Creating a new business structure for your small business may be advantageous for various reasons such as: to minimise tax and compliance issues, raise new capital or to provide greater asset protection.
Previously though, doing a restructure may have incurred a significant income tax liability. Following the introduction of the Small Business Restructure Rollover last year, small business entities may now be able to change the legal structure without this costly imposition.
The rollover applies to the transfer of active assets that are CGT assets, trading stock, revenue assets or depreciating assets. Active assets are those assets used or held ready for use, in the course of carrying on a business. To be eligible for the rollover, the transfer of assets must form part of a “genuine restructure” as opposed to an artificial or inappropriately tax-driven scheme.
A genuine restructure
The ATO considers a “genuine restructure” of an ongoing business as one that could be reasonably expected to deliver benefits to the business owners in respect of their efficient conduct of the business.
The following features are indicative of a “genuine restructure of an ongoing business”:
It is a bona fide arrangement undertaken in a real and honest sense to facilitate growth, innovation, and diversification
The need to adapt to changed conditions
Reducing administrative burdens, compliance costs and/or cash flow impediments
The economic ownership of the business and its restructured assets is maintained
The small business owners continue to operate the business through a different legal structure. For example, there is:
continued use of the transferred assets as active assets of the business
continuity of employment of key personnel and
continuity of production, supplies, sales or services.
A “safe harbour” rule may be available to deem there to be a genuine restructure where no further changes are made within 3 years of the restructure.
The transaction must not result in a change to the ultimate economic ownership of the transferred assets. The ultimate economic owners of an asset are the individuals who, directly or indirectly own an asset. Discretionary (family) trusts may be able to meet the requirements for ultimate economic ownership, for example, when there is no practical change in which individuals economically benefit from the assets before and after the transfer. This may require family trust elections to be made.
Opportunities and benefits
Small business restructuring can present all sorts of benefits under certain circumstances. There are however, potential associated flow-on tax consequences.
There may also be other potential liabilities to consider prior to restructuring, such as stamp duty and GST.
If you own a small business, we suggest that a short conversation with your Saward Dawson business advisor might be well worthwhile.