Tax law amendment smooths way for small business restructuring

8 April 2016

 The passage of the Tax Laws Amendment (Small Business Restructure Roll-Over) Act 2016 (Cth) (The Act) which received royal assent on 8 March 2016 removes one major obstacle to the restructuring of small businesses. From 1 July 2016 small businesses wishing to restructure can access Capital Gains Tax Roll-Over relief for business assets provided they meet the requirements prescribed in the Act.

The CGT Roll-Over relief provided for by the Act is available to:

  • an ongoing business
  • undertaking a genuine restructure
  • where the asset being transferred is transferred between:
    • small business entities[1]; or
    • entities which have small business affiliates[2]; or
    • entities which are connected with[3] small business entities; or
    • partners in a partnership which is a small business entity
  • where the economic ownership of the asset transferred is not affected by the transfer.

The effect of the relief provided for in the Act is that the cost base at acquisition by the prior-existing small business structure is preserved for use by the incoming small business structure and in the case of pre-CGT Assets the pre-CGT character of the asset is maintained.

The CGT implications of restructuring a business have been one of the main disincentives to undertaking the exercise. As and from 1 July 2016 that disincentive has been removed.

Removal of the CGT hurdle allows for small business to adopt structures and strategies which optimise stakeholder protection and deliver optimised income retention and growth without the tax consequences which come with transferring property between entities. This is the underlying rationale behind the Act which forms part of the Govenrnment’s “Growing Jobs and Small Business” package announced in the 2015 Budget.

Business restructure is almost always undertaken in the context of broader estate and business planning concerns. The flexibility to change and adapt to prevailing circumstances is the hallmark of a strong and effective business or estate plan. By deploying the right tools in the planning process the small business owner can protect their hard earned gains against attack from outside and from within their business. As with most strategies, they are more economically implemented at the start of a business or a structure than they are once that business or structure is established. In restructuring an existing business and adopting a business model which allows for effective protections to be implemented as part of that restructure a business can now avoid the additional costs which might have been incurred in overlaying protective strategies on an existing model. An obvious example of such an expense is solvency reports for an existing business where security is being given to a related party or a party internal to the business.

The right tools will obviously depend on the circumstances and the objective sought to be achieved but may include:

  • Buy Sell agreements to provide for succession of the business;
  • Shareholder or Stakeholder agreements to provide for means of resolving disputes among many other things;
  • Agreements which provide for the securing of internal liabilities such as director’s loans
  • Insurances and funding arrangements in respect of key personnel and stakeholders.

Business Plans and associated Business Structures benefit from regular monitoring and review. The changes to the CGT Roll-Over rules in respect of restructuring allow for those reviews and any modifications necessitated by them to be undertaken with greater ease and economy. To find out more about the effectiveness of your Business Structure and whether you are able to take advantage of these new Tax Law Amendments contact us on 3007 3777.

[1]section 328.110 Income Tax Assessment Act 1997 defines “small business entity”

[2]section 328.130 Income Tax Assessment Act 1997 defines “affiliate”

[3]section 328.125 Income Tax Assessment Act 1997 specifies what it is to be “connected with”