The Government is currently considering the implementation of the “Small Business Restructure Rollover”. This new income tax rollover, it if becomes law, will present many new opportunities for businesses to change their operating structure without adverse tax implications.
Overview
Broadly, the proposed roll-over will apply for the transfer of capital gains tax (CGT) assets, trading stock, revenue assets and depreciating assets where a “small business entity” transfers an “active asset” to another small business entity as part of a ‘genuine’ business restructure.
The definitions of “small business entity” and “active asset” are borrowed from the Small Business CGT Concession regime.
One of the key elements of the proposed rollover will be the notion of a “genuine restructure”.
Genuine restructure
The Explanatory Memorandum to the Bill provides examples of situations that would indicate a genuine restructure. These include:
- there is a bona fide commercial arrangement undertaken to enhance business efficiency;
- the business continues to operate following the transfer, through a different entity structure but under the same ultimate economic ownership;
- the transfer of assets continue to be used in the business;
- the restructure results in a structure likely to have been adopted had the business owners obtained appropriate professional advice when setting up the business;
- the restructure is not artificial or unduly tax driven; and
- it is not a divestment or preliminary step to facilitate the economic realisation of assets.
A safe harbour mechanism has been included in the Bill providing that the genuine restructure requirement will be taken to be satisfied where, for three years following the roll-over:
- there is no change in the “ultimate economic ownership” of any of the significant assets of the business (other than trading stock) that were transferred under the transaction;
- those significant assets continue to be active assets; and
- there is no significant or material use of those significant assets for private purposes.
Importantly, a failure to satisfy the safe harbour provisions does not result in the roll-over being unavailable. It will be a question of fact whether a genuine restructure has taken place, in full view of the available evidence.
Any application of the roll-over is subject to the anti-avoidance provisions of the Tax Act (Part IVA ITAA 1936).
Ultimate economic ownership
Another key requirement of the proposed Subdivision 328-G is that there is no change in the ‘ultimate economic ownership’ of the active asset. Importantly, ultimate economic ownership refers to underlying interests of individuals only. 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.
At first blush this concept is difficult for discretionary trusts, as discretionary beneficiaries would not be considered to hold any ultimate economic interest. The Bill provides that in the context of a non-fixed (discretionary) trust, every individual who has ultimate economic ownership of the transferred asset before and after the transfer must be a member of the same ‘family group’. This would mean that family trust elections would be necessary for a discretionary trust.
The Explanatory Memorandum to the Bill provides a useful example at the end of paragraph 1.36:
‘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.’
The proposed new roll-over provisions are useful in circumstances where a business owner has established their structure without taking proper advice at the outset.
If the Bill is passed, the new provisions will apply from 1 July 2016.
Disclaimer
This information is provided as a guide only and is not intended to constitute advice whether legal or professional. You should obtain appropriate advice concerning your particular circumstances.
** Information current as at publishing date.
