We have recently come across two (2) private ruling requests, in 2024, for restructures utilising the subdivision 328-G small business restructure provisions that we think are strange:
An operating discretionary trust converting to a company wholly owned by an individual; and
A partnership of an individual and discretionary trust converting to a company wholly owned by the partnership.
Scenario A
We find this scenario strange because of the reduction in flexibility and asset protection achieved by the structure.
The operating discretionary trust affords flexibility of distributions (as set out in our tax tip #54) and asset protection – because no single person is beneficially entitled to the assets of the trust.
However, restructuring to a company wholly owned by an individual removes the flexibility of distributions and increases risk due to lower asset protection because a single person, being the individual, is beneficially entitled to all the shares in the company and those shares are subject to claims from the individual’s creditors, even where those creditors are not linked to the business of the company.
We can reasonably assume the individual is a member of the family in control of the discretionary trust otherwise the small business restructure provisions would not apply.
We are unable to understand why there would be a need to restructure in this way. We would appreciate if any readers have insight that they wish to share with us.
We can only guess that the restructure occurred this way because the applicant was trying to ensure that the ultimate economic ownership test was satisfied – in accordance with the small business restructure provisions.
We suggest a better outcome would have been to restructure to a company wholly owned by the operating discretionary trust. In effect, the operating discretionary trust becomes a passive discretionary trust as shareholder.
Our suggestion means the flexibility of distributions and asset protection elements remain the same both pre- and post-restructure.
Further, the suggested restructure ought to occur under subdivision 122-A (rollover by individual/trustee to wholly-owned company – see tax tip #52) as opposed to the small business restructure provisions.
This is important because subdivision 122-A does not require a basis that it is a genuine restructure (as required under the small business restructure provisions). The fact a trustee rolls over to a wholly-owned company is a sufficient basis.
The application of subdivision 122-A to the restructure would have been a more straightforward exercise.
We can only guess that because the applicant and their advisor were relying upon the small business restructure provisions, which are more complicated provisions due to the ultimate economic ownership test, that the applicant and advisor required a private ruling on account of such complication.
If the applicant and/or their advisor instead relied upon subdivision 122-A, which has much less complicated provisions, then we suggest a private ruling (including the expense and time delay of obtaining such private ruling) would not have been needed.
In these circumstances we have to assume that the applicant and their advisor were not aware of subdivision 122-A.
Scenario B
This scenario is not strange in the fact there is a rollover from a partnership to a company wholly owned by the partnership.
The strange fact was that the applicant relied upon the small business restructure provisions.
The same result would have been achieved by relying on subdivision 122-B (rollover by partnership to wholly-owned company).
Similar to scenario A:
subdivision 122-B does not require a basis that it is a genuine restructure (as required under the small business restructure provisions). The fact the partnership rolls over to a wholly-owned company is a sufficient basis; and
we suggest that relying upon subdivision 122-B, which has much less complicated provisions than the small business restructure provisions, would mean that a private ruling would not have been needed.
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