Small Business Restructure Rollover

Small Business Restructure Rollover

On 4 February 2016, the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 (‘the Bill’)
was introduced into Parliament and received Royal Assent on 8 March 2016 as the Tax Laws
Amendment (Small Business Restructure Roll-over) Act 2016 (‘the Act’). The amendments are designed
to make it easier for small businesses to restructure by allowing them to defer (i.e., roll-over) gains and
losses that would otherwise be realized when business assets are transferred from one entity to
another.
The purpose of the small business restructure roll-over (‘new roll-over’) is to provide small business
entities with the flexibility to change their legal structure without realising an income tax liability upon
the transfer of their business assets. This is achieved by treating the transferor as if they had transferred
the asset for an amount that results in neither a gain or a loss (irrespective of what the actual transfer
consideration is, if any).

New Subdivision 328-G (ITAA 1997) will apply to:

• transfers of depreciating assets if the balancing adjustment event arising from the transfer
  occurs on or after 1 July 2016.
• transfers of trading stock or revenue assets if the transfer occurs on or after 1 July 2016; and
• transfers of CGT assets (other than one mentioned above) if the CGT event arising from the
  transfer occurs on or after 1 July 2016

1 Eligibility for Small Business Restructure Rollover

• Subdivision 328G- ITAA1997
  
  A rollover Is available for the transfer of active assets as part of a genuine restructure of an ongoing
  business, provided that broadly, the following criteria are also met (s328-430) :
  
• Each transferor and transferee is
  1. A small business entity
  2. An affiliate, connected entity or partner of an SBE
  The asset(s) transferred must be an active asset at the time of transfer
• The ultimate economic ownership of the transferred assets must not be materially changed
• The transferor and transfers are (broadly) Australian residents and both choose to apply the
  SBRR.

Genuine Restructure Broadly

• The transfer must be part of a genuine restructure of an ongoing business. In this regard, there
  is both a factual test and a “safe harbour test”. The factual test generally assessed objectively as
  per LCR 2016/3. As per LCR2016/3:

1. It is Bonafide commercial arrangement undertaken in a real and honest sense to
   facilitate growth, innovation and diversification, adapt to changed conditions or reduce
   administrative burdens, compliance costs and or cashflow impediments
2. It is authentically, restructuring the way in which the business is conducted as opposed
   to “divestment “or preliminary step to facilitate the economic realization of assets.
3. The economic ownership of the business and its restructured assets is maintained.
4. The small business owners continue to operate the business through a different legal
   structure and
5. It results in structure likely to have been adopted had the small business owners
   obtained appropriate professional advice when setting up the business.
   6.

• Safe Harbour Rule
  “For the purpose of paragraph 328-430(1) (a) (but without limiting that paragraph), a
  transaction is, or is a part of, genuine restructure of an ongoing business if, in the 3 year period
  after the transaction takes effect:

1. There is no change in ultimate economic ownership of any of the significant assets
   or the business (other than trading stock) that were transferred under the
   transaction and
2. Those significant assets continue to “active assets; and
3. There is no significant or material use of significant assets for private purposes.”
   

• Ultimate Economic Ownership

1. If the assets are transferred from one entity to another entity where there is same
   ownership in the same proportion as their respective interest, the ultimate economic
   ownership test under s 328-430(1) (c) is likely to be satisfied as can be traced
   through the ownership interest to determine the ultimate economic ownership of
   the assets transferred.

• Asset Transfer Under the Rollover
• Goodwill
  1 Likely to be internally generated

1. If the nil cost base, when transferred under rollover relief -cost base to the company
   will also be nil.
2. Future disposal of goodwill by the entity may result in a taxable capital gain (no 50%
   CGT discount per s 115-100 in case of company). Small Business Concessions can still
   be considered on sale (s152).

• Depreciating Assets

1. Transfers at adjustable value (written down value)
2. The company continues depreciation from the tax written down value

• Leasehold Fit- Out Costs:

1. Transfer at original cost base (reduced by prior capital allowance deductions claimed under Div -43)
2. Continue claiming 2.5% p.a. in the company post- transfer based on the rules under Div 43.
3. Assignment of leases is legal matter and should be confirmed with the landlord and solicitor prior to finalizing the restructure.

• Other impact of the new roll- over:
  Whilst deeming an asset to be transferred for its roll-over cost purports to make it tax-neutral, this will
  not always be the case. This is because the transfer of an asset can potentially give rise to multiple taxing
  points. For example, it may be necessary to consider the application of other provisions in the ITAA such
  as S.44 (dividends), Division 7A (deemed dividends), Divisions 725 and 727 (value shifting) as well as FBT
  and GST and perhaps stamp duty.

Fortunately, the problem will be at least partly solved with the S.328-450 which provides that, apart from
the consequences set out in Subdivision 328-G:
“a transfer of an asset has no direct consequences under the income tax law.”

• S.328-450 ensures that there are tax neutral consequences for a transfer that qualifies for the roll-
  over, by ‘switching off’ the application of the existing income tax law.
• This does not mean that the transfer is deemed not to happen, or that ‘downstream’ income tax
  consequences of the transfer will also be ‘switched off’.
  Nor will the amendments affect a tax liability arising under another Commonwealth taxing statute (for
  example, FBT or GST), or any liability for stamp duty under State legislation
  Therefore, taxpayers must do their ‘homework’ before undertaking a transfer.
• Dividend and Division 7A issues
  Where the transferor is a private company, the transfer of an asset to a shareholder (or their associate)
  for less than its market value constitutes a payment (under S.109C of the ITAA 1936) and could give rise
  to a deemed dividend. Fortunately, the ‘switching off’ rule in S.328-450 ensures there will be no Division
  7A consequences in respect of the transfer. This will also be the case where the transferred asset could
  amount to a dividend under S.44 of the ITAA 1936.
  The ‘switching off’ rule is crucial to the potential success (i.e., take-up) of the new roll-over. It is
  anticipated that many companies will consider transferring assets to a discretionary trust as part of a
  genuine restructure on the basis they are eligible for the roll-over. However, if there would be residual
  exposure to Division 7A, the new roll-over would be meaningless.

• Trading Stock

If the transferred asset is trading stock of the transferor, S.328-455(2)(b) provides the roll-over cost will
be the amount equal to:

• the cost of the item for the transferor at the time of the transfer; or
• if the transferor held the item as trading stock at the start of the income year – the value of the item
  for the transferor at the time of the transfer.

The setting of the roll-over cost at this amount ensures the amount the transferor brings in as assessable
income under S.6-5 equates with the effective deduction claimed for cost of goods sold (i.e., the reduction
of stock on hand) under S.70-35. Accordingly, the transfer is tax neutral.
The setting of the roll-over cost at this amount ensures the amount the transferor brings in as assessable
income under S.6-5 equates with the effective deduction claimed for cost of goods sold (i.e., the reduction
of stock on hand) under S.70-35. Accordingly, the transfer is tax neutral.
The transferee will be taken to have acquired the trading stock for the same amount (i.e., the transferor’s
cost or value). The transferee will claim a deduction under S.8-1 for this amount which will be offset by
the requirement to effectively include the same amount in assessable under S.70-35 (if the stock remains
on hand for the transferee at the end of the income year).