Tax Restructuring Using...Division 615 –Business restructures Interposition of a holding company between shareholders and a company/unit trust OR Amalgamation of multiple companies

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Tax Restructuring Using

CGT Rollovers & Small

Business CGT Concessions

Jacci Mandersloot

Director – MC Tax Advisors

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Introduction

• Why restructure & what rollovers are available?

• Common Capital Gains Tax rollovers

• Small Business Restructure Rollover

• Small Business CGT Concessions

• Case Studies

Why may a client need to restructure?

• Improve tax efficiency or flexibility - distribution of income, access to 50% CGT

discount, access to R&D or innovation concessions, Division 7A management

• Expanding business or investment interests

• Want to merge or introduce new equity

• Risk concerns - asset protection

• Succession planning / Estate planning

• Exit plans / long-term goals

• Meeting industry or regulatory requirements

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Capital gains tax and other rollovers

Types of CGT rollovers:

• Division 122- transfer or creation of assets in wholly-owned company

• Division 124- replacement asset rollovers

• Division 125 – demerger relief

• Division 126 – same asset rollovers

• Division 615 – business restructures

Can provide deferral of capital gain tax and balancing charges on disposal or creation of

assets. As a general rule, the original cost base of the relevant asset is retained, as well

as the acquisition date (for limited purposes, e.g pre-CGT status and 50% CGT

discount). This can apply differently under each rollover.

Other rollovers:

• Division 328- G – small business restructure rollover

• Division 152 – small business rollover

Rollovers to corporate structure – Subdivisions 122-A/122-B

Disposal by individual / trust / partnership of a single CGT asset, or all the assets of a

business, to a company in which they own all the shares.

Key requirements:

• Only consideration for the transfer can be the issue of shares in the acquiring

company and an assumption of liabilities in respect of the assets transferred.

Note: ATOID 2004/94 - this requirement also satisfied if no consideration provided

• Market value of shares issued must equal market value of assets transferred less

any liabilities assumed.

• Depreciable assets can also be rolled over under a whole business rollover, but not

trading stock.

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Watchouts

• If don’t transfer all business assets must use single asset rollovers and meet

requirements on an asset by asset basis.

• Assumption of liabilities capped at cost base of assets being transferred. (Trade

debtors from the provision of services may have no cost base - ATOID 2005/211).

• No stamp duty reconstruction relief

• Restart acquisition date for small business 15-year exemption

When you might use it:

• Corporatise a structure for external investment or to meet regulatory requirements

• Create a consolidated group and separate assets or business lines

• Management of Division 7A.

Your client conducts a manufacturing business in a discretionary trust, X Trust.

The client wants to build up the business and there is the potential for third-party

investment. X Trust has significant UPEs owed to individuals and corporate

beneficiaries and is struggling to manage its Division 7A requirements due to the need

to retain cash flow for the business.

The business assets include valuable internally generated goodwill, as well as cash,

trade debtors and creditors, manufacturing equipment and trading stock.

You recommend they move to a corporate structure by utilising a subdivision 122-A

rollover

Subdivisions 122-A/122-B – Case Study

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Assets to be transferred - All business assets

Asset/Liability Cost/WDV Market value

Cash 200,000 200,000

Trade debtors 500,000 500,000

Trading stock 1,000,000 1,000,000

Goodwill 0 3,000,000

Plant & Equipment 800,000 1,000,000

Liabilities / employee entitlements (1,000,000) (1,000,000)

Loan (refinanced from UPE) (1,500,000) (1,500,000)

Net assets Nil 3,200,000


Outcomes:

• No immediate income tax

implications for eligible assets

• Assets retain original cost

base & date of acquisition

• Cost base of shares based on

underlying assets & liabilities is

nominal

• Transfer of UPEs/Loans from

Trust to X Co – no Division 7A

• Structure facilitates third-party

investment

Rollover assets to X Co under 122-A and section 40-340

X Co

Trust

X

100%

Loan

Beneficiary

Co


Loan

(Note: Applies to all trust types, including unit trust)

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Division 615 – Business restructures

Interposition of a holding company between shareholders and a company/unit trust OR

Amalgamation of multiple companies /unit trusts with same equityholding under a single

holding company

Key requirements:

• Original company/unit trust must have more than one equityholder

• Original equityholders dispose of their interests and only receive shares in

interposed company in return. The percentage of shares received, and their relative

market value, must equal that of their original equityholding

• Interposed company must become sole equityholder of original company/unit trust

• Original equityholders must own all the shares in the interposed company.

Refer Taxation Ruling TR 97/18


Watchouts

• Can’t be used by a company or unit trust with only a single equityholder (look at

using scrip-for-scrip rollover instead)

• If amalgamating ownership of multiple entities, each entity needs to have identical

ownership percentages.

• Stamp duty corporate reconstruction relief can only apply on a single interposition

(relevant for certain land-rich entities)


• Interpose a holding company to allow retained profits to be moved out of operating

companies for asset protection purposes

• Centralise shareholding of multiple sister entities, and enable tax consolidation

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Outcomes:

• No income tax implications

• Acquisition date and cost base

of interests in subsidiaries held

by Holdco based on underlying

assets and liabilities

• Acquisition date and cost base

of shares received in Holdco

by Trust X and Trust Y equal

to original interests

• Structure facilitates formation

of tax consolidated group

(Note: Trust X and Y must own same percentage of each of Co 1, Co 2 and Unit Trust)

Co 2

Trust

X

Trust

Y

Unit TrustCo 1


HoldCo

Interpose new holding company

Subdivision 124-N - Disposal of assets by unit trust to a company

Transfer of assets from a unit trust to a new company with the same equityholders

Key requirements:

• Trust must transfer all assets, other than those it needs to pay its debts

• CGT Event E4 must be able to apply to all interests in the trust

• Company has not previously operated, unless it is the trustee of the trust

• The shareholders must hold the same percentage interest in the new company as

they held in the unit trust

• The unit trust must be vested within 6 months of the transfer of assets

• Both entities must choose the rollover to apply. Separate rollover applies for

unitholder.

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Subdivision 124-N disposal of assets by unit trust to a company

Watchouts:

• Trusts won’t be eligible if they have an interest with only a discretionary income

entitlement (i.e ‘hybrid trusts’).

• Stamp duty


• Wish to keep structure simple – can corporatise a unit trust without needing to

maintain the original entity (in contrast to preceding rollovers).

Outcomes:

• Asset rollover - same tax outcome as whole business rollover under 122-A

• Equity rollover – same tax outcome as business restructure rollover under 615

Scrip for scrip rollover – subdivision 124-M

Company acquires shares in another company in return for the issue of shares in the

acquiring company. Can also apply for units or options.

Key requirements (company):

• Acquiring company must become owner of at least 80% of voting shares in target

• All voting shareholders must be able to participate

• All shares of same ‘type’ (e.g the same share class) must be able to participate on

the same terms

• Replacement shares must be issued in acquirer or its ultimate holding company

• If non-arm’s length / both entities < 300 members - replacement interests must

have the same market value and same kind of rights and obligations

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Scrip for scrip rollover – Subdivision 124-M

Watchouts:

• May need valuations of the acquiring company and its target to ensure the

replacement shares issued have the same market value as the shares acquired.

• If receive part shares and part scrip, rollover only applies proportionately

• Does not apply to pre-CGT shares or if another rollover applies


• Third party takeover or merger of two businesses

• Interpose a holding company where ineligible for Div 615 as only one shareholder

Outcomes:

• Original shareholder transfers cost base to new shares to extent of rollover

• Tests apply to determine if acquiring company obtains uplift in cost base, otherwise

also adopts cost base of original shares

Subdivision 328-G – Small business restructure rollover

Allows assets to be transferred from one structure to a more appropriate structure.

Tax relief extends to capital assets, trading stock, revenue assets and Division 7A

Key requirements:

• Must be a ‘small business entity’ – aggregated business turnover

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Genuine restructure - Guidance in LCR 2016/3

• Undertaken mainly for commercial purposes rather than unduly tax driven. Likely

structure to have adopted if had received appropriate advice on establishment.

• Not genuine if to prepare for sale or for succession planning purposes.

• Safe-harbour rule if no change in ultimate economic ownership and business use of

asset maintained for 3 years.

Ultimate economic ownership

• Must not change the individual/s share of ultimate economic ownership of the

assets.

• This is traced through a partnership, company or trust.

• Alternative test if transferor and/or transferee is a non-fixed trust that has made a

Family Trust Election. Every individual with ultimate economic ownership of the

assets before and after the transfer must be a member of the Family Group.


Watchouts:

• Lack of certainty with genuine restructure requirement or ultimate economic

ownership requirement – may require a Private Binding Ruling

• Original acquisition date does not apply for 50% CGT discount

• If transferring to a discretionary trust need to make an FTE and ensure that

beneficiaries under the deed are appropriate.

• Stamp duty may apply


• If CGT rollovers do not allow you to move to desired structure, eg transferring to a

discretionary trust.

• To preserve access to 15 year exemption

• Turnover is too high to access small business CGT concessions

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Co Co

DT

FTE

DT

FTE

PartnershipCo


Co

DT 2

?

DT 1

FTE

FTE

• Unclear if allowed under

legislation. No similar example

given in LCRs

• PBRs issued indicate that may

be possible.

• Need to take care with

beneficiaries of trust deed

when relying on ultimate

economic ownership test for

non-fixed trusts.

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Small Business Restructure Rollover – Case Study

Your clients, Mary and Adrian are both over 55 years of age and operate a successful

real estate agency company (M&A Co). M&A Co is owned by Mary and Adrian

individually.

The turnover of the company is less than $10m and it has a current value of $4m

Mary and Adrian established the company 10 years ago when they were starting their

first agency. They are concerned with the lack of personal asset protection and flexibility

of income distribution in their current structure. They have no plans to sell or pass on

the business in the next three years.

You recommend that they use the SBRR to transfer the business to a discretionary

trust.

Small Business Restructure Rollover – Case Study

M&A CoTransfer of Business

M&A

Trust

Requires FTE

Outcomes:

• No tax liabilities triggered on goodwill or depreciables (refer consequences set out in LCR 2016/2. Also extends to trading stock)

• Transfer of unrealised gain out of company

• Access to 50% CGT discount on any future sale after 12 months

• Original acquisition date applies for 15-year exemption

• Assets/income transferred from personal name

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Small Business CGT concessions

Basic conditions for eligibility for concessions

1. Taxpayer must meet one of the following requirements:

• They are a small business entity (‘SBE’); or

• If they do not carry on a business, the asset is used in a business carried on by a

connected entity or affiliate that is an SBE; or

• They are a partner in a partnership that is an SBE and the CGT asset is an interest

in a partnership asset or is used in the business of the partnership; or

• They satisfy the maximum net asset value (‘MNAV’) test.

In order to meet this condition, the relevant entities must therefore either have an

aggregated turnover of no more than $2m, or aggregated net asset value of less than

$6m.


2. Active Asset Test

• If asset owned for 15 years or less – must be active for at least half the ownership

period (or when the business ceased if this occurred within the previous 12 months).

• If asset held for more than 15 years - must be active for at least 7.5 years.

• An asset is active if it used in the course of carrying on a business, or inherently

connected to a business. Assets mainly used to derive rent are excluded unless

used in a business carried on by a ‘connected entity’, ‘affiliate’ or partnership in

which the taxpayer is a partner. Shares or units are subject to a look-through test to

determine if they are active.

3. Asset is shares or units – additional (and complex!) basic conditions

• Amended active asset test

• If MNAV test not satisfied taxpayer must be carrying on a business

• Company or unit trust must satisfy either an amended SBE or MNAV test

• CGT concessions stakeholder test

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15-year exemption (takes priority over other concessions)

• Requires the CGT asset to have been held for at least 15 years.

• If the gain is derived by a company or trust, the entity must have had a significant

individual for a period of 15 years (this does not need to be the same individual). A

significant individual must have a direct or indirect interest of at least 20%.

• At the time the CGT event happened the taxpayer was either aged 55 years or more

and the event happened in connection with their retirement, or permanently

incapacitated.

If exemption applies the capital gain is fully exempt in the hands of the taxpayer. If gain

made by company or fixed trust may be able to distribute without triggering any

additional tax liability, as long as it takes place within 2 years.


50% active asset reduction

• No additional conditions are required to apply this concession.

Retirement exemption

• Capital gain derived by an individual can be reduced by up to the CGT retirement

exemption lifetime limit of $500,000.

• Capital gain derived by a company or trust can be reduced by $500,000 per ‘CGT

concession stakeholder’ in the sale year. (This is a significant individual or the

spouse of a significant individual who also holds an interest).

• Individual 55 – can choose amount to be paid directly to the individual.

• Strict timing and written election requirements also apply.

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Replacement asset rollover

• Provides a taxpayer with a minimum 2-year deferral for any remaining gain if they

apply this amount to acquire or improve eligible active assets

• If an eligible expenditure is not made within the necessary time frame, then the gain

is assessable at the end of this period.

• If a taxpayer will turn 55 years of age during this period, they may choose to apply

this in preference to the retirement exemption. If no replacement asset is acquired

the deferred gain may qualify for the retirement exemption (as the basic conditions

do not have to be met again) and a payment can be made directly to the individual.

• If a replacement asset is acquired but the requirements cease to be met in a future

income year, the capital gain will be triggered at that time.

Watchouts:

• If disposal by company or trust may not have funds to make retirement payment to

individuals where have not received any sale proceeds.

• Tax liability can result if retirement exemption does not eliminate gain or individuals

< 55 and do not contribute to super

• If rollover into shares or units need to monitor to ensure continue to be active assets

• Complexity of rules means that great care must be taken to ensure compliance

When you might use it (to restructure):

• Unable to achieve preferred structure under other rollovers

• Expectation that may exceed thresholds in future (uplift in cost base)

• Ability to contribute greater amount to superannuation


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Small Business CGT concessions – Case Study

Assume the facts from the previous case study, except that M&A Co has expanded to

operate a number of real estate agencies. Further, Mary and Adrian advise you that, as

their three adult children have become involved in the business, they would like to be

able to pass on the business to each of them.

The children are interested in grow the business further, with the possibility of external

shareholders in the future.

Assume basic conditions to satisfy the SBCGT concessions are satisfied.

You recommend that they use the SBCGT concessions to transfer the ownership of the

shares in M&A Co to a new holding company owned by three discretionary trusts


Ultimately for

Child 1

Ultimately

for Child 2Ultimately

for Child 3

Income Tax

Consolidated

Group

New Holding Co

(optional)

Trust 1

33.33%

M&A Co

Trust 2 Trust 3

33.33% 33.33%

Outcomes:

- Use of SBCGT on transfer to eliminate

tax liability (refer next slide)

- Asset protection – no personal ownership.

Option to create tax consolidated group -

retain profits in Holding Co and/or

separate ownership of agencies between

subsidiaries.

- Uplift in cost base of assets if tax

consolidate.

- Each child has own trust to control

- Sale proceeds could be used to repay

shareholders debit loan, create credit loan

or invest as equity

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Tax outcome under the SBCGT concessions

Net capital gains $4m

Less: 50% CGT discount ($2m)

Less: 50% small business reduction ($1m)

Less: retirement exemption x 2* ($1m)

Net taxable gain $Nil

*If under 55, need to contribute to superannuation

Documents

Tax Restructuring Using...Division 615 –Business restructures Interposition of a holding company between shareholders and a company/unit trust OR Amalgamation of multiple companies