Changes to tax rules from 1 July 2016 will significantly broaden the landscape for Small Business owners to restructure with generally no immediate tax consequences.

 

At the moment even a transfer of an asset, business or shares in a company within a family group will generally result in a Capital Gains Tax (CGT) event. While there are currently some concessions that allow for the CGT to be deferred or rolled over, small business owners have not been able to restructure for either asset protection purposes, succession planning or tax efficiency without creating both a CGT liability or stamp duty cost.

 

From 1 July 2016, the Federal Government intends to expand the CGT roll-over relief concession and allow qualifying small business entities to transfer the ownership of business assets within family groups without triggering an immediate tax liability, provided the assets are transferred for commercial reasons.

 

The added bonus, if made law, is that private company shares and business assets located in NSW could be transferred without any stamp duty consequences. The NSW government intends for the stamp duty exemptions to also apply from 1 July 2016.

 

For the purposes of accessing the CGT concessions, a small business is entity is defined as an entity “carrying on business” with an “aggregated turnover of less than $2m”.

 

Only assets that qualify as “active assets” can be transferred without creating a tax liability. An active asset is used or held ready for use by a small business entity in carrying on business. Passive assets such as shares in public companies or rental properties not connected with carrying on business are not considered active assets.

 

• Eligible entities won’t have to pay CGT on the asset transfer where the market value of the asset exceeds the original cost.

• Accessing this concession could provide family groups the opportunity to reconsider existing Division 7A loan arrangements (broadly, loans from private companies to shareholders) and Unpaid Present Entitlements (unpaid trust distributions), in some cases they could be eliminated or restructured.

• Restructuring more broadly may provide small business owners the opportunity to mitigate any asset protection risks, make the business more saleable, allow for estate planning and also unlock tax planning opportunities.

 

Together with the existing capital gains tax concessions for small business entities and owners, the new rules provide for significant tax savings. However, there are consequences in choosing to take advantage of the roll-over relief that a small business owner should be aware of.

 

For example, the transfers of trading stock and depreciating assets generally will not attract any roll-over relief. There could also be GST implications of rolling over business assets.

The key to these concessions is that first and foremost there must be a bona fide commercial reason for undertaking a restructure. Small business owners should make sure they seek professional advice before embarking on any new restructure and make sure it’s the right move for their business.