Yes I am way too excited about this… But the Commissioner has produced his first two bits of guidance on using this rollover.
In the first he looks at the consequences of using the rollover. This is all pretty simple stuff (cost base transfer…) but the final example has the trick in it…
Example 6 – Indirect tax consequence – subsequent debt forgiveness
- Dean operates a fishing tour business through a company, where he is the sole director and shareholder. The active assets of the business include a fishing boat, which cost the company $300,000.
- In January 2017, a discretionary trust is set up, Dean is one of the beneficiaries and a family trust election is made with Dean as the primary individual. The termination value and adjustable value of the boat is $260,000 at this time.
- The company transfers the boat to the trust for $260,000 as consideration, payable within 60 days. Both the company and the trust choose to apply the SBRR.
- The trustee does not pay at that time and enters into a written loan agreement that complies with the requirements of section 109N of the ITAA 1936.
- In June 2018, the company executes an effective deed to forgive the loan.
Other tax consequences are recognised
- A transfer of an asset has no direct income tax consequences, except as provided for under Subdivision 328-G. Related rollover relief for depreciating assets is available under section 40-340.
- The subsequent application of Division 7A to the loan, which was created in connection with the transfer of the assets, is an indirect consequence of the transfer and is not turned off by section 328-450. The forgiveness of the loan or failure to make minimum yearly repayments may give rise to a deemed dividend under Division 7A.
So a simple transfer of assets out of a company to a trust can lead to a big DIV 7A issue… But maybe not. Have a look at paragraph 1.65 of the EM to the Bill that introduced the rollover…
1.65 Consistent with the object of allowing small business owners flexibility to change their legal structure, the roll-over does not require that market value consideration, or any consideration, be given in exchange for the transferred assets. A transferor and transferee may, for example, agree to transfer the assets at cost in order to eliminate any future unrealised gains on membership interests held in the transferor entity. 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.
So if you transfer the assets for no consideration you get no debt to forgive and no Division 7A issues. The accountants scream “how do I account for this???” I say “work it out because if we transfer it at book value to make your accounting easy we have the company making a loan to the trust and that is much worse than your accounting problem!”
So beware of Division 7A traps when transferring out of a company using the rollover – especially as they are very easily fixable (if fixable is a word?).
In the second document the Commissioner considers what is a ‘genuine restructure of an ongoing business’? Remember that if we don’t have one of these genuine restructures we can’t use the rollover. SO what is a genuine restructure?
The following features indicate that a transaction is, or is part of, a ‘genuine restructure of an ongoing business’:
It is a bona fide commercial arrangement undertaken in a real and honest sense to facilitate growth, innovation and diversification, adapt to changed conditions, or reduce administrative burdens, compliance costs and/or cash flow impediments.
It is authentically restructuring the way in which the business is conducted as opposed to a ‘divestment’ or preliminary step to facilitate the economic realisation of assets.
The economic ownership of the business and its restructured assets is maintained.
The small business owners continue to operate the business through a different legal structure. For example, there is continued use of the transferred assets as active assets of the business, continuity of employment of key personnel and continuity of production, supplies, sales, or services.
It results in a structure likely to have been adopted had the small business owners obtained appropriate professional advice when setting up the business.
And if this is too vague (which it definitely is) the law provides a safe harbour rule…
To provide certainty to small businesses using the roll-over, a ‘safe harbour’ rule is included. A small business will be taken to satisfy the requirement that the transaction is, or is a part of, a genuine restructure of an ongoing business where, for three years following the roll-over:
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;
Those significant assets continue to be active assets; and
There is no significant or material use of those significant assets for private purposes.
But in this document the Commissioner applies this rule to examples. He states that restructures that achieve substantially better asset protection, or allow employees to buy in, or allow new capital, or simplify complex affairs are all genuine restructures
But he goes on to say that transferring assets from a company to an individual and waiting 12 months to get the CGT discount on those assets is not a genuine restructure.
Neither is succession planning where the assets of one company are split into two companies to allow Dad to give a company each to his two sons a genuine restructure (unless Dad meets the safe harbour above by waiting three years).
Finally he states that having a trust that transfers assets to a company to pay of a UPE and then having the company transfer it back at no consideration is not a genuine restructure as it just wipes out the UPE.
Getting the CGT discount and succession planning will come to your mind when planning a small business restructure but it cannot be the main reason you did it!
1 July 2016 is almost here and the Small Business Restructure Rollover is almost available…
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