Q&A: The small business restructure rollover provision and the 15-year exemption

Article from our Outlook magazine, published July 2019


Scenario

The taxpayers are a married couple. In the 1990s they started a business in partnership together. Using the small business restructure rollover provisions, the partners transferred their business into a discretionary trust in 2018. In 2019, when both partners were in their sixties, the business was sold.

Question

Can the 15-year exemption under the small business CGT concessions be claimed in relation to the disposal of the goodwill of the business?

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Guidance

A new type of small business rollover was introduced into the tax law in 2016. It can apply to the transfer of an asset that occurs on or after 1 July 2016. This new law, which is found in subdivision 328-G ITAA 1997, is not to be confused with the small business CGT concessions that are in Division 152 ITAA 1997. This new type of small business rollover is generally referred to as the small business restructure rollover.

The purpose of the small business restructure rollover is to permit closely held groups to restructure their assets without consequences under the federal tax legislation. State based taxes may still apply to such a rollover. GST may also be applicable. Broadly, if the rollover provisions apply, the income tax legislation (including capital gains legislation) is “switched off” in relation to the transfer of the assets.

There are several conditions that must be satisfied before the small business restructure rollover can be used. Broadly, these are:

  • there is a genuine restructure of an ongoing business
  • there is a small business involved in the transaction (i.e. aggregated turnover less than $10 million)
  • the transaction does not have the effect of materially changing the ultimate economic ownership of the asset being transferred
  • the asset is a CGT asset (other than a depreciating asset) that is an “active asset”.
  • the transferor and each transferee are Australian tax residents, and
  • the parties to the transaction choose to apply the small business restructure rollover
The small business restructure rollover is a very useful facility for small business owners who want to change the type of structure under which they conduct business. For example, the following types of transfers can all attract the rollover provisions, provided the conditions are met:
  • Transfer of an asset from a sole proprietor to a company or trust.
  • Transfer of an asset from a trust to a company and vice versa.
  • Transfer of assets from one entity to multiple entities
  • Transfers of assets from multiple entities to one entity.

There may be other types of rollovers available for the transfer of assets mentioned above. However, these rollover provisions can have conditions attached that are not in keeping with the outcomes being sought. The small business restructure rollover can bypass these conditions.

One of the key conditions of the small business restructure rollover is whether a “genuine restructure” of an ongoing business has occurred. The law provides a safe harbour rule in relation to this requirement. This will apply, broadly, where in the three year period after the transaction takes effect:
  • there is no change in ultimate economic ownership of any of the significant assets of the business (other than trading stock) that were transferred under the transaction
  • those significant assets continue to be active assets, and
  • there is no significant or material use of those significant assets for private purposes.

In the scenario under discussion, there were two key issues that needed to be considered. The first is whether, due to the sale of the business within three years of the transfer of the business into the discretionary trust, there was a genuine restructure when the partnership transferred its business to the trust. If there was not a genuine restructure, the rollover from the partnership to the trust could be undone.

The second question is whether the change in ownership of the goodwill of the business due to the restructure meant that the clock started again in relation to the ownership period of the goodwill for the purposes of the small business CGT concessions. If this were the case, the 15-year exemption under the small business CGT concessions would be lost.

With regard to the genuine restructure issue, the three-year period, mentioned above, should not be seen as the default time period during which assets must not be disposed of. The disposal of the business by the partners to the discretionary trust was part of a genuine desire to restructure the way the assets of the business were held. Among other things, the risk of unlimited joint and several liability applied to the partners whereas this is not the case in relation to the discretionary trust. At the time of the restructure, the idea of selling the business was not seriously in contemplation. Nevertheless, due to the age of the partners, retirement was at the back of their minds. In substance, this was a genuine restructure of the business, despite the safe harbour provisions not being met.

When the goodwill of the business was sold from the discretionary trust, the small business CGT concessions were considered. Fortunately, when the small business restructure rollover provisions were enacted, the government had the foresight to place a provision within the small business CGT concessions to deem the acquisition date for the purposes of the 15-year concession to be the date that the partners originally acquired the asset (s. 152-115(3)). This provision has application for both the original acquisition date of the asset and also the test of whether there is a significant individual for a total of at least 15 years.

Accordingly, the discretionary trust was able to claim the 15-year small business CGT exemption.

 

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