Edited version of private advice

Authorisation Number: 1052193996453

Date of advice: 20 November 2023

Ruling

Subject: Small business restructure rollover

Question

Will the disposal of the business assets held in company B to company A meet the requirements of the small business restructure rollover in Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This private ruling applies for the following period:

Year ending 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

Company A has X equal shareholders.

Company A has operated a business of developing, licencing and servicing marketing software for 10 years. Company A does not derive any passive income and more than 80% of the assets it holds are active assets.

Company A does not have any Division 7A loans.

Company B's sold shareholder is company A.

Company B has operated a business of digital marketing consulting and services for almost 10 years.

Company B does not derive any passive income and more than 80% of the assets it holds are active assets.

Proposed transaction

Company B intends to transfer, for nil consideration, all the active assets of the business, including its brand, to Company A.

The operations of company B will continue with the same people, clients and the brand name will be transferred as well.

Reasons for the proposed restructure

The current structure necessitates duplicated administrative resources, mainly around payroll, staff management (where staff complete tasks related to both businesses), inter entity revenue and shared costs. Combining the businesses will simplify the administration which greatly simplifies the affairs of the business.

The transaction also simplifies the affairs by removing the need to maintain separate brands.

In the current structure, there are also issues that will stop the introduction of outside investment in either entity. Company B is hampered in attracting investment where another business is the shareholder which creates a perceived conflict of interest and competing business priorities.

Both companies are small business entities in accordance with subsection 328-110(1) of the ITAA 1997.

The aggregated turnover of the companies will be less than $XX million in the 2024 financial year.

Both are Australian resident companies.

Relevant legislative provisions

Income Tax Assessment Act 1997Subdivision 328-G

Reasons for decision

Summary

The conditions in Subdivision 328-G of the ITAA 1997 have been satisfied and therefore the entities are entitled to apply the small business restructure roll-over.

Detailed reasoning

Subsection 328-430(1) of the ITAA 1997 outlines the conditions to be met for the roll-over relief to be available:

a)    The transfer of the asset is, or is part of, a genuine restructure of an ongoing business; and

b)    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; and

c)    There is no material change in the ultimate economic ownership of the transferred asset; and

d)    The asset being transferred is an active asset of the relevant small business entity at the time of the transfer; and

e)    Both the transferor and each transferee are residents of Australia; and

f)     Both the transferor and each transferee choose to apply the roll-over.

All conditions need to be met for the roll-over to be applied.

Genuine restructure of an ongoing business

Law Companion Ruling LCR 2016/3 - Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters (LCR 2016/3) explains the meaning of the term 'genuine restructure of an ongoing business. Whether a transaction is or is part of a genuine restructure of an ongoing is a question of fact that is determined having regard to all of the circumstances surrounding the restructure.

Paragraph 7 of LCR 2016/3 states:

The following features indicate that a transaction is, or is part of, a 'genuine restructure of an ongoing business':

•         It is a bona fide commercial arrangement undertaken in a real and honest sense to

- facilitate growth, innovation and diversification

- adapt to changed conditions, or

- 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:

- continued use of the transferred assets as active assets of the business

- continuity of employment of key personnel, and

- 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.

LCR 2016/3 also provides the following example:

Example 3: Raising new capital

Facts

30. Melvin and Jenny operate a 'mobile app development' business in partnership and need new capital to fund a major expansion into new ventures.

31. A local investor, Steve, has expressed interest in making a capital contribution in return for an equity stake into the business, if suitable terms can be reached.

32. Melvin and Jenny transfer their active assets to a newly incorporated company where they each own shares in the same proportions as their interests in the partnership assets (50:50). If the SBRR is available, the business assets will be transferred from the partnership in a tax free manner.

Relevant considerations

33. Operating a business through a company more readily allows Melvin and Jenny to attract the necessary investors needed to raise cash and facilitate growth of the business.

34. The potential new investment from Steve is not part of the restructure and will represent a fresh source of capital for the entity post restructure. On these facts the restructure is not a mechanism by which Melvin and Jenny are realising their interest in the business, which they continue to operate.

Conclusion

35. Restructuring in this manner provides benefits to Melvin and Jenny in their ongoing efficient conduct of the business. Melvin and Jenny are undertaking the arrangement to facilitate growth of the business, and not as a preliminary step in divesting the business to Steve. Accordingly, this is a 'genuine restructure of an ongoing business'.

36. However, the Commissioner will be concerned if Steve's capital contribution is used to facilitate a divestment of the business, as this would be inconsistent with it being a 'genuine restructure of an ongoing business'.

Ultimate economic ownership

Subparagraph 328-430(1)(c) of the ITAA 1997 explains that 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;

Application to your circumstances

In this case the Commissioner accepts that the proposed restructure will reduce the duplicated administrative efforts and overall simplify the business operations. From the information provided the restructure will also facilitate capital investment, similar to the circumstances demonstrated in example 3 of LCR 2016/3, but the purpose of the transaction is not to facilitate a divestment of the business.

Further, both parties to the transaction are small business entities with a turnover of less than $10 million. All of the shares in company B are owned by company A, who in turn has X shareholders. We accept that the proposed transfer in this case will not change the ultimate economic ownership of the assets. Further that the assets will be active assets both before and after the transfer. Both parties to the transfer are Australian residents and will elect the rollover. Therefore, the companies satisfy the conditions in Subdivision 328-G of the ITAA 1997 and are entitled to apply the small business restructure roll-over.

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