Tax Relief on Changing Business Structures

Whilst the ability for a small business to change their legal structure without attracting a tax liability has been available for a little over 15 months, it may be one of those areas that small business and tax practitioners are still coming to terms with. This tax tip considers:
The eligibility criteria;

  • How the provisions work; and
  • What are the impacts. 

Is My Business Eligible 

To be eligible and to gain access to the rollover provisions, a number of tests must be satisfied as follows: 

  1. Both the transferor and the transferee must be small businesses 

This means that both the transferor and the transferee must be businesses each with an aggregated turnover of less than $10 Million.  Note that this aggregated turnover not only relates to the subject entity, but also to entities that may be affiliated or connected with the subject entity. Care is required in determining the applicability of this test as the affiliated or connected with test can be quite complex. 

  1. The restructure must be part of a genuine restructure and not part of a tax driven scheme 

Whether or not a restructure is “genuine” will depend on the specific circumstances surrounding the restructure. The guidelines that accompanied the restructure legislation provide some details on what may be considered a “genuine restructure” and include:

  • A bona fide commercial arrangement has been undertaken to enhance business efficiency;
  • The business continues to operate following the transfer, through a different entity structure;
  • Transferred assets continue to be used in the new business structure;
  • The new structure that has been adopted has taken professional advice when setting up the business;
  • The restructure is not artificial or unduly tax driven; and
  • The restructure is not a divestment of assets or a preliminary step to facilitate the disposal of assets outside the business. 
  1. Ultimate economic ownership must be maintained before and after the restructure 

The ultimate economic owners of an asset are the individuals who, directly or indirectly, own an asset. Where there is more than one individual with ultimate economic ownership, there is an additional requirement that each individual’s share of ultimate economic ownership be maintained. Where a discretionary trust is involved, this means that there is no practical change to the individual beneficiaries who ultimately benefit from the assets before and after the transfer. 

How The Provisions Work 

A business can be operating either as a sole trader, a partnership, a company or as a trust. There may be a time when the business owners believe that they have “outgrown” their current trading structure and that the structure no longer meets their needs. This could involve asset protection issues, commercial requirements, public perception, etc.  The Rollover Provisions provide opportunities for a business to restructure from one legal entity to another without incurring a range of tax liabilities that would normally arise when such a transaction is performed. 
It is important to note however that the rollover provisions only apply to certain “active assets” of a business. Such assets are normally CGT assets, depreciating assets, trading stock and other assets that form part of the operating business being restructured.  The rollover does not apply to certain assets such as shareholder or beneficiary loans or  passive assets held in a structure. 

What Are The Impacts 

There are a number of impacts that you should consider before applying the restructure rollover measures including:

  • Assets are taken to be transferred at their tax cost and as such will not result in an income tax liability to either the transferor or the transferee.
  • There is no requirement for any consideration (market value or otherwise) to be provided by the transferee in exchange for those assets.
  • In relation to specific asset classes, the following should be considered:
  • Pre-CGT assets retain their pre-CGT status.
  • Post-CGT assets are taken to be acquired by the transferee at the date of transfer for their cost at that time. This means that to be eligible to claim the CGT discount on any subsequent sale from the new structure, you will need to wait at least 12 months.
  • Access to the 15 year exemption however as part of  the small business CGT concessions is not affected as the transferee will be taken to have acquired the asset when the transferor acquired it (different to the CGT discount).
  • Trading stock can either be transferred at the transferor’s cost or at the market value of that stock held by the transferor at the start of an income year.
  • Revenue assets take the cost which will result in no profit or loss to the transferee.
  • Depreciating assets will be transferred at the written down value of those assets at the date of the transfer and then continue to depreciated using the same method and effective life that the transferor was using. 
  • There may also be issues to consider in relation to GST or stamp duty on the restructure so professional advice should be sought when utilising the rollover measures. 
  • The restructure provisions can have a very positive outcome for small businesses looking to restructure their affairs, but ensure you seek appropriate professional advice as there may also be some other implications that result in unwanted outcomes..