New Financial Year; new small business roll-over in play

With the new financial year underway, the roll-over provisions under subdivision 328-G are now available to small business entities to restructure without adverse capital gain tax (CGT) consequences.

The rules significantly increase the flexibility to restructure businesses, particularly as part of an estate planning exercise.

This post considers the eligibility requirements for accessing the roll-over. A previous post has considered in detail a number of the main opportunities available under the provisions, see - 'Tantalising opportunities for trust restructures under new Subdiv 328-G'

Unlike other CGT roll-overs, the provisions allow direct roll-over of non-CGT assets such as trading stock, depreciating assets and revenue assets. The provisions do not however provide any relief in relation to related transaction costs such as GST or stamp duty.

Eligibility

The concessions are available to small business entities being individuals, companies or trusts whose annual turnover is less than $2M.

In order for the roll-over to apply, the following criteria must also be met:

1. the CGT asset must be an active asset; 
2. an election must be made; 
3. the transferor and transferee must be Australian residents; 
4. the transactions must not change the ‘ultimate economic ownership’; and 
5. the transferee cannot be an exempt entity (for example, a superannuation fund). 

The definition of active asset includes captures all assets used in a business except for company loans to shareholders and unpaid present entitlements which cannot be transferred under the provisions.

Ultimate Economic Ownership and Discretionary Trusts

The rules require that each relevant individual’s interest in the assets of the business remain in proportion after a restructure. Tracking economic ownership when using the provisions to transfer assets from an individual to a company, or from company to company is relatively easy.

Given the nature of a discretionary trust, where beneficiaries do not have a direct interest in the trust assets, the provisions set out how to determine whether ultimate economic ownership is maintained.

In particular, the rules create a ‘safety net’ test that allows access to roll-over relief if a trust has made (or makes) a family trust election. Where such an election is made, it effectively limits the range of potential beneficiaries who can receive a distribution without triggering a penal tax consequence (being the family trust distribution tax).

Integrity measures and the safe harbour rule

Given the very broad potential application of the provisions a discrete integrity measure has been included.

In particular, there is the requirement that any transaction is a 'genuine' restructure of an ongoing business.

While ‘genuine’ is not itself defined, a transaction will be deemed to fall within a safe harbour under the rules if for three years after the relevant restructure:

1. there is no change in the ultimate economic ownership of significant assets; 
2. the significant assets transferred continue to be active assets; and 
3. the significant assets transferred are not used for personal purposes. 

Conclusion

The 328-G concessions are arguably the most comprehensive CGT roll-over provisions introduced since the commencement of CGT. The new rules will provide small business entities with a myriad of restructuring opportunities.

View Legal will be live streaming a webinar on 21 July 2016 covering everything you need to know about the new small business roll-over rules.

For more information about the webinar and your opportunity to register, see the link below - https://viewlegal.com.au/product/webinar-small-business-rollover-rules/

The webinar will explore all technical aspects of the provisions and use numerous case studies, including:

1. what constitutes a ‘genuine restructure’; 
2. using trust cloning and trust splitting as a restructuring method;
3. restructuring heritage trusts with proximate vesting dates or limited variation powers; 
4. how to restructure from a sole-trader to a company owned by a family trust; and 
5. other planning opportunities.

Image courtesy of Shutterstock

Tantalising opportunities for trust restructures under new Subdiv 328-G

For those that do not otherwise have access to the Weekly Tax Bulletin, a further recent article is extracted below.

Introduction

The new Subdiv 328-G rollovers (the provisions) commencing 1 July 2016 provide significant opportunities for Small Business Entities (SBE) to restructure into a more appropriate entity, assuming the “genuine restructure” provisions can be satisfied.

This article considers a number of opportunities to restructure discretionary trusts. In particular:

1. trust cloning with or without a Family Trust Election (FTE);
2. trust splitting and effectively limiting the range of potential beneficiaries without causing a resettlement; and 
3. restructuring out of trusts with heritage issues. 

The new rollovers were introduced via the Tax Laws Amendment (Small Business Restructure Roll-Over) Bill 2016 which passed all stages without amendment and received Royal Assent on 8 March 2016.

Ultimate Economic Ownership (UEO) and cloning

Section 328-430(1)(c) requires the UEO of assets being transferred remain the same, or in the same proportion after the restructure. While this is relatively simple for companies or sole-traders, it presents difficulties for trusts, where beneficiaries do not have a direct and absolute interest in the assets of the trust (merely a right to due administration).

Trust cloning of discretionary trusts is again available following its abolition on 31 October 2008 through the provisions without causing any CGT consequences. Where a trust makes (or has previously made) an FTE pursuant to Sch 2F of the ITAA 1936, the provisions ensure (under s 328-440) access to the roll-over if the cloned trust has made the same FTE.

Historically, the Tax Office had set out its view of how to implement a valid trust clone for tax purposes in the (now withdrawn) Taxation Ruling TR 2006/4.

Although not free from controversy, the Tax Office was of the view that in order to implement a valid trust clone, it was necessary for the "beneficiaries and terms of both trusts (to be) the same".

In this context, the position of the Tax Office was that any FTE made by the original trust would need to be made by the cloned trust in order to gain access to the tax concessions.

Under the UEO rules, in situations where there is either no FTE made by the original trust or a desire for the cloned trust to not make a FTE, the provisions still allow cloning to take place so long as there is "no material change" between the original trust and the cloned trust.

It is assumed, pending more detailed comments from the Tax Office, that withdrawn TR 2006/4 will provide at least a framework for how to interpret the concept of "no material change". Given that there is a discrete roll-over available under the provisions for trusts that have identical FTEs, it is reasonable to conclude that the no material change requirement will be satisfied regardless of the approach taken by either trust in relation to a FTE.

Anecdotally, prior to 31 October 2008, there was some debate as to whether "reverse clones" could be implemented without tax consequence. In other words, consolidating assets across 2 or more trusts into one trust. Again, under the provisions, it seems clear that reverse cloning will be available, so long as each trust has made the same FTE, or alternatively, the "no material change" test can be satisfied.

Trust splitting

With the Tax Office providing some clarity in relation to trust splitting through Private Binding Ruling Authorisation Number 1012921290075 (Ruling) (see - http://blog.viewlegal.com.au/2016/03/trust-splitting-some-clarity-at-last.html) the provisions appear to provide further opportunities to structure a comprehensive split.

In the Ruling, the Tax Office confirmed its view that narrowing the class of potential beneficiaries of each split trust to a separate family unit would cause a resettlement. Relying on the FTE safety net, it should be possible to limit the range of potential beneficiaries to individuals or classes of individuals falling within the specific family group.

Similarly, all other substantive aspects of a trust split, including limiting the right of indemnity for each trustee to only the assets of the split trust, will fall within the ambit of at least the "identical FTE" aspect of the provisions.

Whether a traditional trust split can also be used, for example, to extract certain assets out of the reach of a pre-existing FTE, for example, by relying on the "no material change" provisions, is more debatable. In particular, from a stamp duty perspective, access to duty concessions in most states for trust splitting relies on any split trust still forming part of the original trust, in which case, any FTE made would need to continue to apply for tax purposes.

Heritage trusts

Where a trust deed has heritage problems, such as limited variation powers or a proximate vesting date, the provisions can be used to transfer the assets to a "clean skin" trust deed, avoiding the difficulties and costs associated with making an application to Court to vary the deed.

While there have been a number of Court decisions in recent years allowing the extension of a vesting date to avoid adverse impending revenue consequences, it should be noted there are similarly a number of cases where the Court has denied such an application (see Re Arthur Brady Family Trust; Re Trekmore Trading Trust [2014] QSC 244; Re Plator Nominees Pty Ltd [2012] VSC 284; Stein v Sybmore Holdings Pty Ltd [2006] NSWSC 1004 and Paloto Pty Limited v Herro [2015] NSWSC 445).

In any event, the costs of a Court application itself would appear to be able to be avoided if the provisions can be accessed.

In theory, the new rules will also provide a potential pathway in other problematic areas of an existing trust such as narrow beneficiary classes, mandated (but now inappropriate) appointor or principal roles and, potentially, lost trust instruments.

Future focus While the provisions appear to meet many of the tax-related issues facing SBEs wishing to restructure, other potential transaction costs, particularly stamp duty, will need to be carefully considered before implementing a rearrangement. With New South Wales, following the lead of Victoria and South Australia, set to abolish stamp duty on business transfers from 1 July 2016, it is hoped that all states fall into line in the near future.

Image credit: Markus Spiske cc