Small Business Restructure

30 September, 2016

From time to time small business owners may find they should review their business structure and that it may be pertinent to restructure their business.  A restructuring may involve Capital Gains Tax (CGT) event and also incur further taxes such as stamp duty and income tax.  However, recent amendments to the Income Tax Assessment Act (1997) (“ITAA Act“) have created greater flexibility to small business owners with respect to restructuring their business.

The Tax Laws Amendment (Small-Business Restructure Roll-Over) Act 2016 (“the Amending Act“) was passed this year by the Commonwealth Government which made changes to the ITAA Act and took effect as of 1 July 2016.  It means that small businesses are now allowed to transfer active assets from one entity to one or more other entities without incurring income tax liability.  Furthermore, as of 1 July 2016 the New South Wales State Government has abolished stamp duty on the transfer of private company shares and unit trusts thereby reducing costs associated with a restructure of small businesses and their assets.  This also provides the opportunity to convert non-deductible debt to deductible debt as part of a restructuring process.

The condition which must be satisfied in accordance with the legislation is the, “genuine restructure of an ongoing business.”  In order to satisfy this condition, it is essential that there is no significant change in the ultimate economic ownership of any of the significant assets of the business for three years following the roll-over.  To demonstrate how this applies, we have included the following example:

Margaret and Bob run a small family business via a company structure.  The maximum turnover of the business vehicle is under $2 million and they are now looking to restructure the business ownership in order to transfer the business and its assets to a Family Discretionary Trust to which they are both the beneficiaries.  Under the new amendment to the Legislation, Margaret and Bob would receive roll-over relief from the capital gains event which is made as a result of the transfer.  Furthermore, neither Bob nor Margaret would be liable to pay GST on the transfer of the private shares in the company as stamp duty on private shares has been abolished since 1 July 2016.

It is important to note that this roll-over relief is not available to small business owners who are restructuring in the course of winding down or in realising (selling) their ownership interests.

The Amending Act may also allow Discretionary Trusts to meet the requirements for ultimate economic ownership where there is no practical change in the individual economic benefit from the active assets before and after the transfer.  In accordance with the Amending Act, the Family Discretionary Trust may meet an alternative ultimate economic ownership test in the following circumstances:

  • A family trust selection is made by the Trustee of the Trust; and
  • Every individual who has had and is to have ultimate economic ownership of the transferred assets before and after the transfer, must be members of the same family group relating to the Family Trust.

A helpful example of how the new amendment may be used to restructure a Family Discretionary Trust can be read in the article written by Mr Peter Johnson from CST Documents link provided:

https://gallery.mailchimp.com/9c2e4ae90e6c8f478ca673fb6/files/Small_Business_Roll_Over_Relief_Formatted.pdf

The main tax implications of utilising the roll-over restructuring process is that assets transferred under the roll-over will not result in an income tax liability arising either for the transferor or the transferee at the time of the transfer.  Furthermore, the entity transferring the asset is taken to have received an amount for the transferred asset which is equal to their cost of the asset for income tax purposes.  This effectively means that the transferor will not be liable for any tax liability as they are not taken to have realised any gain from the transferred asset.

Running your business through a unit or family trust can have significant asset protection and tax advantages over other business structures such as a sole trader, partnership or even a company structure.

Call today and ask the friendly and professional team at Access Law Group how you can restructure your business to ensure that you take the full benefit of this amendment for both taxation purposes and for the protection of your business assets.