The purpose of the small business restructure roll-over relief is to make it easier for small business owners to change the legal structure of their business. This greater flexibility allows eligible small businesses to defer capital gains or losses that would otherwise be taxable when transferred. This extends this flexibility to pre-CGT assets, allowing the transferee the ability to deem an acquisition of an active asset to before 20 September 1985.

However, one such structure where ownership is not necessarily easily determined would be a discretionary trust. Since the economic interests in the assets of a discretionary trust are not fixed in proportion, it could not be completely determined that the restructure is eligible. In order for a small business restructure roll-over to apply for CGT purposes, the ultimate economic ownership of the assets must remain the same. Therefore, the assets must remain within the family group just before or just after the transaction.

How this can be completed, without failing the "genuine restructure" requirement necessary for the application of this division, has been shown by a recent private binding ruling.

Relevant facts and circumstances

An individual held pre-CGT land that was used in a primary production business since the date of purchase.

Initially, the business structure for the primary production business was the individual and their spouse.

Many years ago, the structure changed to a discretionary trading trust where the individual was the trustee along with their spouse and child. The individual and their spouse were the appointors of the trust, and the individual is listed as the primary individual in the Family Trust Election.

The proposal is to transfer the pre-CGT land, which is owned under multiple titles, into various discretionary trusts with corporate trustees. For each discretionary trust, a Family Trust Election will be in place with the individual listed as the primary individual.

After the transfer the land will continue to be used in the primary production business run by the family trust started many years ago.

Eligibility for small business restructure roll-over

The taxpayer advised the ATO in the private ruling that the purpose of the restructure is to:

•         provide further asset protection by separating the ownership of assets from the individual who is integral to the trading trust, and

•         enable additional options with financiers to be negotiated over longer terms to assist in the growth of the primary production operations.

These reasons were considered by the Commissioner of Taxation to be in accordance with a genuine restructure.

The Commissioner did not form the opinion that the transfer of the land to the shareholders was a restructure in the course of winding down or realising ownership interests in the land.

As a result, the Commissioner allowed the restructure to be eligible for roll-over relief. And, as the land was a pre-CGT active asset, the family trusts acquiring the land would retain the pre-CGT status.

LCG 2016/3

LCG 2016/3 deals with the ATO interpretation of the genuine restructure of an ongoing business as it relates to the small business restructure roll-over.

In the guideline, a small business will be taken to satisfy the condition where, among other things, there is no change in the ultimate economic ownership of any of the significant assets of the business for three years following the roll-over.

As mentioned through the ruling above, a client with a similar situation may have a significant opportunity to delay the realisation of a major pre-CGT asset.

Information sourced using CCH iknow