Another way to convert water into wine - trust to company rollovers

The vast majority of rollovers available under the Tax Act relate to transactions between companies.

There is however a series of transactions that effectively allows one form of structure to be converted into another.

Following last week’s post, I was reminded of one of the very few rollovers that allows the iteration from one legal structure to another. In particular, the tax rollover available for a discretionary trust that allows a trust to transfer all of its assets into a company, so long as the shares in the company are owned by that same discretionary trust. This form of rollover is available under Subdivision 122A of the 1997 Tax Act.

Obviously, there are stamp duty considerations in many states still that often need to be taken into account, however the rollover can be a very useful one in a wide range of circumstances to ensure no tax is triggered.

We have particularly seen it used proactively as part of a succession plan – it is often seen as easier to facilitate the transfer of shares in a company, as opposed to managing the control of a discretionary trust.

For those interested, our book ‘The Seven Foundations of Business Succession’ explores each of the key company and trust rollover concessions used in estate and succession planning see - http://viewlegal.com.au/product/the-seven-foundations-of-business-succession/

Image courtesy of Shutterstock

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

What are some of the issues with a professional partnership ‘rolling over’ into a company structure?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are some of the issues with a professional partnership ‘rolling over’ into a company structure?’at the following link - http://youtu.be/pIwVOyEAeBA



As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

The rollover at face value is always the easiest way to go, because it removes one seriously significant transaction cost being the capital gains tax implications. The problem though is that when you dig a little bit deeper, that is a little illusionary at times, particularly for a group of individual partners rolling over to a company. The attraction of taking that style of rollover can be diminished by the fact that they will still individually own the shares in the company.

So if it's a standard rollover, for example a partnership to a company under Division 122B of the Tax Act, ultimately, the individuals would still actually own the shares in the company. What they will have done is taken away 100 cents in the dollar, if that’s the right way to say it, of income that they’ve historically been enjoying and replaced that with 70 cents in the dollar and an imputation credit or franking credit.

This can lead to a situation where people, having done a rollover are then looking to restructure again anyway. So effectively it's a double restructure because they'll want to divest themselves individually of shares and make those shares be owned via some sort of discretionary trust arrangement.

It can also lead into a range of other potential restructures, dividend access shares and these types of arrangements that certainly get away from the overall goal in the first place, which was to simplify arrangements and get true limited liability.

The other areas (and some of these touched on in other parts of today's program) that obviously need to be taken into account include that while there is no stamp duty on unlisted shares, there is certainly stamp duty in every state moving from an individual or partnership arrangement into a company arrangement. That's a significant transaction cost that cannot be avoided in any way, shape or form currently and needs to be paid upfront effectively to get yourself into the new structure. The other ancillary costs that go around an incorporation include issues such as payroll tax, which is inevitably a lot more expensive if you've moved into a company structure as opposed to remaining in a partnership structure.

Until next week.