The Treasury has recently released an Exposure Draft (ED) setting out the proposed 'Small Business Restructure Rollover' measures announced in the 2015/2016 federal budget.
Whilst it was initially broadcast that the new measures would deal with the roll-over of capital gains tax liability, the ED reveals that eligible taxpayers will in fact be entitled to income tax relief from any gains or losses that would otherwise arise upon the transfer of CGT assets, revenue assets, depreciable assets or trading stock.
Under the current law, restructuring can be a difficult and costly prospect for small business owners. In many cases, significant tax liabilities can arise. The Treasury states that its aim is to make it easier for small business to restructure their affairs so that they can continue to grow, develop or avoid unnecessary compliance costs. This ED introduces a new 'Small Business Restructure Rollover', which works to disregard any gains or losses that would otherwise arise as a consequence of transferring business assets, making it less costly to change legal structure.
Eligibility for rollover
Access to the proposed rollover requires satisfaction of the following:
- The transferor of the assets must be:
- a 'small business entity' (an aggregated turnover of less than $2M or satisfies the $6M maximum net asset value test), or
- an entity who is an affiliate of, or connected with, a 'small business entity' that satisfies the $6M maximum net asset value test (where the CGT assets are passively held or used by the small business entity in their business as set out in ss152-10(1A) and (1B) ITAA 1997).
- The transferor must transfer a CGT asset or all of the assets of its business (which may include CGT assets, depreciable assets, trading stock or revenue assets) for nil consideration to the transferee
- the transaction must be a restructure that has the effect of changing the type or number of entities through which all or part of the business is operated
- the 'ultimate economic ownership' of the assets must not change (i.e. the ownership proportions must be maintained where applicable)
- the transferor, transferee and ultimate owners of the assets must be Australian tax residents
- a transferee must not be an exempt entity or a complying superannuation entity, and
- the transferor must choose the rollover to apply.
Where the proposed rollover is applied, any gains or losses that would have otherwise arisen upon the transfer of the particular assets are disregarded.
From the transferee’s perspective, the asset is taken to have been transferred at the asset’s 'roll-over cost' immediately before the transfer. A determination of the 'rollover cost' will depend on the nature of the asset transferred (see below).
Click here to view table.
There are some interesting aspects of the draft legislation worthy of note:
Cost base of membership interests in transferor is reduced
The ED includes integrity provisions which operate to ensure that owners of membership interests in the transferor cannot access artificial losses by disposing of their interests after the assets have been transferred. They operate by reducing the cost base of the membership interests to the extent value has been transferred.
Transferring to a discretionary trust
Beneficiaries of discretionary trusts do not hold ownership interests. Therefore, the 'Ultimate economic ownership' element poses some initial concern for taxpayers who may wish to transfer their business to a discretionary trust. However, the ED overcomes this concern by providing that the 'Ultimate economic interest' will be maintained if the transferee trust makes a family trust election and the individuals holding interests in the transferor are part of the same family group.
Acquisition dates are maintained
The transferee is taken to have acquired the transferred CGT assets on the same date the transferor acquired them. Therefore, the twelve month ownership period for the General 50% CGT Discount will not recommence as a consequence of the rollover. Furthermore, the pre-CGT status of any CGT assets transferred would be maintained.
Interaction with Division 7A ITAA 1936
It remains to be seen how the integrity provisions in Division 7A ITAA 1936 (Division 7A) will interact with the proposed rollover. In circumstances where a private company transfers all of its assets to a discretionary trust (presuming it to be a shareholder or an associate) without market value consideration (either cash or on a deferred and complying basis) a deemed dividend will arise. Given that the examples in the explanatory material accompanying the ED refer to a company transferring assets to individuals who are shareholders of the company, one would assume that due consideration has been given to Division 7A consequences. However, it is not readily apparent on a reading of the ED that this is the case.
Given that the current law only allows individuals, trustees or partners in a partnership to rollover over CGT assets to a wholly-owned company (but not from a company to any other entity), taxpayers and their advisors will certainly welcome the flexibility and enhanced planning opportunities that these measures will bring.
However, it is important to remember that the rollover only provides relief in an income tax context. The impact of transfer duty remains a critical consideration in any restructure scenario and taxpayers will need to familiarise themselves with the applicable law in their state.
The small business entity test can be complicated for some taxpayers. Therefore, those wishing to apply the rollover would need to consider their circumstances carefully.
If the draft legislation is passed it will take effect from 1 July 2016.