Small businesses operate as sole traders, partnerships, trusts, companies or a combination of such entities. A number of factors determine which structure meets any given particular circumstances, including tax implications, personal liability, asset protection and estate planning arrangements, access to equity capital, compliance costs, as well as changing circumstances.
Alternately, a small business may choose an unsuitable legal structure at its establishment and may need to restructure into a more appropriate structure. Such a restructure may trigger significant income tax liabilities when business assets are transferred from one entity to another, e.g. from a company to a trust, partnership or a sole trader.
Tax Laws Amendment (Small Business Restructure Roll‑over) Bill 2016 (Bill), introduced into the Commonwealth Parliament on 4 February 2016 and currently considered by the Senate, will allow roll-overs of gains or losses making restructure of a small business feasible.
If the Bill is passed, new Subdivision 328-G “Restructure of Small Businesses” will be introduced into the Income Tax Assessment Act 1997 (Cth) meaning that a small business operating under a wrong structure can transfer its assets into a suitable structure and defer the recognition of gains or losses arising from the transfer.
The amendments are to apply to small business restructure transfers occurring on or after 1 July 2016.
What follows is an outline of the amendments proposed by the Bill.
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When a Roll-Over Is Available
A roll-over relief under Subdivision 328-G will be available if the requirements in section 328-430 are satisfied as outlined below.
1.1 Genuine Restructure
Small businesses will need to ensure that a transfer is or is part of a genuine restructure of an ongoing business.
Whether a restructure is ‘genuine’ is a question of fact determined having regard to all of the facts and circumstances surrounding the restructure. For example, a bona fide commercial arrangement undertaken to enhance business efficiency would indicate a genuine restructure.
1.2 Small Business Entity
The transferor and transferee each must be a small business entity or connected with a small business entity or has an affiliate that is a small business entity.
An entity is a small business entity if it meets the requirements under Subdivision 328-C, which essentially requires it to carry on a business and have the combined annual turnover of the entity, and other entities that are affiliated or connected with it, less than $2 million.
1.3 Unchanged Ultimate Economic Ownership
To be eligible for the roll-over, the ultimate economic ownership of the transferred assets and each ultimate owner’s share in that ownership must not change in a material way. The ultimate economic ownership is attributed to the individuals who, directly or indirectly, beneficially own an asset. That is to say, the individuals who ultimately benefit from a business asset must maintain the same proportionate economic ownership in the asset.
1.4 Eligible Assets
The roll-over will apply to gains and losses arising from the transfer of active assets, i.e. used in a business, that are CGT assets, depreciating assets, trading stock or revenue assets between entities.
1.5 Australian Tax Resident Status
Subdivision 328-G will only apply where both the transferor and transferee are Australian tax residents who have chosen to apply a roll-over under that Subdivision.
1.6 Not an Exempt or Superannuation Entity
The transferee cannot be an exempt entity (e.g. a charity) or a complying superannuation entity (e.g. a self-managed superannuation fund).
1.7 Other Taxes and Duties
Importantly, the Bill does not cover other taxes and duties which may apply to a restructure transaction, e.g. goods and services tax and stamp duty. Therefore, small businesses will need to consider application of those to their restructures.
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Consequences of a Roll-Over
Small business entities will be able to choose to apply a roll-over relief under Subdivision 328-G when they transfer a business asset or assets under a restructure transaction from an entity to one or more other entities. The roll-over relief will allow small business entities to avoid direct income tax consequences arising from the transfer of assets.
2.1 Transferor
The income tax law will apply to the transferor as if the transfer occurs for the assets roll-over cost. The roll-over cost will be the transferor’s cost of the asset for income tax purposes so that the transfer would result in no gain or loss for the transferor.
2.2 Transferee
The transferee will be taken to have acquired each asset for an amount that equals the transferor’s cost just before the transfer. For example, if the cost base of an asset is $1,000 and the market value of the asset is $1,200, the roll-over cost is equal to $1,000.
Business Lawyers Sydney at Pavuk Legal can provide you with a sound legal advice in respect of starting your business and choosing an appropriate legal structure, including but not limited to corporations, partnerships, trusts. We can assist you with establishing, changing and restructuring your business and preparing all necessary documentation.
We can provide assistance for a range of related legal matters, including: business name registration, copyright and intellectual property law, shareholders, partnership and joint venture agreements, transferring, buying and selling a business, lease agreements, asset protection, estate and succession planning, business management and administration, employment law including employment contracts, employee rights, unfair dismissal and confidentiality agreements, employee share option schemes, advice in regard to tax law including capital gain tax.
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