Does Your Current Business Structure No Longer Suit Your Business Needs?
The Small Business Restructure Rollover could be your answer.
The small business restructure rollover (SBRR) allows small businesses to transfer active assets to a new entity structure without incurring an income tax liability.
This, however, does not mean the restructure places the transferee in a better CGT position than the transferor, as the transferee inherits the asset with the same tax consequences, including cost base, as applied to the transferor.
The object is to facilitate flexibility for owners of small business entities to restructure their businesses, and the way their business assets are held. So long as the restructure is not unduly tax-driven, then the result could be a more tax effective structure.
For example, you may be a sole trader who is now genuinely concerned about protecting your personal assets as a result of a significant growth in your business, meaning you are now employing staff and engaging in much riskier contracts. You may be able to utilise the SBRR to transfer your active assets used to carry on your business into a family discretionary trust with a corporate trustee, which may ultimately provide some tax minimisation benefits, but is not the primary purpose of the restructure.
The SBRR is available where each party to the transfer is a small business entity (an entity that operates a business and has a turnover of less than $10m), an entity connected with a small business entity or an entity that has an affiliate that is a small business entity.
The SBRR only applies to actives assets, being assets that an entity owns and utilises in the course of its business, including capital gains tax assets, revenue assets, trading stock and depreciating assets.
If your entities meet the small business eligibility test, the residency requirement and the restructure concerns active assets, then both parties involved in the transaction can elect to apply the SBRR to avoid tax implications of a restructure where the restructure:
- is genuine and for an ongoing business, as opposed to a tax-driven/minimisation strategy, and
- will not result in a change to the ultimate economic ownership of the transferred assets.
Genuine Restructure of Ongoing Business
The Commissioner of Taxation has provided some guidance to circumstances that could and would not be classed as a genuine restructure:
1. Features suggesting a genuine restructure:
- bona fide commercial arrangement undertaken in a real and honest sense to facilitate growth, adapt to changed conditions or reduce administrative burdens, compliance costs and/or cash flow impediments,
- authentically restructuring the way in which the business is conducted, or
- results in a structure likely to have been adopted had the small business owners obtained appropriate professional advice when setting up the business, such as for asset protection purposes.
2. Features that indicate no genuine restructure:
- directed at eliminating an impending or existing tax liability,
- a preliminary step to facilitate the economic realisation of assets, or takes place in the course of a winding down to transfer wealth between generations,
- an extraction of wealth from the assets of the business for personal investment or consumption or otherwise designed for use outside of the business,
- where artificial losses are created or there is a bringing forward of their recognition, or
- there are other tax outcomes that do not reflect economic reality.
Safe Harbour for Genuine Restructures
A small business entity will be deemed to have satisfied the genuine restructure requirement where, for three (3) years following the restructure:
- there is no change in the ultimate economic ownership of any of the significant assets of the business (other than trading stock) 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.
Ultimate Economic Ownership
The ultimate economic owners of an asset are the individuals who, directly or indirectly, own an 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 be maintained. There is a specific concession made for discretionary trusts where the transferred assets continue to be held for the benefit of the same family group.
Note: There may be other potential liabilities such as stamp duty or goods and services tax (GST) consequences to consider prior to restructuring. We find the best structuring advice involves input from both your Accountant and Lawyer.