Small Business Restructure Roll-over

From 1st July 2016 small businesses, defined as those with a turnover under $2m in the prior year, current year, or following year, have a new tax rollover available when restructuring. Should the Turnbull government be able to get key parts of their budget passed by Parliament qualification for this rollover increases to $10m turnover entities. Known as the “Small Business Restructure Roll-over”, it allows the transfer of assets used in connection with business from one entity-type to another without triggering the usual capital gains tax implications.

Whilst there are existing rollovers and small business CGT concessions, these aren’t always accessible and don’t always create the desired outcome.

Advantages of the Small Business Restructure Roll-over

Key advantages of the new Small Business Restructure Roll-over include:

  1. No requirement to qualify for the Small Business CGT Concessions – or face the prospect of an ATO audit to ensure that these have been applied correctly.
  2. The existing rollovers are fairly limited in which existing structures can rollover to which new structures – the new rollover has a far broader scope.
  3. Non-capital assets, such as trading stock and plant and equipment, can rollover under the new rollover without a tax impact. The previously available rollovers would treat a stock transfer as a sale of the stock to be taxed to the old business entity. The transfer of plant and equipment would have been treated as a sale at market value, possibly causing additional taxable income as well if the market value is more than the depreciated value.

Unfortunately, state-based transfer duty (generally known as stamp duty) still applies to transactions under the new rollover.

Applications for the New Roll-over

We see some potentially very useful applications for this new rollover. Some examples below:

Example 1

Jim has been running a business operating under his own name (ie a sole trader) for a number of years. It worked well for him when things were small but the business has grown and so have profits. Jim only draws a modest amount from the business for his living costs and reinvests the rest of the profits back into growing the business. However as the entire business profits are taxed at his marginal tax rate, he is now paying the top tax rate (47%+Medicare Levy). Jim uses the new rollover to restructure from a sole trader business into a company so he can cap the tax on his business at the company tax rate (28.5% as he is a small business). Jim also gains added asset protection by shifting the risks of the business away from him personally and into the company structure.

Example 2

Jack and Jill are siblings who have been running their business through a discretionary trust for many years. They are thinking about how they exit the business and have two key employees who would be interested in taking over. As it is not possible to buy or sell part of a discretionary trust they can’t bring the employees into their existing structure as owners. Jack and Jill use the rollover to roll the business into a company structure. They are then able to add their key employees as shareholders and transition ownership of the business to them over time.

Example 3

Carly’s co-owns her dream business (that does extreme base jumping tours) with Colin through a partnership. Carly has just won the $20m lotto and wants to protect her lotto winnings should there be any legal challenges to the business in the future. Carly and Colin can’t use the Small Business CGT Concessions to shift the business into a company because Carly now has more than $6m of net assets, so they use the new rollover instead.

If you would like to discuss the Small Business Restructure Roll-over in more detail or any other restructuring question, please contact Dale Edwards or Chris Morris on 07 3226 1800. You may also use our contact form.