When a family outgrows its home, one option is to extend or renovate by calling in the builders with their toolboxes. In the same way, when a client’s trust structure is no longer appropriate, accountants must dig into the toolbox to find and use the right tools to deal with the CGT consequences of a restructure.
Why become a company?
Here are some of the most common reasons:
. Division 7A compliance has become too hard.
. The client is preparing for an equity injection.
. A complex structure is being simplified.
. It is preparation for a share sale to exit the business.
The most common stumbling block or objection to a restructure is that the 50 percent general discount will be lost on the sale of the business out of the company. Counter to this argument is that it is increasingly common to see share sales, especially where the company has been well managed, with the share sale exit plan in mind from the inception of the company.
The tool box
Some of these tools are the least used and the most complex to use. As with most things,
familiarity and practice make perfect. In future issues of Public Accountant, we will look at each of these tools in more detail. But for now, it is important to note the following key points about your options:
CGT event A1
. Where the value of a business has fallen, triggering CGT event A1 may result in a capital loss and no CGT liability.
122-A and 122-B rollover
. A 122-A rollover may be in respect of a single asset or all the assets of a business.
. There is no uplift in the CGT cost base oft shares as a result of a 122-A rollover.
. The only consideration for the transfer of a business under a 122-A must be ordinary shares and, if necessary, the assumption of liabilities.
. The trust must own all the shares in the company after the rollover.
. A 122-B rollover works in the same way a the 122-A rollover but is used for partners of trusts.
SBCGTC
. Preconditions must be satisfied by the trust: the Small Business Entity test ($2 million turnover); or the $6 million net asset test; the active asset test.
. There is uplift in the CGT cost base of the share in the company.
. Four possible concessions can be used to reduce or eliminate the capital gain.
. Care must be taken with the complex rules that apply to trusts.
124-N rollover
. CGT event E4 must be capable of happening in respect of the units.
. The rollover is not available to discretion trusts.
. The unit trust must cease to exist within months of the disposal of its first asset.
Familiarity with these tools will give accountants greater confidence in giving clients options to restructure and achieve their goals.
