A duty exemption for small business restructures – at last!

4 November 2020

Initially published 4 November 2020. Updated following OSR expansion issued on 21 July 2021.

One of the biggest problems with any business restructure is the transaction costs.

Even though your professional advisors will point out the many advantages of restructuring your business, it simply doesn’t sit well with most clients that duties and taxes have to be paid to the Queensland and Australian Government.

Whilst the Australian taxation office may provide relief to small business restructures (in the form of rollover relief, reductions and exemptions) or the transfer does not trigger any tax due to there being no gain, the Queensland Office of State Revenue has stood firm that duty be paid in most circumstances.

When does this apply ?

However, that has changed – at last !

Taking effect from 9 October 2020, the Queensland Government has announced that eligible transactions entered into on and from 7 September 2020 involving the transfer of small business property will be duty exempt to a certain value.   That exemption was expanded on 21 July 2021 in respect of transactions involving discretionary trusts occurring after 28 June 2021.

What is an eligible transaction ?

So what is an ‘eligible transaction’ ?

Firstly, the current business owner must be either:

(a) an individual sole trader;

(b) a partnership; or

(c) a discretionary trust.

Notably, unit trusts are not mentioned.

Secondly, that current business must:

(a) be conducted from within Queensland or provide land, money, credit, goods or services to Queensland customers; and

(b) have an annual turnover of not more than $5 million.

Thirdly, the buyer of the business must be a newly registered (or dormant) unlisted company the shareholders of which are:

(a) the individuals (where the current business owner is an individual sole trader);

(b) the partners (where the current business owner is a partnership);

(c) where the current business owner is a discretionary trust, either:

(i) the taker in default beneficiaries; or

(ii) the trustee of that discretionary trust (provided the rights and interests of the beneficiaries of that discretionary trust are the same before and after the transaction) – note this part of the exemption only applies to transactions entered into after 28 June 2021

Fourthly, the dutiable property being transferred must only be business property actively used to carry on that small business.

Finally, the dutiable value of the transaction is not more than $10 million.

How much can I save ?

So what does that mean in real terms ?

A $10 million eligible transaction saves $555,525.00 in duty.


Example 1medical practice restructure

A medical practice has 10 practising doctors.

The owners of the medical practice are two discretionary trusts trading as a partnership in equal shares.  Each discretionary trust has a corporate trustee for a family trust set up for the benefit of the family of 2 of the principal doctors.  Each corporate trustee is controlled and owned by a spouse of the relevant principal doctor.

The medical practice has an annual turnover of $4.5 million and has been valued at $1.5 million.

The principal doctors want to grow the practice and sell it to a corporate group.  They know that trading through a company will make it a lot easier for the corporate group to buy the shares in the company, rather than buying the business from the existing discretionary trusts.

They have sought advice on a restructure and have been advised by their accountant that the taxation on the transfer will be minimal.  However, their lawyer has, correctly, informed them duty of $66,775.00 will still be payable.

The principal doctors find it hard to justify spending that money (out of their pocket) where they see the true benefit of the restructure being to sell the medical practice which may, or may not, ever eventuate.

This exemption allows the transfer of the medical practice to a newly formed company that is owned by the 2 discretionary trusts or the takers in default of those 2 discretionary trusts, saving $66,775.00.

Example 2tech guru on the rise.

A young IT graduate has an idea – to create a new app that will revolutionise the crowd source funding process with new technology they will create.

They have nothing more than an idea, skills and big dreams.  So when they start trading, they cannot afford the company set up costs.  Instead they trade in their own name, starting from the modest abode of mum and dad’s garage.  To cover costs of developing that technology, they provide IT support to legal and accounting firms.  Over time, the IT business grows and has an annual turnover of $250,000.

Who would know it, but in 2019 the Australian Government announces changes that makes crowd source funding more easily available and the complete business (including the technology that individual has built) is now been valued at $9 million.  A larger technology company is looking to buy a 40% share in the business in the next 2-3 years, but will only consider an acquisition of shares in a company.  It could never be seen to be in partnership with the individual.

Previous to this exemption, unless an existing exemption applied (notably IP transfer exemptions), that individual would have to find $498,025.00 to pay the duty on transferring the entire business into a company, before 40% of the shares could be sold to the large tech company.  Now, the exemption creates a saving of at least 60% of the dutiable value that duty would have been calculated and payable upon.

Need assistance?

If you would like any assistance with considering if this is exemption could be relevant for you then please do not hesitate to contact our commercial partner, Antony Harrison, on 07 3007 3716 or aharrison@mahoneys.com.au