The roll-over of the business run by a family discretionary trust
Scenario:
I run my current business through a family discretionary trust. I am looking to roll the business into a company or unit trust with the intention to take on additional business partners. I understand that there are roll-over provisions for a trust to a company. Are there any rollover provisions that would apply if I rolled the business from a discretionary trust to a unit trust? The intention is to roll 100% of the business over to this alternative structure and I will own 100% initially. With the view that down the track I would either transfer unit/shares to other business partners (and ultimately have a CGT event) or issue new shares (if I go into a company).
Explanation:
There is the small business restructure roll-over relief that was introduced in 2016 as Div. 328-G of ITAA 1997 which is close. The relief allows a roll into another trust or company. However, there appears to be a problem with applying this relief to a family discretionary trust in these circumstances. Requirements for the relief are:
- both the transferor and transferee of the assets must be small business entities (SBE) and must be Australian tax residents;
- both the transferor and transferee must choose to apply the roll-over in relation to the assets transferred;
- the roll-over will not apply to a transfer to or from an exempt entity or complying superannuation entity;
- the asset being rolled over must pass the active asset test under the small business CGT provisions;
- the roll-over must be part of a genuine restructure of an ongoing business, and
- there must be no material change in the ultimate economic ownership of the assets.
Assuming the family discretionary trust is an Australian resident and an SBE, the trust could roll over into a resident SBE unit trust. However, to meet the "no material change in the ultimate economic ownership of the assets" requirement, a discretionary trust that has equivocal ultimate ownership is required to elect to become a family trust (ITAA 1936 Sch 2F) and the target unit trust is required to have beneficiaries in the same family group to maintain the ultimate economic ownership of the rolled-over assets (s 328-440). This seems impractical as additional business partners in the unit trust are likely to come outside of the family group.