The Tax Laws Amendment (Small Business Restructure Roll-over) Act 2016 received Royal Assent on 8 March 2016.
As a result, from 1 July 2016 small business operators will have significantly greater options for reorganising the structure through which they operate their businesses, without causing adverse tax consequences.
To obtain the new rollover benefits, It will be necessary to ensure that each of the parties to the restructure is a small business entity (SBE) and that the restructure:
- forms part of a genuine restructuring of an ongoing business; and
- does not result in any material change in the ultimate economic ownership of the assets affected or of the percentage shares of the holders of that ultimate economic ownership.
Neither “genuine restructuring of an ongoing business” nor “ultimate economic ownership” are legislatively defined. The result is that while the central principles that underpin the provisions resonate well on the ear, they may lead to uncertainty in circumstances where detailed analysis is necessary.
An SBE is an entity which has an aggregated turnover of less than $2 million.
Entities that will not qualify for relief are superannuation funds and exempt entities.
In effect, the new provisions provide the opportunity to over-ride the rollover relief provisions which are currently available to businesses of all sizes. They will provide most small business operators with options for ensuring “tax neutral” reorganisation of their structures in a manner which is both easier to implement and covers a wider range of business assets than is presently the case.
The relief covers reorganisations to and from all types of entities (i.e. sole trader, partnership, company and trust) and addresses both capital gains tax and income tax consequences of moving assets between entities.
In particular, the provisions enable transfers of:
- CGT assets
- trading stock
- revenue assets
- depreciating assets
However the relief provisions do not apply to GST, Fringe benefits tax or State taxes such as stamp duty.
Under the provisions, notwithstanding the fact that assets are transferred to a new entity:
- pre-CGT assets retain their “pre-CGT” status;
- the 15 year exemption period will relate back to the date of acquisition by the transferor.
However the 12 month period for the 50% CGT discount will not relate back to the acquisition date of the transferor. Time will start again for the transferee from the date of the rollover for this concession.
The requirements for relief are:
- An asset is transferred as a part of a genuine restructure of an ongoing business.
- Each of the parties to the transfer are any one or more of the following for the year of transfer:
- an SBE
- an affiliate of an SBE
- connected with an SBE
- a partner in a partnership which is an SBE
- There is no material change in the ultimate economic ownership of the asset rolled over or the percentage holdings of that ultimate economic ownership.
- The assets that are CGT assets are active assets (which can include passively held assets which are held by an affiliate or entity which is connected with the SBE and are used in the SBE’s business)
- Residency requirements are met by both transferor and transferee.
For the relief to apply, it is necessary for both parties to choose to obtain it.
There are specific integrity provisions to prevent losses being generated on membership interests in entities.
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.