What can the small business restructure roll-over do for you?
Are you a small business owner who finds yourself stuck in a ‘bad’ business structure?
Do you want to improve your business’ structure, however have been unwilling to do so given the tax implications of such a change?
The small business restructure roll-over (SBBR) available under subdivision 328-G may provide the assistance that you have been seeking, to change your business structure.
What does the roll-over do?
The object of the SBBR is to facilitate flexibility for owners of small business entities in restructuring their business and the way business assets are held, while disregarding the tax gains and losses that would otherwise arise.
Practically, this roll-over operates where a business seeks to transfer assets as part of a change in legal structure without changing the ultimate legal ownership of the assets.
If you’re looking to authentically restructure your business to facilitate growth, innovation and diversification. Or to reduce administrative burdens, compliance costs and cash flow impediments. The SBBR provides new flexibility to assist you in achieving both an efficient and appropriate structure for your business.
Can the roll-over assist you, in restructuring your business?
For the roll-over to apply to restructure transactions, a number of conditions must be satisfied:
1. Genuine restructure
The SBBR applies to a transaction that is, or is part of, a “genuine restructure of an ongoing business.” Under the Australian Tax Office’s Guideline LCG 2016/3, a genuine restructure refers to one which could reasonably be expected to deliver benefits to small business owners in respect to the efficient conduct of their business. That is, opposed to a restructure made in the course of winding down or realising the business owner’s own interests or an artificial and inappropriately tax-driven scheme.
This includes a restructure to quarantine the business from the business owners’ assets. This would be a restructure for a genuine business purpose, as the restructure is made to achieve the ongoing efficient conduct of the business, allow riskier operations and enhance its profits.
However, a restructure to make the business more valuable for sale, would not be considered a genuine restructure, as the restructure was not made to deliver benefit to the business, but to facilitate its sale.
2. Small business entity
Each party to the transfer must be a ‘small business entity’, an affiliate of a small business entity, connected with a small business entity, or a partner in a partnership that is a small business entity.
Practically, you can access this concession as a small business entity if your aggregated turnover is less than $10 million.
3. No change to ultimate economic ownership.
The transaction cannot have the effect of materially changing the individual(s) which have ultimate ownership in the asset. Notably, this requirement could be met by non-fixed (discretionary) trusts where there is no practical change in which individuals economically benefit from the assets before and after the asset.
4. Eligible assets
The asset being transferred is a CGT asset (other than a depreciating asset) and at the time of the transfer is an ‘active asset’. That is, an asset which is used, or held ready for use, in the course of carrying on a business.
5. Residency requirement
The transferor and transferee are residents of Australia i.e. an individual Australian resident, a resident trust for CGT purposes, a corporate limited partnership that is a resident for tax purposes, or at least one partner in a partnership is an Australian resident.
The transferor and transferee must choose the roll-over to apply.
So the SBBR could apply, but what are the benefits?
The value in the SBBR as a re-structuring tool rests in its tax implications. Under the SBBR there are no direct income tax consequences. This is most notable in the benefits of the CGT effect of the roll-over, which operates as follows:
- Firstly, the CGT asset is transferred for an amount equal to the transferor’s cost base of the asset just before the transfer, hence preventing any capital gain or loss.
- Any pre-CGT asset transferred maintains its pre-CGT status.
- For the purpose of the 50% CGT discount capital gain, the transferee is treated as having acquired the CGT asset at the time of the transfer.
This translates to there being no capital gain or loss arising from the transfer of the assets.
If you’re contemplating a restructure of your small business, to protect your assets, maintain essential employees, raise new capital or just to simplify your affairs, it is worth considering if and how, the SBRR can assist you with the ongoing efficient conduct of your business.
This roll-over has the potential to allow you to make the structural changes to your business that you have always wanted to make, but avoid the CGT implications which prevented you from doing so in the past.