The Small Business Restructure Rollover is now before the Parliament!

Its almost law!!!!

Under this Bill, from 1 July 2016, small businesses can roll-over “active assets” that are CGT assets, trading stock, revenue assets and depreciating assets as part of a genuine restructure of a small business from one entity to another.

In Summary, here is how it works:

Subdivision 328-G creates an optional roll-over where a small business entity transfers an active asset of the business to another small business entity as part of a genuine business restructure, without changing the ultimate economic ownership of the asset.

Genuine restructure

In the EM the Treasury makes it clear that they could not come up with a solution to all the tax savings ideas that this rollover could create so they have added the “genuine restructure” rule. As they state in the EM:

“The genuine restructure principle distinguishes genuine restructures from artificial or inappropriately tax-driven schemes. This acknowledges that while tax considerations are significant factors in small business structuring, a minority of taxpayers and advisers may try to manipulate the operation of a ‘black letter’ provision of the tax law to achieve an inappropriate or uneconomic tax outcome.”

So if you have a company with lots of assets and a Division 7A loan and you transfer all the assets other than the loan (which you can’t transfer according to paragraph 1.40 of the EM as it is not an active asset) for no consideration so that there is no distributable surplus left in the company so you can forgive the loan, this may not be a “genuine restructure”.

There is a safe harbour for the “genuine restructure” rule. If, for three years following the roll-over:

  1. there is no change in the ultimate economic ownership of any of the significant assets of the business (other than trading stock) that were transferred under the transaction;
  2. those significant assets continue to be active assets; and
  3. there is no significant or material use of those significant assets for private purposes.

Then you have a genuine restructure.

Small Business Entity

This is the definition we all know (carrying on a business and passes the $2 million turnover test) but also includes the affiliates, connected entities and partners of a small business.

The Ultimate Economic Ownership

This has not changed from the draft Bill. You can still roll into a discretionary trust if all the original owners are covered by a family trust election over the discretionary trust.

I do love it that the EM shows exactly how we will use this rollover time and time again in example 1.3:

“Chris and Victoria are husband and wife and are the only shareholders in Puppy Co, with each owning one share with a cost base of $2 per share.

Puppy Co has successfully carried on a puppy training school and has acquired significant assets including puppy boarding facilities, a vehicle, and goodwill.

Victoria and Chris wish to transfer the puppy boarding premises from Puppy Co to a recently settled discretionary trust, the Fluffy Trust, which will lease the premises to Puppy Co. The family trust election is made nominating Victoria as the primary individual controlling the trust. Victoria and Chris are members of Victoria’s family group.

For the purpose of the roll-over, there will not be a change in the ultimate economic ownership of the premises as a result of the transfer of the asset from Puppy Co to the Fluffy Trust. Therefore, assuming that the other requirements are also met, the roll-over would be available in respect of the transfer.”

An Active Asset

This is just like the standard rules in the small business CGT Concessions.

However, due to the Division 7A opportunities, like the one discussed above, the EM states that assets such as loans to shareholders of a company are not active assets.

“A purported transfer of such assets to the debtor shareholder, or trust liable to pay the unpaid distribution could potentially defeat the operation of Division 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). The roll-over cannot be used for such transfers.

Example 1.5

Mr and Mrs Smith are directors and shareholders of private company ABC Pty Ltd. They each own 50 shares in ABC Pty Ltd, which operates the family business of a milk bar.

Due to the administrative burden of operating a private company,

Mr and Mrs Smith decide to restructure their business affairs. They use the small business restructure roll-over and transfer all plant and equipment of the milk bar to a newly formed partnership.

A complying Division 7A loan for $50,000 to Mr Smith also exists in the balance sheet of ABC Pty Ltd. The Division 7A loan cannot be transferred to the partnership as it not an active asset, and the normal operation of Division 7A continues to apply in respect of the loan.”

And here are all the other bits an pieces we need to be aware of…

Tax planning

The Treasury is scared we will “misuse” this rollover. Therefore they have put in lots of integrity rules – in addition to the “Genuine restructure” rule.

The Bill makes it clear that Part IVA, containing the general anti-avoidance provisions of the taxation law, can apply to a scheme involving the application of the roll-over.

The Bill also has an integrity rule (called the loss denial rule) to ensure that a capital loss on any direct or indirect membership interest in the transferor or transferee that is made subsequent to the rollover will be disregarded, except to the extent that the taxpayer can demonstrate that the loss is reasonably attributable to something other than the roll-over transaction.

Pre-CGT assets

Pre-CGT assets transferred under the roll-over will retain their pre-CGT status in the hands of the transferee.

It’s optional

Need I say more… But I am struggling to work out why you would not want to use this… Say this is the last year you will be a small business entity due to turnover growth and you want to use the $500,000 lifetime concession so you want there to be a CGT event… There, I thought of an example!

Residency

To be eligible for the roll-over, both the transferor and the transferee of the assets must be residents of Australia.

SMSFs?

The roll-over will not apply to a transfer to or from an exempt entity or complying superannuation entity

The CGT Discount

As soon as we looked at this law we knew it would allow us to roll a CGT asset from a company that cannot use the 50% discount, to a trust that can.

In the new Bill, the Treasury have tried to solve this problem by making the time period for eligibility for the CGT discount will recommence from the time of the transfer. To quote from the EM:

“This is consistent with the policy intent of the roll-over, which is to make it easier for small business owners to change the legal entity or entities that run the business in the course of a genuine restructure of an ongoing business. The policy is not to facilitate the transfer of assets to an entity that is entitled to the CGT discount shortly before the sale of the asset.”

So you can still do the roll to a trust to get the discount, you just need to do it a year in advance (and as a part of a genuine restructure as discussed above).

No longer transfer for no consideration

The draft Bill stated the transfer had to be at no consideration. However, the new Bill states that the roll-over does not require that market value consideration, or any consideration, be given in exchange for the transferred assets.

So where an asset transfer is made at other than market value, decreases and increases in the market values of any interests that are held in the transferor and transferee can result.

New membership interests issued as consideration for the transfer

Where membership interests are issued in consideration for the transfer of a roll-over asset or assets, the cost base and reduced cost base of those new membership interests is worked out based on the sum of the roll-over costs and adjustable values of the roll-over assets, less any liabilities that the transferee undertakes to discharge in respect of those assets, divided by the number of new membership interests.

Effect on 15 year CGT exemption

I am only including this as I asked for it and the Treasury said yes… For the purpose of determining eligibility for the 15 year CGT exemption for small businesses, the transferee will be taken as having acquired the asset whether the transferor acquired it.

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About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
This entry was posted in Income Tax, Legislation, Planning Idea, Planning Stuff. Bookmark the permalink.

One Response to The Small Business Restructure Rollover is now before the Parliament!

  1. Pingback: Small Business Restructure Rollover and Stamp Duties | Tax Rambling

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