On Thur 24.3.1016, the ATO issued 2 Draft Law Companion Guidelines on the new small business restructure roll-over in Subdiv 328-G of the ITAA 1997, which takes effect on 1 July 2016.
Draft Law Companion Guideline LCG 2016/D2 explains the consequences and adjustments that occur when the transferor and transferee choose to apply the small business restructure roll-over. This is done via 6 examples. A particularly interesting example (example 6) involves a company to discretionary trust restructure, where an asset is transferred for consideration but the trustee enters into a Div 7A compliant loan. Draft LCG 2016/D2 states that the subsequent application of Div 7A of the ITAA 1936 “is not turned off” by the roll-over. Accordingly, it is the Commissioner’s preliminary view that a deemed dividend may arise if the company subsequently forgives the loan or the trustee fails to make the minimum yearly repayments.
Draft Law Companion Guideline LCG 2016/D3 explains the meaning of “genuine restructure of an ongoing business” as the expression is used in Subdiv 328-G and includes 8 examples to illustrate the Commissioner’s preliminary views. The Commissioner accepts that tax considerations are factors that can be taken into account under a genuine small business restructure (eg a sole trader subject to the highest marginal rate moving to a corporate structure), but says this is not without limits. The ATO’s attention may be attracted if the restructure is contrived or unduly tax driven in the sense that it achieves a tax outcome that does not reflect the economic reality, or creates an outcome that would, but for the roll-over, ordinarily attract other tax integrity measures. The Draft also discusses the safe harbour rule, which is satisfied if no significant assets, apart from trading stock, are disposed of, or used for private purposes, by the small business owners for 3 years after the transfer. The ATO says that if the safe harbour is satisfied, it is not necessary to consider whether the arrangement would qualify as a genuine restructure.
When the Draft Law Companion Guidelines are finalised, they will apply to transfers occurring from 1 July 2016. Comments on the Drafts are due by 29 April 2016.
[LTN 57, 24/3/16]