Small business restructure rollover relief means SME restructuring has become easier

There is a “safe harbour” test which is satisfied if there has been a “genuine restructure of an ongoing business”, based on 3 years of compliant activity.

In the case of a discretionary trust, that trust will be deemed to satisfy the “ultimate economic ownership” requirement if:

  • the trust has made a family trust election; and
  • the same individuals who were members of the family group for the purposes of that election before the rollover are members of the family group after the rollover.

The “tax neutrality” of the rollover is achieved by ensuring that the transfer of each asset is deemed to take place at its roll-over cost, plus a provision which states that a transfer made under the provisions “has no direct consequences under the *income tax law”.

The roll-over cost is appropriately defined for each type of asset (e.g. CGT asset, depreciating asset, trading stock) to ensure that there is no CGT or ordinary tax consequence as a result of the transfer.

However the extent to which Division 7A will be prevented from operating by the provisions is open to doubt. The better view is that, the provisions will not prevent the operation of Division 7A to a loan which arises as a result of a transfer of assets for a loan which arises between a company transferor and a transferee entity as a result of a transfer of assets (e.g. the unpaid consideration for the transfer under a sale contract).

Transferring assets without giving market value consideration can expose directors of a company to personal liability to creditors and serious (including criminal) penalties. Therefore the creation of debts on transfers out of companies is difficult to avoid. As a result, careful advice may be required on the Division 7A consequences in these cases.

Legal advice and documents will still be an essential requirement for any restructure, but in most cases the costs are likely to be significantly reduced because of the relative simplicity of the new provisions when compared to the other rollover provisions.

However in some cases, that simplicity may result in uncertainty. In those cases, further advice or Private Ruling applications may be necessary.

Page: 1 2Full Article