New small business restructure roll-over

Is your current business structure the best fit for your business and family needs?

A newly introduced tax law “small business restructure roll-over relief” will apply from 1 July 2016 and will present greater opportunities to change operating structures without tax cost.

On 8 March 2016 the “Small Business Restructure Roll-over Bill” received Royal Assent. It broadly provides greater flexibility for “small businesses” (currently defined as a business with an aggregated annual turnover of less than $2 million) to change their current legal structure without income tax cost.

This roll-over was announced in the 2015-16 Budget as part of the Growing Jobs and Small Business package. The roll-over will apply in conjunction with other existing tax roll-overs currently available whereby an individual, partner or trustee transfers an asset to, or creates an asset in, a company in incorporating their business.

Overview of the Small Business Restructure Roll-over

This optional roll-over relief will be available where a small business entity transfers an “active asset” of the business to another small business entity as part of a “genuine restructure”, without changing the ultimate economic ownership of the asset.

This roll-over applies to the transfer of active assets that are Capital Gains Tax (CGT) assets, trading stock, revenue assets or depreciating assets as part of a genuine restructure of an ongoing business.

Requirements of the roll-over relief

In broad terms, the optional roll-over relief will be available where all of the following key conditions are satisfied:

  • The transfer of an asset is part of a “genuine restructure” of an ongoing business.
  • The parties to the transfer are both small business entities, or entities connected to or affiliated with such entities.
  • The transaction does not have the effect of materially changing the ultimate economic ownership of the asset and there is no material change in the percentage share of that ultimate economic ownership of the asset.
  • The assets that are CGT assets are “active assets” (i.e. assets used in connection with the business).
  • Both the transferor and transferee meet certain residency requirements.
  • Both the transferor and transferee choose to apply the roll-over relief in relation to the asset transferred.
  • The transferor and transferee is not an exempt entity or superannuation fund.
  • Whilst “genuine restructure” is not defined in the legislation, a “safe harbour rule” applies which broadly requires the asset transferred be actively used in the business for three years after the roll-over and there is no change in the ultimate economic ownership of the assets transferred.

    What is the effect of the roll-over?

    This roll-over allows small businesses to defer gains or losses that would otherwise be realised upon transfer of an active asset of the business to another small business entity.

    The effect of the roll-over relief is to provide for “tax neutral” consequences for the transfer, but only for the purposes of the transfer and not for the purposes of Goods and Services Tax, Fringe Benefits Tax or duty.

    Importantly, pre-CGT assets will retain their pre-CGT status after the transfer. However, the 12 month period for eligibility for the 50% CGT discount will recommence from the time of the transfer.

    When does the roll-over apply from?

    This roll-over applies to transfer of assets occurring on or after 1 July 2016.

    What to do now?

    On face value, this roll-over provides significantly enhanced opportunities for small businesses to restructure their business in a broader variety of ways than was the case in the past without direct income tax consequences.

    However, compliance with the requirement that the transfer be in connection with a “genuine restructure” will need to be carefully assessed before this roll-over is utilised. Importantly, the deliberate use of this roll-over to accommodate more tax efficient sale of business assets in the short term will not meet this requirement.