A couple of vital changes in our tax laws are due to commence from 1 July 2016, and they’ll provide a big opportunity to small businesses to restructure. At the federal level, the new small business restructure roll-over (SBRR) kicks in, allowing small businesses to restructure in a tax neutral way. At the same time in NSW, stamp duty on transfers of business assets (other than land) and shares in private companies will be abolished (more details on this can be found here).
Existing roll over relief is limited to business restructure into a company, but the new SBRR will be far less restrictive, allowing small business entities (SBE) to move from their current structure to a sole trader, partnership, discretionary trust, unit trust or company structure without triggering capital gains or income tax. This is provided that there is no change in ultimate economic ownership of the assets transferred.
The SBRR can be accessed by resident SBEs. An entity is an SBE if it carries on a business and satisfies the $2 million aggregate turnover test. It is available for transfers of “active assets”, which are broadly any asset used in conducting business. The rollover is also available for active assets that are used by an SBE, but are passively held by a connected entity (e.g. where a business is conducted from a property owned by an individual and rented to his SBE operating company, a transfer of the property would be eligible for SBRR).
Ultimate Economic Ownership
To be eligible for SBRR, a transaction can’t change the ultimate economic ownership of the asset. Only natural persons can be ultimate economic owners, so where a company, partnership or trust owns the asset it is necessary to trace through those interposed entities to determine the ultimate economic owners. For transfers from companies, dividend access shares owned by non family members could present problems that will need close consideration.
Transfers to Discretionary Trust
The SBRR do allow for transfers of assets to discretionary trusts. While it’s not essential in all cases, the simplest way to be certain of satisfying the ultimate economic ownership requirement is for the discretionary trust to make a family trust election. This involves making an election that will limit the possible beneficiaries of the trust to your family group (which can include both your own and your extended family).
Genuine Restructure of an Ongoing Business
The SBRR is intended to only apply to a genuine restructure of an ongoing business. There are a range of factors that are indicative of a genuine business restructure, including:
- It’s a bona fide commercial arrangement undertaken to enhance business efficiency.
- The business continues to operate following the transfer, just through a different entity but with the same ultimate economic ownership.
- The transferred assets continue to be used in the business.
- The new structure is one that would likely have been adopted had appropriate professional advice been obtained when setting up the business.
- It’s not artificial or unduly tax driven.
- It’s not a divestment or preliminary step to facilitate the sale of the assets.
There is a safe harbour rule that the transaction will be treated as a genuine restructure of an ongoing business where for three years following the rollover:
- there is no change in ultimate economic ownership of the significant assets;
- those assets remain active assets; and
- there is no significant or material private use of the assets.
Other Tax Issues to Consider
While SBRR provides great flexibility, it is important to fully consider some tax implications that can arise from a restructure that aren’t addressed by the relief.
- The ownership period for eligibility for the 50% general CGT discount resets on transfer, so the transferee would not be eligible for the discount until 12 months after the transfer. Note that the three year safe harbour rule will likely mean that this doesn’t have a real impact for most transfers.
- Division 7A issues (these are anti-avoidance provisions that can result in deemed dividends in relation to related party loans, payments, or forgiveness of debts) can arise without careful planning.
- GST may apply to the transfer of some assets but can be managed with proper planning.
- Stamp duty implications should be addressed. It will still be applicable to land transfers or transfers in some states.
- The Commissioner has warned that the general anti-avoidance provisions may apply even though the safe harbour rules are satisfied where the restructure is unduly tax driven.
Business and family circumstances change for business owners, and we often come across businesses with structures that are no longer appropriate. For example, the business owner may have accumulated assets that they now wish to protect from business risk, they may have married or have growing families since establishing their business, or they may have grown their business from a one man operation to employing staff.
A restructure for commercial reasons will often result in substantial tax benefits. For example:
- Moving from a sole trader operation to a discretionary trust to better protect your assets might allow some profit to be distributed to other family members at lower tax rates.
- Moving an appreciating asset, such as business premises, from your trading company into an asset holding trust would allow access to the 50% general CGT discount that wouldn’t be available within the company.
- Moving active assets from a company to a trust or individual can result in better access to the small business CGT concessions.
If you’re in business and have a turnover of up to $2 million, you should contact us to discuss your specific circumstances.