On 5 November 2015 the Commonwealth Treasury released exposure draft legislation to implement the 12 May 2015 Budget announcement that a roll-over would be introduced to allow small businesses to change their legal structure without incurring a capital gains tax (CGT) liability. The Tax and Superannuation Laws Amendment (2015 Measures No 6) Bill 2015: Small business restructure rollovers (the Bill) is drawn even more widely than the original announcement suggested. Not only can CGT assets be transferred without a tax cost but an entire business can be moved to another entity without CGT and also without tax on the transfers of trading stock, depreciating assets or other revenue assets.
Given the recent State budget announcements in South Australia there is a very real prospect that significant restructures could take place without prohibitive tax costs.
The Bill introduces a new concept into tax law; the concept of “roll-over cost”. An asset’s roll-over cost is defined in proposed sub-section 328-430(2) as an amount which:
When the roll-over applies the entity that transferred the asset is deemed to receive the roll-over cost and so have no federal tax consequences. The entity which acquires the asset has a cost base equal to the roll-over cost. This could be a welcome relief for a corporate entity which had significant goodwill with no cost base. By transferring the business to individual shareholders or a trust for the individual shareholders the goodwill is transferred with no tax consequence and the new owners will, unlike the company, be eligible for the general 50% discount.
If a business is transferred by a company or unit trust this could mean that the holder of shares or units could make a capital loss after the transfer. To prevent this happening there is a provision which reduces the cost base of shares or units in the entity transferring the business. For example, if a company did transfer its business to a partnership of individuals the shareholders would, if the company had owned nothing but the business, be left with worthless shares. After the roll-over the cost base of the shares would be reduced by the value of the roll-over. If this would result in the shares having a negative cost base their cost base is reduced to zero.
The new roll-over can be used by individuals, partnerships, companies and trustees provided they meet the requirements outlined in the draft law. An eligible entity includes a small business (one with a turnover of less than $2 million) which also has, together with connected entities and affiliates, $6 million or less in net assets. An entity connected with that small business or one which is its affiliate as that terms is defined in Division 328 of the legislation will also be eligible.
Both the transferor and the acquiring entity must be Australian tax residents and the ultimate owners of both entities must be Australian tax residents. Finally, the new law will require that the ultimate economic ownership of the asset remains unchanged.
This last requirement could mean that discretionary trusts could not use the new roll-over as the beneficiaries of a discretionary trust have no interest in the underlying assets and so are not ultimate economic owners. However, there is a proposed concession that where a transferor discretionary trust has made a family trust election (FTE) and the transferees are all members of the family group in relation to that election it will be considered that there is no change in the ultimate economic ownership and the trustee can access the rollover. Similarly, if persons or entities are members of the family group in relation to a trust which has made a FTE those persons or entities can use the roll-over to transfer assets to that family trust. Despite the obvious benefits of the roll-over it is still worth considering the significant and generally permanent restrictions imposed by a FTE; they should never be made lightly.
Tax exempt bodies and superannuation funds are specifically excluded as eligible transferees under this legislation.
The following examples show where the new roll-over could significantly enhance the structure of a small business:
The new law is expected to apply from 1 July 2016.
For more information on the possibilities the roll-over could open up for your business please contact Julie Van der Velde or any of the DW Fox Tucker Tax team.
This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this alert, or what it means for you, your business or your clients' businesses, please feel free to contact us.