As part of the 2015-16 Budget, the Federal Government committed to providing greater flexibility for small businesses when changing their legal structure. To this end, the Treasury has released an Exposure Draft and accompanying explanatory materials for the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015: Small Business Restructure Rollovers.
This Bill will amend the Income Tax Assessment Act 1997. The date of effect for the amendment will apply to transfers of assets occurring on or after 1 July 2016.
The amendments make it easier for small business owners to restructure by allowing them to defer gains or losses that would otherwise be made from transferring business assets from one entity to another. The new small business roll-over is in addition to roll-overs currently available where a sole trader or partner in a partnership transfers assets to, or creates assets in, a company in the course of a business restructure.
Under current laws, restructuring requires business assets to be transferred from one entity to another, such as from a company to a trust, and significant income tax liabilities may arise. The impact of these liabilities on cash flow and available capital may create an impediment to restructuring. Currently, roll-over relief is available in limited circumstances for business restructures.
The Growing Jobs and Small Business package in the 2015-16 Budget introduced a roll-over to allow small businesses to change legal structure without attracting Capital Gains Tax (CGT) liability at that point. These amendments seek to provide further flexibility for small business owners by extending the roll-over to apply to gains and losses arising from the transfer of CGT assets, depreciating assets, trading stock or revenue assets between entities as part of a small business restructure.
There are two types of entities that may be eligible for the roll-over. The first is those that are small business entities in the income year in which the transfer takes place and that satisfy the maximum net asset value test. An entity will be a small business entity if it carries on a business and the combined annual turnover of the entity and other entities that are affiliated or connected with it is less than $2 million.
The entity must also satisfy the maximum net asset value test, which requires the sum of the net values of the entity’s CGT assets, together with the net values of CGT assets of other entities that are affiliated or connected with it, to be less than $6 million. This first kind of entity may access the roll-over in relation to CGT assets that are assets of the business carried on by the small business entity.
The second kind of entity that might be eligible for the roll-over is one that is an affiliate of, or is connected with, a small business entity for the income year that satisfies the maximum net asset value test at the time of the transfer. These entities may access the roll-over in relation to CGT assets that satisfy subsection 152-10(1A) or (1B) of the Income Tax Assessment Act 1997, which relate to passively-held assets that are used by the small business entity in their business.
The requirements for roll-over relief will be available under the following circumstances1 :
- the transferor transfers a CGT asset or all of its business assets that are CGT assets, depreciating assets, trading stock and revenue assets
- the transferor chooses to apply the roll-over
- the transaction is a restructure that has the effect of changing the type of any or all of the entities and/or the number of entities through which all or part of the business is operated
- no consideration is provided for the transfer
- the transferor, transferee and the ultimate owners of the assets transferred are Australian residents
- the transfer does not have the effect of changing the ultimate economic ownership of the asset or assets transferred, and
- the transferee is not an exempt entity or a complying superannuation entity, or none of the transferees are exempt entities or complying superannuation entities.
Further information is available on the Treasury website. AADA supports the Government’s commitment to reducing compliance costs and red tape, and increasing flexibility for Australia’s small business sector. AADA has provided a submission to the Treasury in support of these amendments.
1Explanatory Materials, Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015: Small Business Restructure Rollovers 2015.