The Bill and Explanatory Memorandum for the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 (in the House of Reps on Thur 4.2.2016) are attached.
The Bill effectively seeks to allow small businesses to change the legal structure of their business and have the CGT liability disregarded and deferred until eventual disposal. It will allow small businesses to roll-over assets from one entity to another, provided the underlying economic ownership of the assets remains unchanged.
TT summary of the Bill
328-430 When the Rollover is available
(1) (a) The transfer has to be part of a ‘genuine restructure of an ongoing business’; (b) each party to the transfer must be a small business entity or an affiliate, connected entity or partner; (c) the transaction does not have the effect of materially changing the ‘underlying economic ownership’ of the asset transferred; (d) the asset transferred is an active asset; (e) the transferor and transferee meet the ‘residency requirement’; and (f) they both choose the rollover relief in their tax returns. For depreciating assets, see s40-340(1), item 8 in the table.
328-435 Safe harbour rule for ‘Genuine Restructures’
There will have been a ‘genuine restructure’ if, for three years, there has been no change in the ultimate economic ownership of the ‘significant’ assets (save for stock); and those significant assets remain ‘active’ assets, not subject to private use.
328-440 Discretionary Trusts – Ultimate economic ownership
The transferor ultimate economic owners must be in the ‘family group’ of a transferee trust (which must therefore have made a ‘family trust election’ under Sched 2F of the ITAA36).
A transferor trust, likewise, must have made the same sort of ‘family trust election’ and the recipient ultimate economic owners must be in the transferor’s ‘family group’.
The ‘family groups’ must match if the transfer is from one discretionary trust to another.
328-450 Residency requirement
A transferor or transferee must be an Australian resident (and likewise a ‘partner’ in a partnership).
328-450 Income tax position not changed by rollover of asset
The rollover of an asset will have no ‘direct’ income tax consequences (including not being a dividend under Div 7A).
328-455 Income Tax law applies as is transfer done at ‘rollover cost’
The income tax law will apply to a rollover as if the transfer were done at the ‘rollover cost’, which is the ‘cost base’ for CGT purposes, the stock holding value for trading stock and the value that would give no profit or loss on other revenue assets. Again, depreciating assets are dealt with under Div 40 of the ITAA97.
328-460 – Pre-CGT assets retain their status
Pre-CGT assets retain their status as pre-CGT.
328-465 – New membership interests issued as consideration
If any membership interests are issued as part of the rollover transaction, the first element of their cost base will be the sum of the ‘rollover value’ of the assets dealt with under s328-455, the ‘adjustable values’ of any depreciating assets transferred for the membership interest, and the amount of any liabilities assumed.
328-470 Up-stream capital losses ignored unless not attributable to the rollover
If a taxpayer will have to ignore a capital loss on a membership interest (in an entity that has a direct or indirect membership interest in the transferor or transferee) unless the taxpayer can demonstrate that the loss was not attributable to a rollover transaction.
328-475 Previous Div 152-E clawback provisions remain effective when rolled over under these provisions
Where an asset has been transferred with the benefit of this restructure rollover, and the transferor acquired that asset as a ‘replacement asset’ under a previous Div 152-E small business rollover, then the provisions that would claw back the previous gain, sheltered by the 152-E rollover (J2, J5, & J6), remain effective as this as only the transferee (under this rollover) is deemed to transact at the ‘rollover cost’ (for income tax purposes).
152-115 – 15 year CGT exemption (Div 152-C) unaffected by restructure rollover
The transferee will effectively inherit the previous years ownership for this 15 year CGT exemption.
[Summary: John Morgan: FJMtax.com]