On 8 March 2016, the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 (Bill) received royal assent. The explanatory memorandum for the Bill states that it makes a number of amendments to the Income Tax Assessment Act 1997 (Cth) to provide greater flexibility for small businesses to change their legal structure in order to:
- help growth and development;
- avoid unnecessary compliance costs;
- enhance business efficiency; and
- adapt to current conditions.
These changes are now in force and apply to roll-overs occurring on or after 1 July 2016.
What are the changes?
Roll-overs are currently available for businesses to transfer assets from an individual, trustee or partner to a wholly owned company, or from a trust to a company. The Bill provides for a new roll-over for gains and losses in a business restructure.
For an eligible transfer, the tax cost (that is, the amount the income tax law recognises as the transferor’s cost) of the transferred asset is rolled over from the entity that transferred the asset (Transferor) to the entity to which the asset is transferred (Transferee).
Eligibility requirements
In order for a business to take advantage of the changes, the transfer of gains and losses must:
- arise from the transfer of an active asset;
- as part of a genuine restructure;
- of a small business;
- that does not change the ultimate economic ownership of the transferred asset.
Is the entity a “small business entity”?
Each party to the transfer must be either:
- a small business entity for the income year during which the transfer occurred;
- an entity that has an affiliate that is a small business entity for that income year;
- connected with an entity that is a small business entity for that income year; or
- a partner in a partnership that is a small business entity for that income year.
Broadly speaking, an entity will be a small business entity if it carries on a business and its combined annual turnover, and that of other entities that are affiliated or connected with it, is less than $2 million.
Is the asset being transferred an “active asset”?
The asset being transferred must be a CGT asset that is an active asset. Broadly speaking, an active asset is any asset used in a business, for example, trading stock, revenue assets and depreciating assets.
Is the restructure a “genuine business restructure”?
Whether a restructure is ‘genuine’ is a question of fact that is determined having regard to all of the facts and circumstances surrounding the restructure. Examples of factors that would indicate a genuine restructure include:
- it is a bona fide commercial arrangement undertaken to enhance business efficiency;
- the transferred assets continue to be used in the business;
- the business continues to operate following the transfer;
- the restructure is not artificial or unduly tax driven; and
- it is not a divestment or preliminary step to facilitate the economic realisation of assets.
Was there a change in ultimate economic ownership?
The transaction must not change the ultimate economic ownership of transferred assets in a material way. The ultimate economic owners of an asset are the natural persons who, directly or indirectly, beneficially own an asset.
Learning points
A small business may need to restructure for any number of legitimate reasons, and these changes aim to provide small businesses with the flexibility to do so without realising a tax liability. However, the pre-requisites must be met before the new roll-over can be applied and consequently, it is important to seek legal advice before undertaking a transfer in reliance on the new law.
Links and further references
Legislation
Tax Laws Amendment (Small Business Restructure Roll‑over) Bill 2016
Tax Laws Amendment (Small Business Restructure Roll‑over) Bill 2016 Explanatory Memorandum
Income Tax Assessment Act 1997 (Cth)
Further information about capital gains tax and asset protection
If you need assistance on capital gains tax, contact us for a confidential and obligation–free discussion:
Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
T: +61 7 3221 0013 (preferred)
M: +61 419 726 535
E: mburrows@dundaslawyers.com.au
Disclaimer
This article contains general commentary only. You should not rely on the commentary as legal advice. Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.
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