Small businesses will soon be able to change the legal structure of their enterprise without incurring a capital gains tax (CGT) liability. Instead, the CGT liability can be deferred until eventual disposal.
‘Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016’ will apply from July 2016, providing an optional rollover for small business owners who change the legal structure of their business when transferring assets from one entity to another.
The effect of the rollover is that the tax cost of the transferred asset/s is rolled over from the transferor to the transferee, providing greater flexibility for the small business. Rollovers will apply to any gains and losses which occur from the transfer of active assets that are:
- CGT assets
- Depreciating assets
- Trading stock
- Revenue assets
Businesses that qualify for the rollover are ongoing businesses who transfer asset(s) as part of a genuine restructure.
Whether a restructure is “genuine” is determined by the facts and circumstances of the restructure, such as:
- Whether a bona fide commercial arrangement is undertaken for the purpose of enhancing business efficiency
- Whether the transferred assets will continue to be used in the business
- Whether or not it is a preliminary step to facilitate the economic realisation of assets
To be eligible for the rollover, each party to the transfer must be either:
- a “small business entity” with less than $2 million in turnover for the income year during which the transfer occurred;
- an entity that has an “affiliate” that is a small business entity for that income year;
- “connected” with an entity that is a small business entity for that income year; or
- a partner in a partnership that is a small business entity for that income year.
Since the new rules are rather technical in nature, obtaining professional advice may be in a small business’s best interest to ensure they can take advantage of the restructure rollover.