Small businesses will be able to change their legal structure without triggering a capital gains tax (CGT) liability at that time based on legislation just passed.
The measure is designed to provide greater flexibility for small businesses to change as the business changes.
The legislation is planned to come into play from July 1, 2016, and applies to:
- transfers of depreciating assets, where the balancing adjustment event arising from the transfer occurs on or after July 1
- transfers of trading stock or revenue assets, where the transfer is after July 1, and
- transfers of CGT assets, where the CGT event from this transfer is after the same date.
The ATO says the new rollover relief “is in addition to rollovers currently available where an individual, trustee, or partner … transfers assets to, or creates assets in, a company in the course of incorporating their business”.
The optional rollover will be available where a small business entity transfers an “active asset” to another small business entity as part of a genuine business restructure, without changing the ultimate economic ownership of the asset.
The ATO says the CGT rollover relief will apply to “gains and losses arising from the transfer of active assets that are CGT assets, depreciating assets, trading stock or revenue assets between entities”.
To qualify for the rollover, the transfer of the asset or assets must be part of, a “genuine” restructure of an ongoing business, as opposed to “inappropriately tax-driven schemes”.
Whether a restructure is “genuine” will be determined based on all of the facts and circumstances. Relevant aspects include whether it is a bona fide commercial arrangement undertaken to enhance business efficiency, whether the transferred assets continue to be used in the business, and whether or not it is a preliminary step to, as the bill puts it, “facilitate the economic realisation of assets”.
To be eligible for the rollover, each party to the transfer must be either:
- a “small business entity” with $2 million or less in turnover for the income year during which the transfer occurs
- an entity that has an “affiliate” that is a small business entity for that income year
- “connected” with an entity that is a small business entity for that income year, or
- a partner in a partnership that is a small business entity for that income year.