Taxation Law – Rollover relief for changes to small business structures
TAXATION LAW – ROLLOVER RELIEF
FOR CHANGES TO SMALL BUSINESS STRUCTURES
The Commonwealth Government announced greater Capital Gains Tax (“CGT”) rollover relief to small businesses to come into effect from 01 July 2016.
In Australia, small businesses operate as sole traders, partnerships, trusts, companies or a combination. Small business owners determine which structure is the most appropriate for their businesses including taxation issues, personal liability, risk management, access to equity capital, introduction of new capital or owners and compliance costs.
The most appropriate structure for a small business may change over time. An initial legal structure might become inadequate in the future. Restructuring into a more appropriate legal structure (like a company or a unit trust) may help a business to continue to develop and grow. This will help adapt to current economic and taxation conditions.
However, where a restructure requires business assets to be transferred from one entity to another, such as from a company to a trust, significant income tax liabilities may arise. The impact of these liabilities on cash flow and available capital may create an impediment to restructuring.
Currently, rollover relief is available in limited circumstances for business restructures. There is no rollover relief, for example, for a restructure that transfers business assets from a company to a sole trade, partnership or trust.
The new July 2016 law, however, provides small businesses with a new rollover for gains and losses arising from the transfer of business assets that are CGT assets, depreciating assets, trading stock or revenue assets as part of the restructure of a small business. This provides small businesses with the flexibility to change their legal structure without realizing an income tax liability on the transfer of those assets.
The tax cost of the transferred assets is rolled over from the entity that transferred the assets to the entity to which the asset or assets are transferred. This is achieved by providing that:
The transferor or giver is taken to have received an amount which would result in them making neither a gain or loss under the transfer; and
The transferee or recipient is taken to have acquired each asset for the amount that equals the transferor’s tax cost for the asset just before the transfer.
Generally, the rollover applies to transfers of business assets that do not result in a change in the ultimate economic ownership of the assets.
Discretionary trusts may be able to access the rollover if the assets continue to be held for the benefit of the same family group.
Who then is eligible for the rollover relief in the new July 2016 laws?
An entity will only be a small business entity if:
The combined annual turnover of the entity, and any other entities that are affiliated or connected with it, is less than $2,000,000.00; or
The sum of the net values of the entities CGT assets together with the net values of CGT assets of other entities that are affiliated or connected with it, are less than $6,000,000.00.
Furthermore, the assets being transferred must be active assets for CGT purposes. Problems will arise with the holders of investment properties who manage those properties themselves and claim that they are running a business and that the properties are active assets for CGT purposes.
The requirements for rollover are where:
The transferor or giver transfers a CGT asset or all of its business assets that are CGT asset or all of its business assets that are CGT assets, depreciating assets, trading stock and revenue assets;
The transferor chooses to apply the rollover;
The transaction is a restructure that has the effect of changing the type of any or all of the entities and/or the number of entities from which all or part of the business is operated.
It is a condition of the rollover that no consideration be provided for the transfer. Furthermore, the transferor, the transferee and the ultimate economic owners of the assets must be residents of Australia and taxation residents.
The transaction must not have the effect of changing the ultimate economic ownership of the transferred asset or assets. The ultimate economic owners of an asset are the individuals who, directly or indirectly, beneficially own an asset.
The rollover is restricted to circumstances where there has been no change in the ultimate economic ownership of assets resulting from the transfer of the assets between small business entities.
The situation is more complicated for discretionary trusts because beneficiaries generally do not have an interest in any asset or income of the trust until the trustee exercises their discretion. Where, however, discretionary trusts have made a family trust election, the trusts are administered for the benefit of a specified family group. For the purposes of the rollover, members of this group will be the ultimate economic owners of the business assets.
This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.
For any further information concerning this article, please contact Michael Pickering, Principal, Judicate Lawyers – Barristers and Solicitors of Unit 11 / 233 Cardigan Street, Carlton, Victoria, 3053. His contact details are as follows: