The introduction of new rollover provisions as of 1 July 2016 in the Income Tax Assessment Act 1997 bring significant opportunities to small businesses to restructure into a more appropriate entity. The new legislation Subdiv 328-G ITAA1997 is a significant addition to the CGT provisions which have remained unchanged for some time.
Previously rollover relief was available to businesses but only in limited circumstances which limited the transfer of business assets from a company to a sole trader, partnership or trust. The amendments make it easier for small business owners to restructure and rollover any Capital Gains by allowing a deferral of any gains or losses that would otherwise be incurred.
It has been recognised that as small businesses grow the most appropriate structure changes and so the changes have been made to make a genuine business restructure easier without any Capital Gains Tax burden. To qualify, a small business must pass a number of tests. One test is ensuring the Ultimate Economic Ownership of assets being transferred remain the same or in the same proportion after the restructure. This can be a little tricky for trusts where beneficiaries do not have a direct and absolute entitlement in assets of the trust.
A common enquiry we have received is transferring assets from a company to a discretionary trust which previously would trigger a CGT event and tax consequences. By way of example:
John and Mary are husband and wife and are the only shareholders in Weightloss Co, with each owning one share each with a cost base of $1 per share. Weightloss Co has successfully carried on personal training classes and has acquired significant assets including a training facility, a vehicle, and goodwill.
John and Mary wish to transfer the training facility from Weightloss Co to a recently settled discretionary trust, the Strongman Trust, which will lease the premises to Weightloss Co. The family trust election is made nominating Mary as the primary individual controlling the trust. Mary and John are members of Mary’s family group.
For the purpose of the roll-over, there will not be a change in the ultimate economic ownership of the premises as a result of the transfer of the asset from Weightloss Co to the Strongman Trust. Therefore, assuming that the other requirements are also met, the roll-over would be available in respect of the transfer.
The new provisions defer any gains or losses arising from the transfer of business assets as part of a business restructure where the assets are:
- CGT assets,
- depreciating assets,
- trading stock, or
- revenue assets
Assets such as loans to shareholders of a company are not active assets of the business and the roll-over cannot be used for such transfers. The loans will continue to apply to the company.
If you feel your business could benefit from moving to a more appropriate structure, seek a recommendation about your current business structure or advice on whether you qualify for the new rollover provisions, please call the office on 1300 553 532 or email firstname.lastname@example.org