How to restructure your business in a tax-efficient way

As businesses grow and change, it’s possible that their structure will change. Many new businesses start out as sole traders or partnerships of individuals but as they grow, the owners may look to incorporate or introduce a trust into their structure. There can be various reasons for that:

  • Asset protection to separate personal assets like the family home from business creditors.
  • The ability to stream income to other family members, which a trust allows but can’t be done as a sole trader.
  • The desire to introduce new stakeholders and investors to the business which is better done through a corporate or unit trust structure than a sole tradership.

Unfortunately, until recently, changing a business structure could also trigger an unwanted tax bill. Tax law often regarded a change in structure as effectively a change in ownership. And, as a general rule, where there is a change in ownership, there is a capital gains tax bill.

How the taxman can help: small business restructure rollover relief

When you change business structure, it is likely that assets used in the business will be transferred from the old business to the new one. From 1 July 2016 small businesses can change the legal structure of their business without incurring any income tax liability when assets which are used in the business (“active assets”) are transferred from one entity to another.

This rollover applies to active assets that are CGT assets, as well as trading stock, depreciating assets and other revenue assets like work in progress.

Small businesses qualify for the new provisions if they have an estimated turnover of less than $10million for the current year or if their turnover for the previous year was less than $10 million.

The relief applies where small business taxpayers transfer an active asset of their business to another small business entity as part of a genuine business restructure, as opposed to an artificial or inappropriately tax-driven scheme.

So, provided the restructure is genuine, the tax effect of the restructure will be as follows:

CGT assets

  • No capital gain or loss accrues to the old entity
  • The new entity acquires the asset at the date of transfer for its original cost.
  • Pre-CGT assets remain pre-CGT in the new entity (Quick reminder, assets which were acquired before the introduction of CGT on 20 September 1985 are typically completely exempt from CGT)
  • In relation to the 50 per cent discount, the 12 month clock is reset. You normally need to hold a CGT asset for 12 months in order to claim the 50 per cent discount. So, the new entity must hold the asset for 12 months after the restructure in order to benefit from the discount (remember that companies can’t claim the discount in any event)
  • There’s a different CGT concessions which allows active assets held for 15 years to be disposed of tax-free (provided numerous conditions are met). For the purposes of this exemption the new entity is treated as having acquired the asset at the same date as the old entity

Trading stock

The new entity inherits the trading stock at the old entity’s cost.

Depreciating assets (such as plant and machinery)

The new entity can continue to deduct the decline in value of the asset using the same method and effective life as the old entity. The asset is transferred at such a value that a balancing adjustment event doesn’t occur in the old entity.

If you need advice on the best structure for your growing business (and the potential tax implications of changing), talk to your accountant or tax adviser.

Mark Chapman, Director of Tax Communications, H&R Block Australia

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