Small Business Restructuring
We see many small businesses operating out of a structure that may not be the optimal entity for them. This can arise due to a number of factors. In some cases, a business was established many years ago using a specific entity, for example a company, and as part of the succession of that business through a generation of families, the business has remained in that structure. In other cases, we see a business that has started out as a small operation, and an entity with a low set up cost was deemed appropriate at that point. Overtime that business may have grown substantially, but is still in an entity that in reality is no longer the most suitable.
What can you do to rectify this?
A major impediment to the restructure of a business is the tax liabilities associated with the transfer of ownership of business assets, plant and equipment and trading stock. However in the 2015-2016 Federal Budget, measures were announced to provide small businesses with greater flexibility in rearranging their business structures, assisting them to adopt, or evolve, into a more appropriate legal structure without incurring tax liability on the transfer.
Small businesses will be eligible to apply the new rollover relief provided the following conditions are met:-
1. There must be a genuine restructure of an ongoing business.
The legislation requires that the transfer of assets from one entity to another be a genuine restructure and not driven by artificial or inappropriately tax driven schemes. Whether genuine or not is a question of fact and could include the following examples:-
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A bona fide commercial agreement to enhance business efficiency;
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Business continues to operate following the transfer of assets, under a new entity but with the same economic ownership;
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The transferred assets continue to be used in the business; and
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The restructure is not a divestment or preliminary step to facilitate the realisation of assets.
We note that there are safe harbour provisions in place for genuine restructures.
2. There must be a small business entity.
The requirement to be a small business entity means that both the transferor and transferee must pass the tests to be a small business. In general terms, this requires that the total annual turnovers of the entity and all its affiliates and connected entities do not exceed $2m.
We note that in the 2016-2017 Federal Budget, it was proposed to increase this turnover threshold to $10m. We note this legislation was introduced in to Parliament on 1 September 2016, and we await to see if it is passed in to law with any amendments.
3. The rollover will apply to active assets only.
An active asset broadly includes a Capital Gains Tax asset that is being used by an entity in carrying on a business. Examples of active assets include trading stock, goodwill, business premises, depreciating assets etc.
4. Residency
Both the transferor and the transferee of the assets must both be residents of Australia.
Summary
The small business restructure legislation provides a significant opportunity for those who are dissatisfied with their existing business structure to rearrange their affairs without triggering tax liabilities. Previously there was scope, in some cases, to restructure in to a company. However under the new legislation, restructures that are now possible include:-
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From a company to a discretionary trust
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From a company to a unit trust
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From a company to a partnership.
Overall these measures provide some valuable outcomes for small businesses who wish to change their structure. However consideration will also need to be given to any stamp duty implications when considering the rollover.
Our Accounting team can assist you to ensure you have the most effective structure in place for your business. Please contact your normal Addison Partners contact or call 02 4995 7300 for more information.