Posted on February 21, 2020
Many business owners wish that they had correctly structured their business assets from day one, and not put all their eggs in the same basket just because this has been an easy option to finance the business acquisition or to achieve simplicity and reduce initial costs.
Transferring assets to fix inappropriate structuring choices or gain asset protection at a later stage of the business life can be a complex and costly process resulting in significant tax liabilities.
If you have a business asset that you wish to take out of a trading entity, we have some good news for you.
A few days ago the Government introduced a Bill to give effect to its 2015 Budget promise of a small business rollover. The measure is to apply from 1 July 2016 and will allow a small business entity, and certain entities connected to a small business entity, to rollover an active asset to another entity structure.
Small business entities will have the opportunity and ability to take an active business asset owned by a trading entity out of that entity without triggering tax. For example, the rollover will allow a company that owns a plant and the building it operates from, to move that plant or the building (or both) out of the company and into a family trust without triggering capital gains tax or income tax.
A small business entity is broadly an entity that, together with entities related to it, has a turnover of less than $2 million.
An active asset is broadly an asset that is used in a business being carried on by the entity that owns the asset, or an entity that is connected with it. For example, goodwill of a business is likely to be an active asset of the business owner, and if an entity owns a property from which it conducts its business, then the property is likely also to be an active asset.
Don’t get excited yet. The new measure comes with eligibility criteria and contains rules designed to prevent taxpayers from using the rollover simply to get a tax benefit.
The anti-avoidance part of the measure requires that the restructure be part of a ‘genuine’ restructure. A restructure will be a ‘genuine’ and not solely tax-driven restructure if you can meet certain “safe harbor” criteria in relation to assets you transfer that are ‘significant’. The safe harbour applies if for three years after the assets are transferred:
there is no change in the underlying economic ownership of any of the significant assets (with an exception for trading stock),
the significant assets transferred continue to be active assets, and
there is no material or significant private use of the significant assets transferred.
Bear in mind that restructuring a small business entity can still result in potential State and Territory Duty.
The new measure will provide great opportunities to small businesses and will be welcomed by the business owners.