What is the Small Business Restructure Rollover Bill?
The Bill follows on from the Exposure Draft which we updated you on at the end of last year (Reduced risk for SBE restructures). The rollover allows CGT assets, or an entire business, to be moved from one entity to another small business entity without incurring a CGT liability at that time.
This is an exciting development for Australian business, as it frees businesses to transfer to more appropriate economic structures as their circumstances change, and passive assets need not be held in structures that carry significant risk.
If you would like to discuss how this rollover may be applied to your specific scenario, please contact us at (07) 3223 6100 or firstname.lastname@example.org.
What is the proposed effective date?
1 July 2016
Who can access the rollover?
Only a small business entity. This is defined as an entity that:
- carries on a business in the relevant year; and
- if it carried on a business in the previous year, its previous year’s aggregated turnover was less than $2M OR it’s relevant year aggregated turnover is likely to be less than $2M; and
- if it carried on business in the 2 previous years, both its previous years’ aggregated turnover is less than $2M.
Each party to the transfer must be, for the relevant income year, either:
- a small business entity; or
- an entity that has an affiliate small business entity (an affiliate is an individual/company that, in relation to their business affairs, acts or could reasonably be expected to act in accordance with the small business entity’s directions or wishes or in concert with the small business entity); or
- connected with a small business entity (an entity is connected with a small business entity if either entity controls the other entity or both entities are controlled by the same third entity); or
- a partner in a small business entity partnership.
What constitutes a ‘genuine restructure’?
It is outlined that this rollover is only applicable to a ‘genuine’ restructure; however this term is not defined. This is a question of fact having regard to all the circumstances surrounding the restructure. Artificial or inappropriately tax-driven schemes, including trying to manipulate the operation of a ‘black letter’ tax provision to achieve an inappropriate or uneconomic tax outcome, are not ‘genuine’. Therefore, Part IVA may apply to small business restructures that intend to rely upon this rollover provision and do not appear genuine.
A safe harbour rule exists and applies if, in the 3 year period after the transaction, the following takes effect:
- there is no change in ultimate economic ownership of any significant assets of the business (other than trading stock) that were transferred under the transaction; and
- those significant assets continue to be active assets; and
- there is no significant or material use of those assets for private purposes.
Can I transfer my client’s CGT asset to a family discretionary trust (either existing or newly established)?
Yes, so long as the ultimate economic ownership is maintained.
This can occur in a family discretionary trust where every individual who had ultimate economic ownership of the transferred asset/s before and after the transfer are members of the family group relating to the family trust.
Family group includes, in relation to the test individual, their spouse and their (or their spouse’s) grandparents, parents, siblings, children, nephews, nieces and lineal descendants of children, nephews and nieces.
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 test individual. Victoria and Chris are members of Victoria’s family group.
For the purpose of the rollover, 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 rollover would be available in respect of the transfer.
What happens with Division 7A loans?
Assets, such as loans to shareholders of a company, are not active assets of the business carried out by an entity. A purported transfer of such assets could potentially defeat the operation of Division 7A of Part III of the ITAA 1936. The rollover cannot be used for such transfers.
What types of CGT assets can be rolled over?
If the transferor or transferee is a small business entity, the CGT asset must be an active asset.
A CGT asset is active if it is owned by an entity and is:
- used or held ready for use in a business carried on (whether alone or in partnership) by that entity, its affiliate, spouse or child (under 18 years), or another entity connected with that entity; or
- an intangible asset (for example, goodwill) that is inherently connected with a business carried on (whether alone or in partnership) by an entity, its affiliate, spouse or child, or another entity that is connected with that entity; or
- either a share in an Australian resident company or an interest in a CGT resident trust and the company/trust has active assets (and inherently connected financial instruments and cash) that is at least 80% of the market value of all its assets.
If the transferor or transferee is not a small business entity in their own right, they need to rely upon the affiliates or connected entities rules to apply the rollover. There are additional requirements including:
- the transferor or transferee do not carry on a business (other than in partnership);
- if the business in carried on in a partnership – the CGT asset is not an interest in an asset of the partnership; and
- the small business entity carries on the business.
Continuing the earlier scenario, the business premises are an active asset of the business carried on by Puppy Co and will satisfy the conditions in the hands of the Fluffy Trust. That is:
- the transferee (Fluffy Trust) does not carry on a business because it is a passively held investment premises; and
- the small business entity (Puppy Co) carries on the business.
The premises can be transferred to the Fluffy Trust, provided the other requirements of the rollover are satisfied.
What are the consequences if, soon after the rollover, my client sells the business or equity interest (shares, units, partnership interest), that was transferred or issued as part of the rollover?
If a sale occurs within 12 months of the rollover there will be no access to the CGT discount. Under the rollover provisions, the time the new entity holds the asset for CGT purposes commences at the time of the rollover.
If a sale occurs after 12 months, and prior to the restructure, your client is not entitled to the CGT discount (for example, a company selling its underlying business). Post the restructure, however, your client could access the CGT discount (for example, restructure to a family trust selling its underlying business). Proper consideration ought to be made of the application or non-application of Part IVA.
As discussed previously, the facts and circumstances surrounding the restructure will be reviewed. If a reasonable person would conclude that those facts and circumstances were a genuine restructure and not artificial or inappropriately tax-driven, then Part IVA may not apply.
Can the rollover apply to non-residents?
Generally – no. Both transferor and transferee must be an Australian resident, resident entity or resident for tax purposes (for example, corporate limited partnership).
For a partnership (other than a corporate limited partnership), however, only one partner needs to be Australian resident or resident entity.
Do pre-CGT assets maintain that status?
Yes, except for revenue assets.
Does this rollover apply to my client?
For a discussion on the opportunities this rollover could open up for your business, please contact us.