are set 30. Generally, where membership interests are issued as consideration for the transfer, the cost base of each new membership interest is the sum of the tax values [17A] of the transferred assets less any liabilities that the transferee assumes, divided by the number of new membership interests. [18] Step 1 - Tax values of assets 31. The sum of the roll-over costs excludes the roll-over costs of pre-CGT assets. [19] In this case, the sum is $40,000: Step 2 - Liabilities 32. The sum of any liabilities assumed is then subtracted from the sum of roll-over costs. In this case, LM Services Pty Ltd assumes [20] liabilities amounting to $20,000 for employee entitlements. 33. This means, the first element of the membership interests cost base is $20,000 ($40,000 - $20,000). Step 3 - Consideration other than membership interests 34. Where the membership interests constitute only a part of the total consideration, the calculated sum [20A] needs to be reduced accordingly. [21] In this example, it needs to be reduced by $10,000: Step 4 - Cost base for new membership interest 35. The aggregate cost base of the new membership interests is therefore $10,000. This amount is then divided by the number of newly-issued ordinary shares (10,000) to determine that the cost base of each share is $1. | Example 3: Capital loss on shares attributable to transfer of asset Facts 36. Tom carries on a business of selling vacuum cleaners and cleaning products as a sole trader. He runs his business from a shop that he rents from a company, Cohen Pty Ltd. Tom is the sole director and shareholder of Cohen Pty Ltd. 37. The cost base and reduced cost base of Tom's shares in Cohen Pty Ltd is $250,000. The cost base of the shop to Cohen Pty Ltd is $100,000. 38. Cohen Pty Ltd also holds a small office which it acquired recently for $150,000. Cohen Pty Ltd rents out the office to an independent third party, Mark, who uses it to carry out his accountancy business. 39. Using the SBRR, Tom (as director of Cohen Pty Ltd) decides to transfer the shop into a newly established trust for no consideration (who also elects for the SBRR to apply), leaving Cohen Pty Ltd with the office as its only asset. Uneconomic losses that are attributable to the transfer are disregarded 40. There are no direct income tax consequences for Cohen Pty Ltd from the transfer of the shop. 41. Tom will not need to adjust the cost base of his shares in Cohen Pty Ltd to reflect the roll-over. However, if Tom later disposes of the shares for a loss, he will have to disregard the loss unless he can show that it was attributable to something other than the roll-over transaction. [22] 42. For example, if subsequent to the restructure Tom receives an unexpected offer from Mark to acquire the shares in Cohen Pty Ltd for $175,000 (reflecting the market value of the office), then Tom would need to disregard the capital loss that he would otherwise make on the shares. 43. This is because Tom's capital loss of $75,000 ($175,000 - $250,000) is wholly attributable to the transfer of the shop. | Example 4: Transfer of assets that form a small business pool Facts 44. Sue acquired an existing small business which provides dry cleaning, laundry, home pick-up and delivery services. 45. During the 2016 income year, Sue purchased new assets for the business for $60,000: 46. Sue chooses to use the small business pool. [23] Using the pool, Sue deducted the business' depreciating assets on a diminishing value method and treated the assets in the pool as a single depreciating asset. 47. For the 2016 income year, Sue claimed a deduction of $17,500 for the pool ($7,500 for the delivery vans [24] and $10,000 for the rest of the depreciating assets [25] ). 48. In early January 2017, Sue sets up a Clean Dry Unit Trust and transfers the business and all of the assets to the trustee. The trustee issued Sue with an additional new unit as consideration for the transfer of the assets. Both Sue and the trustee elect for the SBRR to apply. No direct income tax consequences from the transfer of asset 49. Under the SBRR, a transfer of an asset has no direct income tax consequences, except as provided for under Subdivision 328-G. [25A] 50. The effect of the transfer is that Sue no longer holds all the assets in the general small business pool and the trustee of the Clean Dry Unit Trust takes over the depreciating asset pool. 51. If there had been no transfer, Sue could have claimed a deduction of $12,750 [26] for the pool for the 2017 income year. The effect of the SBRR and section 328-247 is that, the $12,750 deductible amount is split equally between Sue and the trustee of the Clean Dry Unit Trust. 52. For the 2018 and later income years, Sue cannot deduct any further amount under this general small business pool. [27] 53. For the 2018 income year, the opening pool balance for the trustee of Clean Dry Unit Trust will be $29,750. Tax values of any membership interests issued for the transfer are set 54. The trustee of the unit trust issues one new unit to Sue as consideration for the transfer. 55. The cost base of these new membership interests is worked out from the sum of the roll-over costs of the transferred assets that are neither depreciating assets nor pre-CGT assets; and the adjustable values of the transferred assets that are depreciating assets; less any liabilities that the transferee assumes, divided by the number of new membership interests. 56. In this case, the sum of the roll-over costs is the adjustable values of the transferred assets that are depreciating assets. The adjustable values are the costs of the depreciating assets less its decline in value up to that time, which is: $36,125 ($60,000 less $17,500 less half of $12,750). 57. The cost base of this one new unit is therefore $36,125. | Example 5: Direct tax consequence - FX loan Facts 58. Following from Example 4, prior to the restructure, Sue had taken out a foreign currency denominated loan for $30,000 (Australian dollar equivalent) to finance the business. 59. As part of consideration for the restructure, the trustee of the Clean Dry Unit Trust assumes Sue's foreign currency liability to the bank through a novation. Other tax consequences are recognised 60. Forex realisation event 4 occurs when Sue ceases to have an obligation, or part of an obligation, to pay foreign currency. In this case, the event happens when the bank discharges Sue from her liability and sets up a new liability with the trustee of the unit trust. 61. Due to the foreign currency movement, the Australian dollar equivalent of Sue's liability to the bank is $25,000. Sue makes a forex realisation gain of $5,000, and this is recognised for income tax purposes. 62. This consequence is recognised because section 328-450 applies to transfers of assets [28] only. | Example 6: Indirect tax consequence - subsequent debt forgiveness Facts 63. Dean operates a fishing tour business through a company, where he is the sole director and shareholder. The active assets of the business include a fishing boat, which cost the company $300,000. 64. In January 2017, a discretionary trust is set up, Dean is one of the beneficiaries and a family trust election is made with Dean as the primary individual. The termination value and adjustable value of the boat is $260,000 at this time. 65. The company transfers the boat to the trust for $260,000 as consideration, payable within 60 days. Both the company and the trustee choose to apply the SBRR. 66. The trustee does not pay at that time and enters into a written loan agreement that complies with the requirements of section 109N of the ITAA 1936. 67. In June 2018, the company executes an effective deed to forgive the loan. Other tax consequences are recognised 68. A transfer of an asset has no direct income tax consequences, except as provided for under Subdivision 328-G. Related rollover relief for depreciating assets is available under section 40-340. 69. The subsequent application of Division 7A to the loan, which was created in connection with the transfer of the assets, is an indirect consequence of the transfer and is not turned off by section 328-450. The forgiveness of the loan or failure to make minimum yearly repayments may give rise to a deemed dividend under Division 7A. Commissioner of Taxation 13 July 2016 © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).



What this Ruling is about | This Ruling describes how the Commissioner will apply the law as amended by the Tax Laws Amendment (Small Business Restructure Roll-over) Act 2016 to entities that rely on this Ruling in good faith. | If you rely on this Ruling in good faith, you will not have to pay any underpaid tax, penalties or interest in respect of matters covered by the Ruling if it does not correctly state how a relevant provision applies to you. | Date of effect: 3. This Ruling applies to transfers that occur on or after 1 July 2016 which involve: | Background: 4. The SBRR assists small business owners to undertake genuine restructures [2] of their businesses which alter the way assets used in their businesses are held. | 5. The measure affects what gains or losses the transferor recognises, the carrying tax values for the transferee, and what subsequent losses on membership interests can be recognised. | 5A. The SBRR does not affect other tax liabilities (for example, fringe benefits tax or goods and services tax), or prevent any liability for stamp duty from arising under State legislation. Existing obligations under other regulatory regimes, such as the corporations law, must still be complied with. Furthermore, care should be taken that any transactions involving a trust are within the power or duties of the trustee. The following examples are provided to illustrate these consequences.


Related rulings: LCR 2016/3
Legislative references: ITAA 1936 ITAA 1936 109N ITAA 1936 Pt III Div 7A ITAA 1936 Sch 2F Subdiv 272-D ITAA 1997 ITAA 1997 Div 40 ITAA 1997 40-85 ITAA 1997 40-340 ITAA 1997 40-340(1) ITAA 1997 40-345(2) ITAA 1997 70-90 ITAA 1997 108-70 ITAA 1997 Subdiv 115-A ITAA 1997 152-115(3) ITAA 1997 Subdiv 328-D ITAA 1997 328-190 ITAA 1997 328-210 ITAA 1997 328-247 ITAA 1997 Subdiv 328-G ITAA 1997 328-430 ITAA 1997 328-430(1)(d) ITAA 1997 328-450 ITAA 1997 328-450(2)(b) ITAA 1997 328-455(1) ITAA 1997 328-455(2)(a) ITAA 1997 328-455(2)(b) ITAA 1997 328-460 ITAA 1997 328-465 ITAA 1997 328-465(1)(d) ITAA 1997 328-465(1)(d)(i) ITAA 1997 328-465(2) ITAA 1997 328-470 IT(TP)A 1997 IT(TP)A 1997 328-180(6) TAA 1953 Tax Laws Amendment (Small Business Restructure Roll-over) Act 2016