1 Will the Proposed Restructure be a transaction that is, or is part of, a genuine restructure of an ongoing business for the purposes of paragraph 328-430(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?
1 Yes. Question 2 Will each party to the Proposed Restructure satisfy the small business or related entity requirement in subparagraph 328-430(1)(b)(i) of the ITAA 1997? Answer 2 Yes. Question 3 Will the Proposed Restructure satisfy the ultimate economic ownership requirements in paragraph 328-430(1)(c) of the ITAA 1997? Answer 3 No. Question 4 Will the transfer of assets under the Proposed Restructure satisfy the active asset requirements in paragraph 328-430(1)(d) of the ITAA 1997? Answer 4 Yes. Question 5 Will the Unit Trust and the New Unit Trust each meet the residency requirement in paragraph 328-430(1)(e) of the ITAA 1997 and the roll-over choice requirement in paragraph 328-430(1)(f) of the ITAA 1997 for the Proposed Restructure? Answer 5 Yes. Question 6 If the Unit Trust satisfies the eligibility criteria to apply the small business restructure roll-over relief under Subdivision 328-G of the ITAA 1997 in relation to the transfer of assets under the Proposed Restructure, can the roll-over relief still be applied where the Family Trusts have not made Family Trust elections under Schedule 2F of the Income Tax Assessment Act 1936 ? Answer 6 N/A.
This ruling applies for the following period : Year ended 30 June 20XX The scheme commenced on: 30 June 20XX
1. The applicant is an Australian resident unit trust (Unit Trust). 2. The trustee of the Unit Trust is Company A, an Australian resident company. The sole shareholder and director of Company A is Person A. 3. X% of the units in the unit trust are held by the Family Trust A, a discretionary trust. 4. The remaining X% of the units in the Unit Trust are owned by Family Trust B, a discretionary trust. 5. The trustee of the Family Trust A is Company B, an Australian resident company. 6. Person A is the sole director and holds X% of the shares in Company B. The remaining X% of the shares are held by Person B. 7. The trustee of the Family Trust B is Person B. 8. Person A is the primary beneficiary of the Family Trust A and Person B is the primary beneficiary of the Family Trust B. 9. The Unit Trust owns and operates two businesses, namely: (i) Business A; and (ii) Business B 10. The aggregated turnover for the Unit Trust for the financial year ended 30 June 20XX and 30 June 20XX was less than $10 million. 11. The trust deeds for the Family Trusts were provided to the Commissioner as part of the private ruling application. Proposed Restructure
12. The Unit Trust is proposing to undertake the Proposed Restructure under subdivision 328-G of the ITAA 1997 in the manner below in the financial year ended 30 June 20XX. 13. In the financial year ended 30 June 20XX, the Unit Trust intends to establish a new unit trust (New Unit Trust) and transfer all assets owned by the Unit Trust used in the Business B (Business Assets) to the New Unit Trust. These assets would include capital and revenue assets used in the business, such as the goodwill associated with the Business B, equipment used by staff (such as computers and printing equipment) and client contact books and databases. 14. All assets being transferred from the Unit Trust to the New Unit Trust under the restructure will be 'CGT assets' and 'active assets' for the purposes of section 328-430 of the ITAA 1997. 15. Employees of Business B will likely migrate to the New Unit Trust. 16. The New Unit Trust will be wholly owned by the Unit Trust. 17. The transfer of assets will be effected under a written restructure agreement between the Unit Trust and the New Unit Trust.
18. The Unit Trust will continue to operate Business A, and all property associated with Business A will continue to be owned by the Unit Trust. 19. It is intended that the Family Trusts make a family trust election naming Person A or Person B as the specified individual. Reasons for Restructure 20. The purpose for the restructure of the business from the Unit Trust to the New Unit Trust is to isolate Business B and the Business Assets in an entity separate from the Business A to facilitate the introduction of a few key employees of Business B (Key Employees) into the ownership structure of Business B. 21. Following the completion of the Proposed Restructure, the Key Employees (or their related entities) will be issued new units in the New Unit Trust. The Unit Trust will not transfer existing units in the Unit Trust to the Key Employees.
22. The purpose of introducing the Key Employees into the Business B ownership structure is to improve retention of the Key Employees and incentivise their performance and contribution to the growth and profit of Business B. It is considered that doing so will enhance Business B's performance and enable it to adapt to changed conditions in order to increase productivity and profit. 23. The applicant submits that there is a commercial need for the Unit Trust to isolate Business B and the Business Assets in an entity separate from Business A. It is intended that the Key Employees are not to benefit from or participate in Business A.
Income Tax Assessment Act 1997 section 328-110 Income Tax Assessment Act 1997 section 328-125 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 paragraph 328-430(1)(c) Income Tax Assessment Act 1997 paragraph 328-430(1)(d) 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 328-440 Income Tax Assessment Act 1997 subsection 995-1(1) Income Tax Assessment Act 1997 subsection 152-40(1) Income Tax Assessment Act 1997 section108-5
Question 1 Will the Proposed Restructure be a transaction that is, or is part of, a genuine restructure of an ongoing business for the purposes of paragraph 328-430(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)? Answer 1 Yes. Detailed reasoning Requirements for roll-over 24. Subsection 328-430(1) states that a restructure roll-over under Subdivision 328-G is available in relation to an asset that, under a transaction, an entity (the transferor) transfer to one or more entities (transferees) if: • the transaction is, or is a part of, a genuine restructure of an ongoing business, and • each party to the transfer is an entity to which any one or more of the following applies: - it is a small business entity for the income year during which the transfer occurred; - it has an affiliate that is a small business entity for that income year; - it is connected with an entity that is a small business entity for that income year; - it is a partner in a partnership that is a small business entity for that income year; and • the transaction does not have the effect of materially changing:
- 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; and • the asset is a * CGT asset (other than a * depreciating asset) that is, at the time the transfer takes effect: - if subparagraph (b)(i) applies - an active asset; or - 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 - if subparagraph (b)(iv) applies - an active asset and an interest in an asset of the partnership referred to in that subparagraph; and • the transferor and each transferee meet the residency requirement in section 328-445 for an entity; and • the transferor and each transferee choose to apply a roll-over under this Subdivision in relation to the assets transferred under the transaction.
25. Furthermore, subsection 328-430(2) provides that a roll-over under Subdivision 328-G is not available if the transferor or any transferee is either an exempt entity or a complying superannuation entity. As all parties to the Proposed Transaction are not exempt entities or complying superannuation entities, subsection 328-430(2) does not apply. Paragraph 328-430(1)(a) - genuine restructure of an ongoing business 26. Paragraph 328-430(1)(a) requires that a transaction is, or is part of, a genuine restructure of an ongoing business. 27. 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. 28. Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters (LCR 2016/3) provides guidance of the Commissioner's view on whether a transaction will be part of a 'genuine restructure of an ongoing business'.
29. Paragraph 7 of LCR 2016/3 outlines the following features that the Commissioner accepts will indicate that 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. 30. Paragraph 10 of LCR 2016/3 lists some factors which tend to indicate that a restructure is not a genuine restructure of an ongoing business. These include:
• 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 • there are other tax outcomes that do not reflect economic reality. 31. Paragraph 11 of LCR 2016/3 provides that the small business restructure roll-over contemplates restructures to or from more than one entity. Accordingly, there may be circumstances where not all business assets that are necessary for the continued operation of an 'ongoing business' are transferred. For example, small business owners may decide to transfer plant and equipment to a new entity but leave real property in the original entity. On its own, this is not a factor that is inconsistent with the conclusion that a restructure is a 'genuine restructure of an ongoing business'.
32. However, the Commissioner's view is that 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. In the Commissioner's view, 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. 33. Relevantly, in Example 2 of LCR 2016/3 [1]
the Commissioner considers a restructure involving the issue of shares to essential employees, which occurred after the transfer of its active assets to another entity. These shares were issued to provide incentives for the employees' ongoing involvement in the business. It was concluded that the restructure was a 'genuine restructure of an ongoing business' Application to your circumstances 34. The primary objective for the Proposed Restructure is to separate and isolate Business B from Business A to enable the introduction of Key Employees into the ownership structure of Business B, with the intention of improving the retention of the Key Employees and incentivise their performance and contribution to the continued growth and profit of Business B. 35. There is a commercial advantage in restructuring to be able to provide incentives to the Key Employees. The admission of employees as equity participants into the business is undertaken to enhance business performance and enable it to adapt to changed conditions in order to increase productivity and profit.
37. Given the above, and in line with Example 2 of LCR 2016/3, the Commissioner is satisfied that the restructure undertaken by the Unit Trust is a 'genuine restructure of an ongoing business'. Consequently, the requirement in paragraph 328-430(1)(a) is satisfied. Question 2 Will both the Unit Trust and New Unit Trust satisfy the small business or related entity requirement in paragraph 328-430(1)(b)? Answer 2 Yes. Detailed reasoning Paragraph 328-430(1)(b) - small business or related entity 38. Paragraph 328-430(1)(b), requires both the transferor and transferee to satisfy one or more of the following: • it is a 'small business entity' for the income year during which the transfer occurs • it has an 'affiliate' that is a small business entity for that income year • it is 'connected with' an entity that is a small business entity for that income year, or • it is a partner in a partnership that is a small business entity for that income year. Small business entity
39. Under subsection 328-110(1), an entity is a 'small business entity' for an income year under if it carries on a business in the current year and the aggregated turnover for the previous year was less than $10 million or likely to be less than $10 million for the current income year. 40. Subsection 995-1(1) defines the term 'business' to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee. 41. Whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators to determine the matter, these indicators are summarised in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production . Connected with 42. The term 'connected with' is defined under section 328-125, under which an entity is 'connected with' another entity if either entity controls the other entity, or both entities are controlled by the same third entity. Application to your circumstances
43. In the income year of the transfer, the Unit Trust will have carried on a business and will have an aggregated turnover below $10 million for Australian income tax purposes in either or both the income year of the transfer and/or the income year immediately preceding the transfer. Therefore, the Unit Trust will satisfy section 328-110. 44. The New Unit Trust is connected with the Unit Trust as both entities are controlled by the Family Trusts. Therefore, the New Unit Trust will satisfy section 328-125. 45. Accordingly, the Unit Trust and New Unit Trust will satisfy the requirements in paragraph 328-430(1)(b). Question 3 Will the Proposed Restructure satisfy the ultimate economic ownership requirements in paragraph 328-430(1)(c)? Answer 3 No . Detailed reasoning Paragraph 328-430(1)(c) - Ultimate economic ownership 46. Paragraph 328-430(1)(c) requires that the restructure does not have the effect of materially changing which individual has, or which individuals have, the ultimate economic ownership of the business assets. 47. The term 'ultimate economic ownership' is not defined in the income tax legislation. The
Explanatory Memorandum to the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 (the EM), which introduced the provisions in Subdivision 328-G, explains at paragraph 1.29 that the ultimate economic owners of an asset are the individuals, the natural persons, who, directly or indirectly, beneficially own an asset. 48. At paragraph 1.30 the EM further states that: 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. 49. The EM further provides that for the purposes of subparagraph 328-430(1)(c)(ii), an individual's share of the ultimate economic ownership of an asset being 'materially unchanged' means that they have the same proportion of ultimate economic ownership before and after the transaction. In other words, that an individual's share of ultimate economic ownership of an asset is ascertainable. Paragraph 1.31 of the EM states:
If there is more than one individual who is an ultimate economic owner of an asset, there is an additional requirement that each of those individuals' share of that ultimate economic ownership be materially unchanged, maintaining the same proportionate ownership in the asset . [Schedule 1, item 1, subparagraph 328-430(1)(c)(ii)] 50. The presence of a discretionary trust in an ownership structure generally means that the ultimate economic ownership test in paragraph 328-430(1)(c) cannot be satisfied. This is because the economic interests that the objects of a discretionary trust have in a trust asset are not fixed in proportion and depend on the trustee exercising their discretion. This means an individual's share of ultimate economic ownership cannot be ascertained. Ultimate economic ownership - discretionary trusts
51. Section 328-440 provides for an alternate ultimate economic ownership test for discretionary trusts. The provision states that 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 the requirements in that section are satisfied. 52. Section 328-440 provides that: 328-440 Ultimate economic ownership - discretionary trusts 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. Application to your circumstances 53. Under the Proposed Restructure, the Business Assets will be transferred from the Unit Trust to the New Unit Trust. The unitholders of the New Unit Trust will be identical to the unitholders of the Unit Trust. That is, the unitholders of the New Unit Trust will be the same discretionary trusts as the unitholders of the Unit Trust. 54. As the Business Assets are not directly owned by individuals, the ownership interests in the interposed entities must be considered to determine which individuals have ultimate economic ownership in the Business Assets and the share of ultimate economic ownership that each individual has. This requires consideration of the Family Trusts as they are the only unitholders in the Unit Trust.
55. As explained above in paragraphs 47 to 50, the economic interests that the objects of a discretionary trust have in a trust asset are not fixed in proportion. For example, under the terms of the trust deeds for the Family Trusts [2] , the trustee at its absolute discretion shall distribute the trust's respective income to any beneficiary in such amount as it determines. Therefore, it is not possible to ascertain an individual's share of ultimate economic ownership in the Sale Business Assets (via the ownership interest in the Unit Trust held by the Family Trusts). An assessment of whether there has been a material change in an individual's share of ultimate economic ownership cannot be undertaken when there is no ascertainable share to begin with. 56. For the reasons outlined above, the Unit Trust cannot satisfy the requirement of subparagraph 328-430(1)(c)(ii), and as a result it is not eligible for a roll-over under section 328-430.
57. Consequently, although paragraph 328-430(1)(c) has not been satisfied, it is necessary to consider whether the Proposed Restructure would meet the alternative ultimate economic ownership test for non-fixed trusts provided in section 328-440 in order for the restructure roll-over to be available. 58. Under the Proposed Restructure, the Business Assets to be transferred are not included in the property of those discretionary trusts (i.e. the Family Trusts) either just before or just after the Proposed Restructure and therefore subsection 328-440(a) cannot be satisfied. As such, section 328-440 has no application to the Proposed Restructure. The Proposed Restructure will not satisfy all the conditions in section 328-430 and the Unit Trust will not be eligible to choose roll-over under Subdivision 328-G.
59. Furthermore, paragraph 328-430(1)(c) does not have reference to family trusts or family groups, so it is therefore important to note that a family trust election or status as a family trust does not assist the Unit Trust. Asserting that the family group, or the members as a collective, hold the ultimate economic ownership, also does not assist in meeting subparagraph 328-430(1)(c)(ii) as it does not deal with the shares of ultimate economic ownership that the individuals have. 60. As such, the Unit Trust will not satisfy the requirements under paragraph 328-430(1)(c). Question 4 Will the transfer of assets under the Proposed Restructure satisfy the active asset requirements in paragraph 328-430(1)(d)? Answer 4 Yes . Detailed reasoning Paragraph 328-430(1)(d) - Active asset 61. Paragraph 328-430(1)(d) states: (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 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 paragraph; ... 62. Referring to question 2 above, if in respect of the transferor, subparagraph 328-430(1)(b)(i) applies in respect of the transfer of the assets from Unit Trust to New Unit Trust, the relevant test, pursuant to subparagraph 328-430(1)(d)(i), is whether the asset is an active asset at the time the transfer takes effect. 63. Subsection 152-40(1) provides that: (1) *CGT asset is an active asset at a time if, at that time: (a) You own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a *business that is carried on (whether alone or in partnership) by; (i) you; or (ii) ; your *affiliate; or (iii) another entity that is *connected with you; or
(b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (either alone or in partnership) by you, your affiliate, or another entity that is connected with you. Business Property 64. CGT assets are defined in subsection 108-5(1) as: (a) any kind of property; or (b) a legal or equitable right that is not property. 65. Paragraph 108-5(2)(b) outlines that goodwill, or an interest in it, is a CGT asset. Application to your circumstances 66. Pursuant to paragraph 108-5(2)(b), goodwill is a CGT asset. At the time of the Proposed Restructure, the goodwill is owned by the Unit Trust and it is used by the Unit Trust in the course of carrying on its business. 67. Immediately following the Proposed Restructure the goodwill will be owned and used by the New Unit Trust in the course of carrying on its business. 68. Therefore, at the time the Proposed Restructure takes effect, the goodwill will be an active asset in accordance with subsection 152-40(1) and will also satisfy subparagraph 328-430(1)(d)(i).
69. The Unit Trust has stated as a fact that all assets being transferred to the New Unit Trust under the Proposed Restructure will be 'CGT assets' and 'active assets' for the purposes of s 328-430. Therefore, the requirements under paragraph 328-430(1)(d) will be satisfied. That is, at the time of the Proposed Restructure, the assets are owned by Unit Trust and used by it in the course of carrying on its business and immediately following the Proposed Restructure, the assets will be owned and used by New Unit Trust in the course of carrying on Business B. Question 5 Will the Unit Trust and the New Unit Trust each meet the residency requirement in paragraph 32-430(1)(e) and the roll-over choice requirement in paragraph 328-430(1)(f) for the purposes restructure? Answer 5 Yes . Detailed reasoning Paragraph 328-430(1)(e) - Residency requirement 70. Paragraph 328-430(1)(e) requires both the transferor and the transferee to meet the residency requirements outlined in section 328-445. 71. For the purposes of paragraph 328-430(1)(e), the Unit Trust is the transferor and the New Unit Trust is the transferee.
72. A trust meets the residency requirement in section 328-445 if the trust is a resident trust for CGT purposes. 73. Section 995-1 defines a unit trust as a resident trust for CGT purposes if the following is satisfied: (i) Either any property of the trust is located in Australia, or the trust carries on a business in Australia; and (ii) Either the central management and control of the trust is in Australia, or Australian residents held more than 50% of the beneficial interest in the income or property of the trust. 74. Both the Unit Trust and the New Unit Trust will satisfy the above requirements and therefore meet the residency requirement in section 328-445. 75. Accordingly, paragraph 328-430(1)(e) will be satisfied. Paragraph 328-430(1)(f) - election to apply the roll-over 76. Pursuant to paragraph 328-430(1)(f), both the transferor and transferee must elect to apply the roll-over under Subdivision 328-G in relation to the assets transferred. 77. Both the Unit Trust and the New Unit Trust will choose to apply the roll-over in relation to the Proposed Restructure. Therefore, the requirement in paragraph 328-430(1)(f) will be satisfied. Question 6
If the Unit Trust is eligible to apply the small business restructure roll-over relief to the proposed transfer under Subdivision 328-G, is it able to do so if the Family Trusts do not make family trust elections? Answer 6 N/A. It is not relevant whether the Family Trusts make family trust elections. Under the Proposed Restructure the Unit Trust will not satisfy all the conditions in section 328-430 and section 328-440 has no application to the Proposed Restructure. Detailed reasoning 78. As discussed above, particularly under question 3, under the Proposed Restructure the Unit Trust will not satisfy all the requirements contained in section 328-430. 79. Under the Proposed Restructure, the Business Assets to be transferred are not included in the property of those discretionary trusts (i.e. the Family Trusts) either just before or just after the Proposed Restructure. Therefore paragraph 328-440(a) cannot be satisfied. As such, section 328-440 has no application to the Proposed Restructure and therefore family trust elections are not relevant in these circumstances.
80. Finally, section 328-430 does not make reference to family trusts or family groups, so it is therefore important to note that a family trust election or status as a family trust does not assist the Unit Trust in the Proposed Restructure. > [1] Paragraphs 24-29 of LCR 2016/3. [2] Clause 6 of the respective discretionary trust deeds for the Family Trusts.