The new small business rollover (the rollover) is contained in Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997). The rollover is effective from 1 July. Readers of the tax report may recall previous articles about taxation rollovers and a tax adviser’s toolbox in restructuring businesses. The rollover is a new, effective tool in restructuring small businesses and, when combined with existing rollovers and concessions, certainly provides a wide range of tools to restructure clients’ affairs.
The purpose of the new rollover is to make it easier for small business owners to restructure their businesses without having to face CGT consequences in restructuring their affairs.
Existing rollovers
Existing rollovers available under Division 122, subdivision 124-N and Division 615 of the ITAA 1997 all focus on transfers of assets to companies or exchange of interests in trust for shares and companies. The focus is on moving to a company structure.
The new rollover
The new rollover is limited to company entities only. For example, assets can be transferred from one trust to another trust and, by utilising the rollover, CGT consequences will not arise. This means that trust cloning techniques used prior to legislative amendments effective from 2008 can now be used again. The rollover will allow for the transfer of assets from:
(a) Individual(s) to trusts or companies;
(b) Partnership assets by partners to trusts or companies;
(c) A company to a trust;
(d) A company to individuals and partnerships;
(e) A trust to beneficiaries of that trust; and
(f) From one trust to another trust.
As with all taxation concessions, stringent conditions need to be satisfied to access the Rrollover.
These are the main conditions which must be satisfied in order to access the rollover:
- There must be a transaction – The transaction may be for consideration (eg, a sale of assets) or for no consideration (eg, a gift of assets). Given the word transaction is not defined, it takes its wide ordinary meaning;
- The entities involved in the rollover must be small business entities – This means that the entities must satisfy the $2 million turnover test. The rollover can be applied to entities holding passive assets, provided those assets are used by a connected small business entity. The connected entity and affiliate rules that apply for the purposes of the small business CGT Concessions apply for the rollover;
- There must be a genuine restructure of an ongoing business – The fact that taxation considerations are taken into account in a restructure is not a bar to a genuine restructure. A genuine restructure is one where the restructure is driven by business efficiency gains, the business continues to operate and the structure would have been adopted at the establishment of the business if advice had been obtained at that time.
- Genuine restructure safe harbour – Where a restructured business continues for at least three years the restructure is deemed to be genuine, provided the assets rolled over continue to be used in the business.
- There must be no change in ultimate economic ownership of the asset subject to rollover – For example if an asset is transferred by partners to a company and they want to use the rollover, they must hold all the shares in the company in the same proportion as they held the partnership assets.
- There is an alternate ultimate economic ownership for trusts – Although two trusts with identical beneficiaries may satisfy the ultimate economic ownership test, where a trust has made a family trust election and the asset transfers are within the members of a family group, the alternate test will be satisfied. For example, an asset transferred from trust A to trust B where both trusts have the same test individual will not give rise to a change of ultimate economic ownership even if the beneficiaries are different.
- The asset subject to rollover must be an active asset – This requirement is consistent with the rollover being used for business and not investment assets. Because of amendments to Division 40 of the ITAA 1997, the rollover also extends to depreciating assets.
- The rollover is intended to be income tax neutral – In other words, there should be no income tax consequences arising from the rollover. It is important to note that tax consequences arising indirectly from the rollover cannot be ignored. For example, a transfer of assets out of a company with a complying Division 7A loan agreement for the purchase price should not have any income tax consequences; but if that loan is subsequently forgiven, the taxation consequences arising from the forgiveness of the loan are not covered by the rollover.
Pre-CGT assets, interaction with the 50 per cent CGT discount and the small business 15-year CGT concession
Pre-CGT assets transferred under the rollover retain their pre-CGT status. The transferee is deemed to have acquired the asset before 28 September 1985.
The acquisition date of CGT assets transferred under the rollover is not carried forward and the transferee acquires the CGT assets at the time of the rollover. This is consistent with the rollover being targeted at genuine restructures of an ongoing business and is not intended to cover restructures to facilitate the sale of a business or asset shortly after the restructure.
For the purposes of the 15-year exemption available under subdivision 152-B of the ITAA 1997, the transferee will be taken to have acquired the asset subject to the rollover when the transferor acquired it. Effectively this means that the rollover will not break the ownership period for the purposes of claiming the 15-year exemption.
The flexibility of the new rollover gives greater scope for restructuring clients’ business affairs without triggering CGT consequences. This is a welcome addition to a tax adviser’s toolbox, and should be considered whenever a business restructure is contemplated.
George C Kolliou is principal of KolliouTax. He can be contacted at George@kollioutax.com.au
