The government recently introduced the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 which will seek to increase the aggregated turnover threshold for access to most small business tax concessions to $10m (previously $2m).
The bill and accompanying explanatory memorandum confirms that the Small Business Restructure Roll-over in subdivision 328-G recently enacted is intended to apply to small businesses with an aggregated turnover of less than $10m (provided the bill is passed). This announcement is good news for small businesses with greater than $2m turnover as it may provide them with the opportunity to reconsider the legal structure with which their business is currently operated.
It should be noted that the bill has been referred to the Senate Economics Legislation Committee and as such is not yet law, however if passed will apply from 1 July 2016, the start date of the Small Business Restructure Roll-over.
Restructure Roll-over Relief for Small Businesses
From 1 July 2016, a taxpayer operating as a sole trader, partnership, trust or company may decide that it would be more appropriate to operate their business through a different legal entity. The transfer of business assets to a new legal structure under ordinary tax rules could result in significant tax liabilities where the entity is not eligible for the Small Business Restructure Roll-over.
The Small Business Restructure Roll-over enables small business entities to transfer capital gains tax (“CGT”) assets, depreciating assets, trading stock and other revenue assets between entities and defer the gains or losses on the transfer until the subsequent sale of those assets to a third party. The effect of the roll-over is that the new legal entity acquires the assets with the same tax characteristics as the original holder of the assets.
There are a number of requirements that must be met in order for the transfer of assets to be eligible for the Small Business Restructure Roll-over to be available. The most contentious of these requirements is that the transaction must be a part of a 'genuine restructure of an ongoing business'.
The term, 'genuine restructure' is not defined in the legislation and can only be determined based upon the facts and circumstances applying to each individual case. In the opinion of the government, the roll-over is being provided with the intention to facilitate the restructure of businesses to more appropriate entities for purposes of gaining efficiencies or to put the taxpayer in a position they may have been in had they sought appropriate advice upon initially structuring the business.
Genuine Restructure - Safe Harbour
The government have kindly included a 'safe harbour' for what will be a 'genuine restructure' and therefore eligible for the Small Business Restructure Roll-over assuming all other conditions are met. Broadly for the safe harbour to apply the following conditions must be present in the three year period following the transaction takes effect:
- there must be no change to the ultimate economic ownership (direct and indirect) of any of the significant assets of the business other than trading stock
- the significant assets continue to be active assets
- there is no significant or material use of those significant assets for private purposes
Whilst many taxpayers will welcome the security that is provided by the safe harbour, it should be noted that the Small Business Restructure Roll-over does not require the assets to be held for three years in order for it to be eligible. Restructures that fail to meet the safe harbour may however be subject to greater scrutiny from the ATO.
Other tax consequences
Whilst the expansion of the eligibility of the Small Business Restructure Roll-over is welcomed, care should be taken by taxpayers seeking to restructure their business. For example, it is noted that generally the transferee will be taken to acquire assets on the date of the transaction, which will have the effect of refreshing the holding period for the purposes of the CGT Discount. Pre-CGT assets will be considered to retain their pre-CGT status in the hands of the transferee.
Further, tax losses held in the original entity are not eligible for transfer, and a taxpayer would need to consider the value of those losses prior to entering into any restructuring arrangement.
Lastly, the Small Business Restructure Roll-over only provides CGT and income tax relief to small businesses. Taxpayers should consider the potential application of other taxes such as transfer duty or goods and services tax prior to entering into any restructuring arrangement.
The proposed expansion of the Small Business Restructuring Roll-over to entities with a turnover of less than $10m will certainly provide additional opportunities for small business owners to consider their current structures.
We strongly recommend taxpayers who are interested in reviewing their business structures to seek advice prior to entering into any restructuring arrangement.
Should you have any queries relating to the above, please contact your local office.