Small Business Restructure Roll-over Bill
On 4 February 2016 the Government introduced legislation to give effect to the 2015/2016 Federal Budget announcement to provide greater flexibility for small businesses to restructure.
Once passed by Parliament, the new law will provide the unique ability to alter legal structures to suit the circumstances of the small business as they change and adapt over time.
What is the roll-over?
A major impediment to the restructure of a business is the tax liabilities associated with the transfer of ownership of CGT assets, plant & equipment and trading stock.
The roll-over will allow eligible small businesses to avoid those tax liabilities so that they can readily adapt their legal structures to meet the requirements of their business as they change over time.
Broadly, this is achieved by the law applying as if the transfer takes place for the asset's "roll-over cost" such that the transaction does not result in a gain or loss. However, do keep in mind that there is some complexity in the detail that does need to be addressed prior to applying the roll-over.
When does the roll-over start?
The roll-over is intended to be available for restructures occurring on or after 1 July 2016.
Who can make use of the roll-over?
The roll-over will be available to small business entities (<$2m turnover), their affiliates, connected entities and partners who undertake a "genuine restructure".
Broadly, a genuine restructure is one undertaken for the benefit of the business and that is not
- artificial or unduly tax driven; and/or
- a divestment, or a preliminary step to facilitate a divestment.
Are there any other requirements?
The roll-over can only be applied to the transfer of "active" business assets, plant & equipment and trading stock used by a small business.
Tax liabilities associated with the transfer of ownership of assets not associated with the operation of the small business will not be eligible for the roll-over. Eg investments unrelated to the business are ineligible.
Additionally, the ultimate economic ownership must not be changed by the restructure. It is important to note that it will be possible to transfer assets to discretionary trusts provided that they have a family trust election in place.
Lastly, the transferor and transferee must both choose to apply the roll-over, must be tax residents and must not be tax exempt or a complying superannuation fund.
Where might use of the roll-over be appropriate?
There are a great number of circumstances in which the roll-over may be used to achieve superior structures and better tax outcomes. For example, to achieve a more appropriate trading structure for the business. Or to move certain assets to a structure that offers enhanced asset protection and tax efficiency.
The following example from the Explanatory Memorandum is a classic scenario where a small businesses would benefit from the roll-over:
Chris and Victoria are husband and wife and are the only shareholders in Puppy Co, with each owning one share with a cost base of $2 per share.
Puppy Co has successfully carried on a puppy training school and has acquired significant assets including puppy boarding facilities, a vehicle, and goodwill.
Victoria and Chris wish to transfer the puppy boarding premises from Puppy Co to a recently settled discretionary trust, the Fluffy Trust, which will lease the premises to Puppy Co. The family trust election is made nominating Victoria as the primary individual controlling the trust. Victoria and Chris are members of Victoria’s family group.
For the purpose of the roll-over, there will not be a change in the ultimate economic ownership of the premises as a result of the transfer of the asset from Puppy Co to the Fluffy Trust. Therefore, assuming that the other requirements are also met, the roll-over would be available in respect of the transfer.
Is there anything else to be aware of?
Yes. Whilst the roll-over will allow small businesses to avoid CGT/income tax on a restructure, there may be other taxes and issues that will need to be taken into consideration.
For example, stamp duty may still apply to the transfer of assets. There may also be complications associated with GST, financing arrangements, leases, HR and other contractual arrangements.
As such, a full due diligence process should be undertaken in order to ensure that all considerations are properly addressed before embarking on a restructure.
The new legislation will present a unique opportunity to alter legal structures to suit the circumstances of small businesses as they change and adapt over time.
Whilst the legislation progresses through Parliament, small businesses and their advisors should reflect upon their existing structures and consider where there are any improvements that could be facilitated by the roll-over come 1 July 2016.