Small businesses will have greater flexibility to restructure their operations and could significantly reduce their tax liabilities under new legislation introduced last month.
The small business restructure rollover, which will take effect on 1 July 2016, will allow small businesses to change the legal structure of their business without triggering any immediate income tax or capital gains tax (CGT) consequences.
As a chartered accountant specialising in tax, I’m often called in to advise businesses about the most appropriate and effective structures for their current position. A business’ legal structure can have a significant impact on a range of issues including its tax position, compliance obligations and the owner’s asset protection.
However, where a restructure requires business assets to be transferred from one entity to another, the upfront costs of a restructure (in particular CGT) often outweigh the perceived long term benefits of restructuring (such as improved business efficiency and/or the reduction of income tax).
The restructure rollover will seemingly remove these impediments.
The Income Tax Assessment Act already provides rollover relief for sole-traders, partnerships and trusts converting to a company structure. These provisions have their limitations for the following reasons:
- Companies are often considered to be a less attractive environment for holding valuable assets, particularly since companies cannot access the 50% CGT discount. The 50% CGT discount is generally available to individuals and trusts that hold investments for more than 12 months. Superfunds can access a 33% discount
- The current rollovers are relatively complex and can be difficult to access.
- Where the current rollovers can be accessed, the small business CGT concessions often result in far better tax outcomes than the general CGT rollovers.
- The other costs of undertaking rollovers, such as advisor costs, stamp duty and potentially GST, may be significant.
The small business restructure rollover will allow businesses to transfer business assets (including real property used in their business), trading stock and depreciating assets out of a company and into other structures, such as trusts and partnerships.
If implemented correctly the small business restructure rollover, should have the effect of reducing the overall cost of the transaction.
Treasury has estimated that, at least initially, this rollover will reduce income tax collections by around $20 million per annum. While the overall savings to businesses could be much higher once reduced advisor fees and increased operational efficiencies are factored in.
The restructure rollover can provide significant tax and planning opportunities, including improving operational efficiency, reducing business risk to owners and assisting intergenerational business transfers.
Businesses that are reviewing their operational structures should consider their eligibility to apply the rollover when analysing the restructuring options available to them.
Like most other rollovers, stamp duty and GST costs may still apply and these should be factored in to any restructure analysis.