The small business restructure roll-over came into effect on 1 July 2016 to provide greater flexibility for small business owners to change the legal structure of their business by allowing them to defer gains or losses that would otherwise be realised when business assets are transferred from one entity to another. Taxpayers seeking to predominantly eliminate or defer taxation obligations should be aware of the risks surrounding the requirement that the transaction be a “genuine” restructure of an ongoing business.
Although the phrase “genuine restructure” is not defined, the legislation provides a safe harbour rule that deems a transaction to be a genuine restructure if for the three years following the rollover:
- there is no change in the ultimate economic ownership of any of the significant assets of the business; and
- the significant assets continue to be active assets and there is no substantial private use of the significant assets.
There remains uncertainty in a restructure where the business is sold within three years, regardless of whether the sale is unforeseen or intentional.
The Commissioner has provided a list of factors that indicate when a restructure is not genuine:
- the restructure is contrived or unduly tax drive;
- the restructure is directed at eliminating an impending or existing tax liability;
- the restructure is a preliminary step to facilitate the economic realisation of assets, or takes place in the course of a winding down to transfer wealth between generations;
- where the restructure effects an extraction of wealth from the assets of the business;
- where artificial losses are created or there is a bringing forward of their recognition; and
- the restructure effects a permanent non-recognition of gain or the creation of artificial timing advantages.
It would be prudent for taxpayers to seek legal advice when considering changing their business structure and electing to apply the small business restructure roll-over. If the business is sold within three years from the restructure or the requirements for the safe harbour rule are not satisfied, the business will be left with a large liability in capital gains and a potentially impractical commercial structure. Where the dominant purpose of the restructure is to gain a tax benefit, the entity may also be exposed to Part IVA tax avoidance provisions.
If you have any concerns or require advice on whether a current or intended restructure would be regarded as “genuine”, please contact our team of tax solicitors at The Quinn Group on (02) 9223 9166 or submit an online enquiry form today.