On 12 May 2015, the new Small Business Restructure Rollover was announced, commencing on 1 July 2016. This permitted small business owners to change their legal structure without attracting a taxation liability. This exemption is similar to accessing the small business rollover relief, but with a focus on a restructure from an entity that may be no longer appropriate.
The new rules are not without complication, and not are a simple replacement for a CGT small business rollover. Before undertaking any restructure, it is important to get advice as to the structure, the follow-on consequences and the benefits as this rollover may not be suitable for your business.
How does the Small Business Restructure Rollover Work?
If your business is held through a structure that no longer is appropriate or suitable for your business, the small business restructure rollover allows for the transfer of the business to a new entity structure without incurring the taxation costs (such as capital gains tax or GST) that would generally apply when a business is transferred from one structure to another. The fundamental requirements are:
- assets must be considered as ‘active assets’; and
- there exists retention of ‘ultimate economic ownership’ of the assets.
Is my Business Eligible for the Small Business Restructure Rollover?
In order to determine if you can access the small business restructure rollover, there are a few questions that need to be confirmed.
Is the Transferring Recipient and the Current Owner a Small Business?
The small business rollover relief only applies to small businesses that have an aggregated turnover of less than $2,000,000. In order to determine the $2,000,000 threshold, we not only consider the primary business but any associated business or connected entities. This is not a simple measure and especially if the business is part of a franchise, has other investors (who own other businesses) or might be part of a wider group.
Is Ultimate Economic Ownership being Maintained?
In the determination of the retention of economic ownership, there is a flow-through analysis that works out if there has been the same ultimate owner of the business after the rollover has taken place. In effect, the transferee and transferor must be the same party. This measure can be complex where there are discretionary family trusts being used or if the structure has a requirement for specific succession or estate planning objectives.
Is the Restructure Genuine?
A restructure, in order to meet the requirements to access the small business rollover relief concessions needs to be a genuine restructure of the ongoing business. Under LCG 2016/3 there are attributes that will need to be met for the restructure to be considered to have met these requirements. The following is scrutinized in determining whether the structure is genuine:
- the restructure needs to be taken to enhance business efficiency;
- the business continues to operate following the transfer through the new business structure;
- the assets that are part of the small business rollover will continue to be used in the business;
- the structure that has been undertaken would be a structure that would, with the information at hand, be a structure that would be recommended by a professional advisor;
- the new structure is not contrived or undertaken solely for taxation purposes; and
- the new structure is not a step towards the imminent sale of the business to a third party or to change ultimate owners.
There is a safe harbor provision, where a restructure will be determined to be a genuine restructure if, for the following three years after the small business rollover:
- there is no change in the economic ownership of any of the assets of the business, other than normal trading stock;
- the active assets of the business remain as active assets; and
- the assets transfers are not used (or significantly used) for the personal benefit of the stakeholders.
Practically, this can be limiting, especially if a core asset (say business premises) is sold during the safe harbor period claiming small business rollover relief, where there may be an argument that the changes undertaken were not protected under the provision.
Equally, if there are FBT items as part of the rollover there will be problems that arise from personal use assets in the small business rollover.
It is for these two issues that we caution the use of the small business to restructure rollover against other alternatives. The rigidness of the structure against the practicalities of running a small business is often time too constraining to deem a benefit from applying these concessions.
What Assets are going to be Transferred?
Assets that are going to be transferred are generally active assets, so CGT assets, trading stock, revenue assets and financial instruments (such as shares or units in a unit trust). Assets such as cash or loans would not be eligible for the rollover concessions, and this may present additional difficulties in applying the small business rollover relief provisions. In order to manage these non-active assets, it is important to ensure that the change of entity will not create additional difficulties or an adverse taxation outcome.
So, what are the benefits of the small business rollover provisions?
Having met the conditions of the small business rollover the benefits are:
- Assets are transferred at their original cost base. Practically this means that there is no CGT event at the time of the restructure.
- For pre-CGT assets, this would mean that they would inherit the original pre-CGT status.
- For post CGT assets this would mean that they will inherit the post CGT cost base and purchase date (for the purposes of either the retention of the general discount or the 15-year rule).
- The trading stock continues to be the cost of stock or the opening value of the stock depending upon the method chosen.
- Revenue assets are transferred on a like for like basis, which means that there is no profit or loss on the transfer of entities.
- Depreciating assets are acquired at the written down value based on the claimed depreciation.
- Consideration does not arise at this time, an effective book transaction and not resulting in the acquiring or requiring additional debt facilities.
A loss denial rule applies within the small business restructure rollover relief rules to any losses that are directly attributable to the restructure and cannot be explained or determined through other events. It is important that there is retained documents to be able to support the creation of any loss that is attributed to the rollover.
Should I apply these concessions?
Whilst on face value these concessions could be beneficial for businesses that may not necessarily be suited to its current structure, the application of the small business rollover relief rules can be unnecessarily rigid and not result in the best outcome for the taxpayer – especially when compared with other requirements under succession planning or tax efficiency. It is fair to say that for some business owners, undertaking this type of small business restructure rollover relief may, in fact, be completely limiting on future planning as the rigidness of the concessions is such that normal commercial activities may be curtailed simply because of obtaining the rollover concessions.
In determining whether to apply these rules we always recommend that there is a review of the total family group and the business and attempt to align the asset protection, succession planning, and taxation planning objectives. It is not a simple determination as to whether to apply the small business restructure rollover concessions as opposed to other alternatives which may supply a better solution.
In preparing to utilise the small business rollover concessions we develop an understanding of the long-term objectives of the family group. Developing a plan based on the implementation of these rules cannot be done in isolation and needs to be a part of the wider review of the business structure.