On Wed 13.7.2016, the ATO released the following Law Companion Guideline:
- LCG 2016/2: Small Business Restructure Roll over: consequences of a roll over. It explains the tax consequences and adjustments that occur when the transferor and transferee choose to apply the small business restructure rollover (‘SB Restructure Rollover‘) in Subdiv 328-G of the ITAA 1997.
Extract from Subdiv 328-G
What this Subdivision is about – s328-420: There are tax-neutral consequences for a small business entity that restructures the ownership of the assets of the business, without changing the ultimate economic ownership of the assets.)
Extract from the Guideline
What this Guideline is about
1. This Guideline explains the income tax consequences and adjustments that occur when the transferor and transferee choose to apply the SB Restructure Roll-over in Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997).
Particular tax consequences and date of effect
3. This Guideline applies to transfers that occur on or after 1 July 2016 which involve:
- a balancing adjustment event for a depreciating asset
- trading stock or a revenue asset, or
- a capital gains tax (CGT) event in respect of a CGT asset (that is not a depreciating asset, trading stock or revenue asset).
Background
4. The SBRR assists small business owners to undertake genuine restructures (see LCG 2016/3) of their businesses which alter the way assets used in their businesses are held.
5. The measure affects what gains or losses the transferor recognises, the carrying tax values for the transferee, and what subsequent losses on membership interests can be recognised.
5A. The SB Rollover does not affect other tax liabilities (for example, fringe benefits tax or goods and services tax), does not prevent any liability for stamp duty from arising under State legislation. Existing obligations under other regulatory regimes, such as the corporations law, must still be complied with. Furthermore, care should be taken that any transactions involving a trust are within the power or duties of the trustee. The following examples are provided to illustrate these consequences.
Example 1 – Restructure from company to discretionary trust
Facts
6. Pep and Sally, a married couple, are the directors and shareholders in Vitamin Pty Ltd, which has issued two shares for total contributed capital of $100. Each share has a cost base of $50. Vitamin Pty Ltd carries on a naturopathy business.
7. As at 1 January 2017, the active assets of the company are:
- a small consulting room, which was acquired by Vitamin Pty Ltd for $200,000 in 2010:
- no other additional capital expenditure has been outlaid in relation to the room; and
- the market value is $230,000.
- a pill press, with an adjustable value [written down value] of $14,000.
- goodwill, which is self-generated.
- 50 bottles of homeopathic pills, which were made and processed by Pep and Sally, and became Vitamin Pty Ltd’s trading stock during the current income year at a cost of $250.
8. The liabilities of the company, arising from a debt for unpaid income tax and trade creditors, total $24,000.
9. A new discretionary trust, the P&S Trust, is settled and family trust election is made with Pep as the primary individual (Subdivision 272-D of Schedule 2F to the ITAA36).
10. On 1 January 2017, Pep and Sally cause Vitamin Pty Ltd to transfer all of its assets (including goodwill but excluding petty cash (see s328-430(1)(d)) to the trustee of the P&S Trust (the trustee) in consideration for the trustee undertaking to discharge Vitamin Pty Ltd’s liabilities. The company and the trustee choose to apply the SB Restructure Rollover.
No direct income tax consequences from the transfer of assets
11. Under the SB Restructure Rollover, a transfer of an asset has no direct income tax consequences, except as provided for under Subdivision 328-G (see s328-450). Related roll-over relief for depreciating assets is available under section 40-340. Most importantly, this means:·
- No capital gain or loss arises from the transfer of the consulting room or goodwill.·
- No amount is included in Vitamin Pty Ltd’s assessable income, or deduction allowed, as a result of a balancing adjustment event under Division 40 (capital allowances) for the transfer of the pill pressing machine.·
- As a result of the disposal of the pills to the trustee, Vitamin Pty Ltd is taken to have transferred the pills for their cost ($250) and not for their market value. Vitamin Pty Ltd includes $250 in its assessable income under section 70-90 [which neutralises the deduction that Vitamin Pty Ltd otherwise claims for the cost of the pills] ($250)).
- No dividend arises as a result of the transfer of CGT assets (that are not depreciating assets*) by Vitamin Pty Ltd (including any ‘deemed dividend’ under Division 7A of Part III of the ITAA 1936 or any other provision of the tax law). [*There is some uncertainty about whether or not a transfer of a depreciating asset under the SB Restructure Rollover will have direct consequences under the income tax law, notwithstanding section 328-450. As a matter of practical administration, the Commissioner will treat transfers of depreciating assets in the same way as other assets for the purposes of compliance with section 328-450.]
12. Vitamin Pty Ltd recognises any tax liability that may arise under another Commonwealth taxing statute (for example, fringe benefit tax or goods and services tax) or any liability for stamp duty under State legislation.
Setting the tax values of the transferred assets in the hands of the transferee
13. The income tax law applies as if the transfer takes place for the asset’s roll-over cost [s328-455(1)*]. [The roll-over of a depreciating asset transferred in the restructuring of a small business is addressed in item 8 of the table in subsection 40-340(1). The transferee can deduct the decline in value of the depreciating asset using the same method and effective life that had been used by the transferor.]
14. The small consulting room is a CGT asset that is not a depreciating asset, revenue asset, or trading stock of Vitamin Pty Ltd.
- The trustee is taken to have acquired the consulting room at the time of the transfer for $200,000, being Vitamin Pty Ltd’s cost base for the asset immediately before the transfer takes effect [s328-455(2)(a)]
15. The goodwill is a CGT asset that is not a depreciating asset, revenue asset or trading stock of Vitamin Pty Ltd.
- The trustee is taken to have acquired the goodwill at the time of the transfer for $0, being Vitamin’s Pty Ltd’s cost base for the goodwill immediately before the transfer takes effect [s328-455(2)(a)].
16. The pill press is a CGT asset that is a depreciating asset.
- The roll-over cost for a depreciating asset is the transferor’s adjustable value just before the transfer takes effect [See item 8 of subsection 40-340(1), subsection 40-345(2) and section 40-85]. The adjustable value is $14,000.
- The trustee’s cost for the pill press is its adjustable value to Vitamin Pty Ltd just before the transfer ($14,000).
- The trustee can deduct the decline in value of the pill press using the same method and effective life (or remaining effective life, if using the prime cost method) as Vitamin Pty Ltd was using [s40-345(2)].
17. The homeopathic pills are trading stock.
- The roll-over cost for these pills is the cost of the item to Vitamin Pty Ltd ($250) [s328-455(2)(b)], and is deductible [The trustee will need to account for either sales income or stock on hand at the end of the income year].
- The pills are trading stock on hand in the hands of the trustee.
Acquisition times in the hands of the transferee are set
18. The general CGT acquisition rules apply [328-450(2)(b)], to determine whether any future capital gain made from a transferred asset is discounted under Subdivision 115-A (the general 50% CGT discount).
- This means, apart from pre-CGT assets, the transferee acquires the asset at the time of the transfer. That is, the time of acquisition is not altered by Subdivision 328-G [s328-460].
19. Following the transfer of assets to the trustee of the P&S Trust, a property investor makes an attractive offer to the trustee for the consulting room.
20. On 30 September 2017, the trustee enters into an agreement for the sale of the consulting room. The trustee disposes of the room and CGT event A1 happens on 30 September 2017.
21. The trustee is treated as having acquired the CGT asset at the time of the SB Restructure Rollover, on 1 January 2017.
22. The trustee is not entitled to access the 50% general CGT discount on disposal, as the trustee acquired the asset less than a year before the CGT event causing this gain.
23. However, for the purpose of determining eligibility for the 15 year CGT exemption for small businesses, the transferee will be taken as having acquired the asset when the transferor acquired it [s152-115(3)].
23A. If Pep and Sally transferred their shares in Vitamin Pty Ltd to the trustee of the newly established P&S Trust, Pep and Sally would not be able to choose to apply the SBRR for those shares [The shares are not active assets relevantly under s328-430(1)(d)].