Business Restructure – SME Focus
Businesses have a lifecycle which is not necessarily the same for all. The business environment is ever-changing. The owners of a business may also have particular needs, goals and outcomes that they want to achieve over the lifetime of the business. Accordingly, a business may have a range of reasons for changing structure over its lifetime.
There are a wide variety of ways to restructure, but in this newsletter we are going discuss the requirements of Small Business Restructure Rollover under Division 328-G ITAA97.
Small business restructure rollover
The small business restructure rollover is a CGT concession which allows small businesses to restructure their ownership without any income tax consequences.
In broad terms, the following requirements must be satisfied in order to apply the rollover:
- The restructure must be a “genuine restructure” of an ongoing business;
- Both the transferor and New Operating Company must be “small business entities” or be an “affiliate” or “connected entity” of a small business. Broadly, an entity is a small business entity if it carries on a business and has aggregated turnover of less than $10.0m per year;
- The restructure must not materially change the ultimate economic ownership of the business’ assets;
- All of the assets which are transferred must be “active assets”. That is, they must be used directly in carrying on the business;
- Both parties to the transfer satisfy the residency requirement;
- Both parties to the transfer choose to elect for the small business restructure rollover; and
- Neither the transferor nor the transferee is an exempt entity or a complying superannuation fund.
This rollover does not apply to depreciating assets, however, a separate rollover is available provided that all of the other requirements above are satisfied and the relevant assets are depreciating assets for the purposes of the capital allowances regime (Div40 ITAA97).
The term “genuine restructure” is not defined in the income tax legislation, however the Commissioner of Taxation has provided guidance on his interpretation of the term. The legislation also provides a “safe harbour rule” which may apply to a transaction.
Under the safe harbour rule, a transaction will be taken to be part of a genuine restructure of an ongoing business where, for a period of at least three years from the date of the transaction:
- There is no change in ultimate economic ownership of any of the significant assets of the business that were transferred under the transaction;
- Those significant assets continue to be active assets; and
- There is no significant or material use of those significant assets for private purposes.
In general terms, an entity will be a “small business entity” for the 2019/20 year if:
- it carries on business in the 2019/20 year (the year of the proposed sale); and
- it carries on business in the 2018/19 year and its aggregated turnover for the 2018/19 year was less than $10m.
The Ultimate Economic Ownership
Under the small business restructure rollover legislation, only natural persons can hold ultimate economic ownership of an asset. Therefore, it is necessary to trace through natural persons in a company, partnership or trust. Effectively,
- Just before the transfer, identify the individuals that are the ultimate economic owners of that asset being transferred; and
- After the transfer, identify the individuals are the ultimate economic owners of that asset; i.e. the owners of the interests in these interposed entities that will ultimately benefit economically from that asset; and
- Prior to the transfer of the asset, no new ultimate economic owners can be introduced; and
- If there is more than one individual who is an ultimate economic owner of an asset, the specific proportion of ownership of each of those individuals in the asset must be unchanged.
Transferred asset is an active asset
At the time that the asset is transferred, the asset must be a CGT asset that is an active asset which usually means that it must be used or held ready for use in the course of carrying on the business.
The asset must be a CGT asset that is not a depreciating asset (e.g. plant and equipment).
Other Rollovers and forming a tax consolidated group
There are other rollovers available, such as subdivision 122-A, 122-B, 124-M and Division 615, subject to specific eligibility requirements being satisfied. Potentially, there are tax and commercial benefits by restructuring your business. For examples,
- Interposing a holding company between the ultimate shareholder and the operating company provides asset protection for the business by allowing it to reduce net assets of operating company by declaring dividends to Holding Company without additional income tax payable.
- Forming a tax consolidated group may result in the tax cost bases of business assets to be uplifted. This would result in an increase in tax deductions in the future years.
- Company or trust can transfer its losses into the tax consolidated group and be utilised in a similar way provided the general loss recoupment provisions are pass.
In summary, rollover reliefs provide significant opportunity and benefits for taxpayers to restructure their business affairs in order to achieve a variety of tax and commercial outcomes. If you would like to know more about the above rollovers or would like to know if you are eligible, please contact our office.
By Wen Yee. Senior Accountant – Venture Private Advisory.