From 1 July 2016, the small business restructure rollover will allow small businesses to transfer active business assets, trading stock, depreciating and revenue assets from one entity structure to one or more other entity structures without incurring an income tax liability. The new law provides the ability to alter legal structures to suit the circumstances of small businesses as they adapt and change over time.
A key obstacle to restructuring a business is the tax liabilities associated with the ownership transfer of plant & equipment, CGT assets and trading stock. The roll-over allows eligible small businesses to avoid those tax liabilities, so they can adjust their legal structures to meet their business requirements as things change over time. This is achieved by the law being applied as the transfer takes place at the asset “roll-over cost” so that the transaction does not result in a loss or gain.
The rollover is available to small business entities where the transfer of assets forms part of a genuine restructure as opposed to an artificial or unduly tax-driven scheme. Ascertaining whether a restructure is ‘genuine’ depends on all the facts surrounding the restructure. Additionally, to be eligible for this rollover, the transaction must not result in a change to the ultimate economic ownership of transferred assets. The ultimate economic owners of an asset are the individuals who, directly or indirectly own the asset. Where there is more than one individual with ultimate economic ownership, there is an additional requirement that each individual’s share of ultimate economic ownership is maintained.
Whilst this roll-over will allow small businesses to avoid income tax and capital gains on a restructure, there may still be other issues and taxes that need to be considered. For example, in some states stamp duty may still be applied to asset transfers. Also, complications may arise associated with financing arrangements, GST, HR, leases and other contractual arrangements.