Tax Laws Amendment (Small Business Restructure Roll-Over) Bill 2016 has amended the Income Tax Assessment Act 1997, w.e.f. 1 July 2016, to provide greater flexibility for small businesses to change their legal structure.
The amendments make it easier for small business owners to restructure by allowing them to defer gains or losses that would otherwise be made from transferring business assets from one entity to another as part of a genuine restructure.
The amendments made by this Bill extend the relief to transfer of trading stock, revenue assets, and depreciating assets, to provide greater flexibility for small business restructures.
This will facilitate flexibility by removing income tax impediments that might arise for small business owners wishing to change the legal entity or entities running the business to a more suitable.
Subdivision 328-G has provided 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. The roll-over may also be available for assets that are used by the small business entity but held by an entity connected with the small business entity, an entity for which the small business entity is an affiliate or, if the small business entity is a partnership, a partner of that partnership. This ensures that partners and other ‘passive entities’ within a small business structure that are not themselves small business entities (because they do not carry on business themselves) can access the roll-over.
The roll-over will apply to gains and losses arising from the transfer of active assets that are CGT assets, depreciating assets, trading stock or revenue assets between entities as part of a genuine restructure of an ongoing business.
When a roll-over is available
The first criterion for eligibility for the roll-over is that the transfer of the asset is, or is a part of, a genuine restructure of an ongoing business.
Entities that can access the roll-over
To be eligible for the roll-over, 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.
This roll-over extends eligibility to those passive entities where they have an affiliate that is a small business entity for that income year; are connected with an entity that is a small business entity for that income year; or are a partner of a partnership that is a small business entity.
Ultimate economic ownership
To be eligible for the roll-over the transaction must not have the effect of changing the ultimate economic ownership of transferred assets in a material way. The ultimate economic owners of an asset are the individuals who, directly or indirectly, beneficially own an asset.
Where a party to the transfer is itself a small business entity, the asset being transferred must be a CGT asset that is an active asset.
Where a party to the transaction is not a small business entity, but is either an entity that has an affiliate that is a small business entity; or an entity that is connected with a small business entity, then the asset must be an active asset that satisfies subsection 152-10(1A), which, among other things, requires that the relevant small business entity carries on business in relation to the asset.
Where a party to the transaction is not a small business entity but is a partner in a partnership that is a small business entity, the asset must be an active asset; and an interest in the asset of the partnership.
Assets such as loans to shareholders of a company are not active assets of the business carried on by the creditor. The roll-over cannot be used for such transfers.
To be eligible for the roll-over, both the transferor and the transferee of the assets must be residents of Australia as per the income tax law.
Choosing to apply the roll-over
The transferor and transferee must both choose to apply the roll-over. This choice affects the tax consequences of the transaction for both the transferor and transferee.
Exempt entities and complying superannuation entities
The roll-over will not apply to a transfer to or from an exempt entity or complying superannuation entity.
Effect of the roll-over
Transfers not to affect income tax position
As with other roll-overs, the small business restructure roll-over is intended to be tax-neutral, in the sense that no income tax consequences arise from the transfer of the asset(s). This will provide small businesses with the flexibility to change their legal structure without the cash flow problems that may arise from realising an income tax liability on the transfer of assets to a different entity. However, the amendments will not affect a tax liability arising under another Commonwealth taxing statute (for example fringe benefits tax or goods and services tax), or any liability for stamp duty under State legislation.
Effect of the restructure on transferred cost of assets
The income tax law will apply to the transferor as if the transfer takes place for the asset’s roll-over cost. The roll-over cost is essentially the transferor’s cost of the asset for income tax purposes, such that the transfer would result in no gain or loss for the transferor. The transferee will be taken to have acquired each asset for an amount that equals the transferor’s cost just before the transfer.
The income tax law may apply different costs to an asset depending on which rules apply to that asset, and this affects the roll-over cost.
To the extent that a gain or loss on the asset is calculated under the CGT provisions, the relevant cost for income tax purposes is the transferor’s cost base for the asset. For the transfer of a CGT asset, the income tax law will apply under the roll-over as if the asset had been transferred for an amount equal to the cost base of the asset.
Pre-CGT assets transferred under the roll-over will retain their pre-CGT status in the hands of the transferee.
Discount capital gains
Capital gains made from a CGT asset may be discounted where the entity making the capital gain acquired the asset at least 12 months before the CGT event triggering the capital gain happened. For the purpose of determining whether a capital gain may be discounted under Subdivision 115-A, a transferee receiving an asset under the roll-over is treated as having acquired the CGT asset at the time of the transfer.
Under a genuine restructure, assets that are trading stock of the transferor will be held as trading stock by the transferee. The transferee will inherit the transferor’s cost and other attributes of the assets as the transferor just before the transfer.
To the extent that an asset is a revenue asset, the roll-over cost is the amount that would result in the transferor not making a profit or loss on the transfer. The transferee will inherit the same cost attributes as the transferor just before the transfer.
Roll-over relief will be available for depreciating assets under section 40-340 where a roll-over under the new Subdivision 328-G would be available in relation to the asset if the asset were not a depreciating asset.
Roll-over relief is also available for pooled assets.
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.
Membership interests affected by transfers
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.
An integrity rule (the loss denial rule) is included 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.
Small business restructures involving assets already subject to small business roll-over
Where the transferor has previously chosen to apply a small business roll-over under Subdivision 152-E, and a replacement asset is transferred under this roll-over, the transferee is taken to have made the choice for the purposes of CGT events J2, J5 and J6.
Effect on 15 year CGT exemption
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.