PowerPoint Presentation · –New structure is the one likely to have been adopted originally –Restructure not artificial/unduly tax driven Small Business Restructure Roll-overs

10/05/2017

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Small business restructures 1

THE BOARD OF TAXATION

Dr Mark Pizzacalla

Board Member

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SMALL BUSINESS RESTRUCTURE ROLL-OVERS

Dr Mark Pizzacalla

Board Member, Board of Taxation

Partner, BDO

Email: [email protected]

Mobile: +61 413 048 440

Small Business Restructure Roll-overs 3

INSTITUTE OF PUBLIC ACCOUNTANTS

2017 TASMANIA CONGRESS

10/05/2017

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The content of this presentation is of a general nature only, and should not

be used or treated as professional advice. The presentation does not take

into account your particular objectives, situations or needs. As a result, it

may not be appropriate to your particular circumstances, and should not be

relied upon. You should rely on your own enquiries, together with

professional advice that takes into account your particular circumstances,

in making any decisions concerning your own interests. The presentation

materials do not constitute the provision of financial advice.

4Small Business Restructure Roll-overs

NOT ALL CONCESSIONS WORK!

• Simplified tax system

• Entrepreneur’s tax off-set

• Trading stock

• [Goodwill concessions

in former 118-250?]


SMALL BUSINESS

LIFE-CYCLE MODEL


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FACTORS IN DETERMINING

STRUCTURE

• Access To Capital

• Compliance Costs

• Flexibility

• Personal Liability

• Tax


WHY CHANGE STRUCTURE?

• Continue To Grow/Develop

• Unnecessary Compliance Costs

• Enhance Business Efficiency

• Move Into More Efficient Structure

• Adapt To Current Conditions


SMALL BUSINESS

RESTRUCTURE ROLL-OVER• Small business package 2015-2016 Budget

• Royal Assent: 8 March 2016

• Effective date: 1 July 2016

• In addition to existing roll-overs

• Provide small business owners greater flexibility to change structures

• Defer gains/losses


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WHAT ARE THE ELIGIBILITY

CONDITIONS? ALL OF THE FOLLOWING 6 CONDITIONS MUST BE MET:

(1)Transfer of asset must be part of a “genuine restructure of an ongoing business”

(2) Each party to transfer must be:

a) SBE for income year when the transfer occurred;

b) Entity who has an affiliate that is a SBE for that income year;

c) Entity who is connected with an entity that is a SBE for that income year; or

d) Entity which is a partner in a partnership that is a SBE for that income year;

(3) Transaction must not materially change the ultimate economic ownership that an

individual has in the asset

(4) Asset must be an active business asset at the time of transfer

(5) Transferor and transferee must be Australian residents for tax purposes

(6) Transferor and transferee must each choose to apply for the roll-over to the

assets transferred

Note: The roll-over applies on an “asset-by-asset” basis.


EFFECT OF THE ROLL-OVER

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ASSET TYPE TRANSFEROR TRANSFEREE

Pre-CGT asset Tax free Retains pre-CGT status

Discount Capital Gains

(CGT Asset)

Cost base Acquire CGT asset as at transfer

time at cost base (refresh

happens!)

Trading stock Cost, or if item held at start of the

income year, value at start of

income year

Acquire Transferor’s cost and

other attributes

Revenue assets Amount that results in no profit or

loss

Acquires Transferor’s cost

attributes

Depreciating assets Roll-over relief under s.40-340

Cost which would result in a nil

balancing adjustment

Acquires transferor’s

depreciation method and

effective life

Small Business Restructure Roll-overs

GENUINE RESTRUCTURE -

MEANING

• Integrity Measure

• Question Of Fact

• Positive Factors

– Bona fide commercial arrangement

– Business continues under same ultimate economic ownership

– Transferred assets continue to be used

– New structure is the one likely to have been adopted originally

– Restructure not artificial/unduly tax driven


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GENUINE RESTRUCTURE – SAFE

HARBOUR

PROVISO IS THAT FOR 3 YEARS FOLLOWING THE ROLL-OVER:

• No change in the ultimate economic ownership of any of the significant

assets of the business that were transferred (except trading stock)

• Those significant assets continue to be active assets

• No significant or material use of those significant assets for private

purposes


GENUINE RESTRUCTURE -

PRACTICAL ISSUES

• ATO guidance on a ‘genuine’ restructure – LCG 2016/3

• The first private ruling on ‘genuine’ – making a business more

attractive to potential investors and protect assets from business

risk

• Safe harbour documentation?


GENUINE RESTRUCTURE:

EXAMPLE 1

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BUSINESSBUSINESS

COMPANY

TRUST


GENUINE

RESTRUCTURE

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NOT A GENUINE RESTRUCTURE:

EXAMPLE 2

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BUSINESSBUSINESS

COMPANY

‘NOT’ GENUINE

RESTRUCTURE

SALE(12 MONTHS LATER)

BUSINESS

PURCHASER


GENUINE RESTRUCTURE:

EXAMPLE 3

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‘ENTITY 2’

TRUST


‘ENTITY 2’

‘ENTITY 1’

‘ENTITY 3’

‘ENTITY 1’

GENUINE

RESTRUCTUREBUSINESS ‘CLASS OF

ASSETS’

‘CLASS OF

ASSETS’BUSINESS

100%

WHO CAN ACCESS ROLL-OVER?

EACH PARTY TO TRANSFER MUST BE EITHER:

• SBE for the income year during which the transfer occurred;

• Entity that has an affiliate that is a SBE for that income year;

• Connected with an entity that is a SBE for that income year; or

• A partner in a partnership that is a SBE for that income year


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ULTIMATE ECONOMIC

OWNERSHIP: EXAMPLE 1

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SOLE TRADER

BUSINESS

Individual

Unit Trust

BUSINESS

100%


ULTIMATE ECONOMIC

OWNERSHIP: EXAMPLE 2

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BUSINESS BUSINESS

PARTNER

1

PARTNER

2PARTNER

3PARTNER

1PARTNER

2

PARTNER

3

UNIT TRUST

50%100% 150%


ELIGIBILITY - PRACTICAL ISSUES

• The Rules are very specific in application

• The first private ruling on the alternate test – the alternate test is

not satisfied when business assets are transferred from SBE to

a company owned by a family trust

• Published ATO guidance also highlights some practical

considerations


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ALTERNATE TEST: PROBLEM 1

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BUSINESS BUSINESS

COMPANY

TRUST



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BUSINESS BUSINESS

COMPANY COMPANY

TRUST




BUSINESS

TRUST

BUSINESS

COMPANY

BUSINESS

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BUSINESS BUSINESS

COMPANY

TRUST


ASSET TRANSFERRED MUST BE

“ACTIVE ASSET”

ACTIVE ASSETS ARE BROADLY ASSETS USED IN BUSINESS

• If SBE; asset must be a CGT asset that is an active

asset for CGT small business concessions

• If not a SBE; asset must be an active asset under

S.152-10(1A)


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RESIDENCY CONDITION

• Both transferor and transferee must be

Australian tax residents

• Transferor and transferee must meet

whichever residency test applies to them


CHOOSING TO APPLY THE

ROLL-OVER

• Both transferor and transferee must both

choose to apply the roll-over

• This choice affects tax consequences of

the transaction for them


PRACTICAL EXAMPLE:

COMPANY TO PARTNERSHIP

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JACK JACK

TRUCK CO PARTNERSHIP

JILL JILL

50%50%

ASSETS

TRUCK $15K

GOODWILL $0

ASSETS

TRUCK

(TWDV $15K; MV$20K)

GOODWILL

(MV$30K; CB$0)


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PRACTICAL EXAMPLE:

ASSET PROTECTION

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BUSINESS BUSINESS LAND

COMPANY COMPANY

BUSINESS

TRUST


SOME FINAL THOUGHTS

• Purchase consideration

• Long-term estate planning

• Bankruptcy considerations – get in touch creditors and bank

• Value shifting integrity rules

• Corporations Law

• Trust Deed


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Dr Mark Pizzacalla

Board Member, Board of Taxation

Partner, BDO

Email: [email protected]

Mobile: +61 413 048 440

OPEN

FORUM

QUESTIONS?

10/05/2017

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Small business restructures 34

Documents

PowerPoint Presentation · –New structure is the one likely to have been adopted originally –Restructure not artificial/unduly tax driven Small Business Restructure Roll-overs