The taxation landscape for small business is experiencing significant changes, with Federal and State tax reform being hot items on the legislative agenda.
Consistent with this trend, on 4 February 2016 a new Bill targeted at small businesses, the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 (“Bill”), was introduced into Federal Parliament.
Businesses may restructure for numerous reasons. However, the transfer of assets from one entity to another may trigger significant income tax liabilities. This is where the new Bill may provide welcome relief.
The Bill introduces an optional roll-over available from 1 July 2016 for transfers of business assets between ‘small business entities’ and/or their associated entities as part of a genuine business restructure. Not only will the proposed roll-over provide a CGT exemption for qualifying transfers, it also extends restructure relief to transfers of trading stock, revenue assets and depreciating assets.
Who will qualify for relief?
One of the main requirements is, in general terms, that each party to an asset transfer is a ‘small business entity’. For these purposes, a small business entity is an entity that carries on a business and whose turnover, when aggregated with other related entities, is less than $2,000,000. In reality, this is a relatively difficult criterion for many small businesses to satisfy and only very small businesses will qualify.
The transaction involved must be part of a ‘genuine restructure’ of an ongoing business. There is also a requirement that the ultimate economic ownership (held by natural persons) of the asset(s) being transferred remains the same, whether that is directly or indirectly through interposed entities. Significantly, the proposed measures provide greater flexibility here than existing inter-entity roll-overs by allowing for the roll-over to non-fixed trusts/discretionary trusts, which has not previously been possible.
The broad effect of the roll-over is that the tax cost of the asset being transferred is rolled over from the transferor to the transferee. This means the rollover effectively enables asset transfers to be tax neutral with no direct income tax consequences arising from its utilisation.
Overall, it appears the Bill is well positioned to provide greater flexibility for small businesses contemplating a restructure. CGT rollover to a discretionary trust – that is news!
The Explanatory Memorandum to the Bill explicitly provides that “Restructuring into a more appropriate legal structure may help a business to: . . . move to a more efficient structure for tax purposes”.
For those small businesses with a low turnover, proposed significant income tax roll-over relief and the recently introduced stamp duty concessions and exemptions there has never been a more opportune time for small businesses to restructure in a tax effective way.
Cowell Clarke has significant expertise and experience in all aspects of taxation law and business structuring. If you need any assistance concerning these areas or wish to discuss the proposed legislative changes further, please do not hesitate to contact us.