A couple of vital changes in our tax laws are due to commence on 1 July 2016, and they’ll provide a significant opportunity for small businesses to restructure. At the federal level, the new small business restructures rollover (SBRR) kicks in, allowing small businesses to restructure tax-neutrally. 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). These alterations are of particular relevance to business valuations.
Existing rollover relief is limited to business restructuring into a company. Still, 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 the ultimate economic ownership of the assets transferred.
Eligibility
Resident SBEs can access the SBRR. 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, ” 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 does allow for transfers of assets to discretionary trusts. While it’s not essential in all cases, the simplest way to be confident 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 you and your extended family).
Genuine Restructure of an Ongoing Business
The SBRR only applies 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 through a different entity but with the same ultimate economic ownership.
- The transferred assets continue to be used in the business.
- The new structure 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 the 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 excellent flexibility, it is important to fully consider some tax implications that can arise from a restructuring that isn’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 this doesn’t have a tangible impact on most transfers.
- Division 7A issues (these are anti-avoidance provisions that can result in deemed dividends concerning related party loans, payments, or forgiveness of debts) can arise without careful planning.
- GST may apply to transfer some assets but can be appropriately managed.
- Stamp duty implications should be addressed. It will still apply 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 restructuring is unduly tax driven.
Opportunities
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, have married or have grown families since establishing their business, or have grown their business from a one-man operation to employing staff.
A restructuring 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.
Kreston Stanley Williamson Team
*Correct as of June 2016
Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
