Law Companion Guideline
Small Business Restructure Roll over: genuine restructure of an ongoing business
|Table of Contents||Paragraph|
|What this draft Guideline is about|
|Proposed date of effect|
|Genuine restructure - safe harbour rule|
|Examples - What is a 'genuine restructure of an ongoing business'|
|Example 1: Asset protection|
|Example 2: Maintaining essential employees|
|Example 3: Raising new capital|
|Example 4: Simplifying your affairs|
|Examples - What is not a 'genuine restructure of an ongoing business'|
|Example 5: Disposal of a business|
|Example 6: Succession planning|
|Example 7: Extraction of wealth from the business assets|
|Example 8: Variation on Example 7 - 'genuine restructure of an ongoing business'|
Relying on this draft Guideline
This draft Guideline describes how the Commissioner will apply the law as amended by the Tax Laws Amendment (Small Business Restructure Roll over) Act 2016. This draft Guideline will, subject to consultation, be finalised as a public ruling when the Act comes into effect to entities that rely on the Guideline in good faith.
If you rely on a Law Companion Guideline in good faith (to the extent it is a public ruling), you will not have to pay any underpaid tax, penalties or interest in respect of matters covered by the Guideline if it does not correctly state how a relevant provision applies to you.
What this draft Guideline is about
1. This draft Guideline explains the meaning of 'genuine restructure of an ongoing business' as the term is used in Subdivision 328-G of the Income Tax Assessment Act 1997 (ITAA 1997).
Proposed date of effect
- 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 a revenue asset).
4. The small business restructure rollover (SBRR) can apply to transactions that are, or are part of, a 'genuine restructure of an ongoing business'.
5. Whether a transaction is or is part of a 'genuine restructure of an ongoing business' is a question of fact that is determined having regard to all of the circumstances surrounding the restructure.
6. A 'genuine restructure of an ongoing business' is one that could be reasonably expected to deliver benefits to small business owners in respect of their efficient conduct of the business going forward. It is a composite phrase emphasising that the SBRR is not available to small business owners who are restructuring in the course of winding down or realising their ownership interests.
- It is a bona fide commercial arrangement undertaken in a real and honest sense to
- facilitate growth, innovation and diversification
- adapt to changed conditions, or
- reduce administrative burdens, compliance costs and/or cash flow impediments.
- It is authentically restructuring the way in which the business is conducted as opposed to a 'divestment' or preliminary step to facilitate the economic realisation of assets.
- The economic ownership of the business and its restructured assets is maintained.
- The small business owners continue to operate the business through a different legal structure. For example, there is
- continued use of the transferred assets as active assets of the business
- continuity of employment of key personnel
- continuity of production, supplies, sales, or services.
- It results in a structure likely to have been adopted had the small business owners obtained appropriate professional advice when setting up the business.
8. The Commissioner acknowledges that tax considerations are factors that can be taken into account under a genuine small business restructure. For example, a sole trader subject to the highest marginal rate moving to a company structure to access the lower corporate tax rate.
9. However, this is not without limits. There are concerns where 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 SBRR, ordinarily attract other integrity measures in the law. For example, a restructure directed at eliminating an impending or existing tax liability, would indicate that a restructure is not a 'genuine restructure of an ongoing business'.
- where the restructure is a preliminary step to facilitate the economic realisation of assets
- where the restructure effects an extraction of wealth from the assets of the business (including accumulated profits) for personal investment or consumption or otherwise designed for use outside of the business
- where artificial losses are created or there is a bringing forward of their recognition
- the restructure effects a permanent non-recognition of gain or the creation of artificial timing advantages
- there are other tax outcomes that do not reflect economic reality.
11. The SBRR contemplates restructures to or from more than one entity. Accordingly, there may be circumstances where not all business assets that are necessary for the continued operation of an 'ongoing business' are transferred. For example, small business owners may decide to transfer plant and equipment to a new entity, but leave real property in the original entity. On its own, this is not a factor that is inconsistent with the conclusion that a restructure is a 'genuine restructure of an ongoing business'.
Genuine restructure - safe harbour rule
12. To provide certainty to small business owners, the SBRR contains a safe harbour rule. This rule provides an alternative way of meeting the 'genuine restructure of an ongoing business' condition. It is satisfied if no significant assets, apart from trading stock, are disposed of, or used for private purposes, by the small business owners for three years after the transfer. Those assets must continue to be active assets of the business.
14. The safe harbour rule does not limit or expand what would otherwise be considered to be a 'genuine restructure of an ongoing business' in circumstances where the safe harbour requirement is not met.
15. The safe-harbour only operates to treat the restructure as being genuine for the purposes of paragraph 328-430(1)(a) and does not impact any consideration of the purpose and effect of the restructure for other tax purposes.
16. The general anti-avoidance rule in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a provision of last resort and is not prevented from applying in appropriate cases to restructures where the safe harbour is otherwise satisfied.
Examples - What is a 'genuine restructure of an ongoing business'
Example 1: Asset protection
17. Mark has been operating a small bookkeeping business and has branched out into financial planning after receiving his financial planning licence. Mark's business has grown significantly and his financial advice arm now generates much larger profits.
19. Mark transfers his active assets used to carry on his financial planning business into a discretionary family trust. He and his wife are the beneficiaries and Mark is the primary individual specified in the family trust election in force in respect of the trust. For asset protection purposes, a corporate trustee is appointed and the trust contracts with clients. Mark does not personally provide guarantees or indemnities. Mark has also caused the trustee to employ other staff to service the larger client base. The trustee pays Mark and the other employees a salary commensurate to the services they provide to the business.
21. Mark is transferring assets from the original entity (himself) to quarantine his business from his personal assets. This is a benefit to Mark in terms of his ability to grow the riskier operations and enhance its profits.
23. Mark has achieved benefits to the ongoing efficient conduct of his small business. The restructure is a response to his business needs, facilitates further growth and is not unduly tax-driven. The economic ownership of the business is maintained. Accordingly the 'genuine restructure of an ongoing business' condition is satisfied.
Example 2: Maintaining essential employees
24. Adrian carries on a business with his two siblings in a discretionary family trust. They are all beneficiaries of the trust and the family trust election specifies Adrian as the primary individual .The family business has several highly skilled, long-standing and trusted employees.
25. The family transfers the active assets to a company owned by Adrian and his two siblings. Sometime later, the company issues shares to those essential employees (who are not members of the 'family group') with vesting conditions attached to provide incentives for their ongoing involvement in the business.
27. Subsequent admission of employees as equity participants into the business is undertaken to enhance business performance and enable it to adapt to changed conditions in order to increase productivity and profit.
28. The company's conduct after the transfer of assets is appropriately taken into account when considering the genuineness of the restructure. Here, even if the issue of new shares to the employees after the time of asset transfer is not insignificant, there is no additional tax advantage to an existing shareholder, nor access to the worth of the shares. Conclusion
29. Adrian and his siblings have achieved benefits to the ongoing efficient conduct of the business. The restructure is authentic in the way it changes the operation of the business going forward while maintaining continuity of use of the assets and of key personnel. Accordingly, this is a genuine restructure of an ongoing business.
Example 3: Raising new capital
32. Melvin and Jenny transfer their active assets to a newly incorporated company where they each own shares in the same proportions as their interests in the partnership assets (50:50). If the SBRR is available, the business assets will be transferred from the partnership in a tax free manner.
34. The potential new investment from Steve is not part of the restructure and will represent a fresh source of capital for the entity post restructure. On these facts the restructure is not a mechanism by which Melvin and Jenny are realising their interest in the business, which they continue to operate.
35. Restructuring in this manner provides benefits to Melvin and Jenny in their ongoing efficient conduct of the business. Melvin and Jenny are undertaking the arrangement to facilitate growth and innovation, and not as a preliminary step in divesting the business to Steve. Accordingly, this is a 'genuine restructure of an ongoing business'.
36. However, the Commissioner will be concerned if Steve's capital contribution is used to facilitate a divestment of the business, as this would be inconsistent with it being a 'genuine restructure of an ongoing business'.
Example 4: Simplifying your affairs
37. Trent, a cabinet maker, runs a business in a complicated legal structure where the active assets are held in a company and a trustee of a discretionary trust is the sole shareholder of the company.
38. Trent is the sole director of the company and also the primary individual specified in the family trust election in respect of the trust. When Trent established his business, his accountant thought this structure was suitable for Trent's current and future circumstances.
42. The asset protection features of Trent's existing structure are minimal given Trent's practice and the commercial need to provide personal guarantees. Any benefits it offers can be seen to be outweighed by the costs and administrative complexity involved in dealing with his business affairs.
44. Trent has achieved significant benefits to the ongoing efficient conduct of his business. On the evidence, the restructure has relieved Trent from additional outlays, and administrative and compliance burdens in running his business, and is a 'genuine restructure of an ongoing business'.
Examples - What is not a 'genuine restructure of an ongoing business'
Example 5: Disposal of a business Facts
45. Willing buyers are prepared to purchase a business carried on by You Beaut Pty Ltd. However, the buyers do not want to purchase the company shares because they are concerned about undisclosed liabilities.
46. Ben Silverfox is the sole shareholder of You Beaut Pty Ltd. He causes it to transfer its active assets to himself. You Beaut Pty Ltd and Ben Silverfox assert this transaction is a 'genuine restructure of an ongoing business'.
47. After 12 months have passed, Ben Silverfox disposes of the assets to the buyers. Ben Silverfox claims the general 50% CGT discount, which would not have been available to You Beaut Pty Ltd had it disposed of the assets directly to the buyers.
48. Ben Silverfox disposes of the assets inside a three year period after the roll-over transaction takes place. Accordingly, Ben Silverfox cannot access the safe harbour rule in section 328-435. Therefore, whether this restructure is a 'genuine restructure of an ongoing business' under the ordinary meaning of that expression must be considered.
50. The restructure is not undertaken to enhance business efficiency in terms of facilitating growth, innovation or diversification. Rather, Ben Silverfox is attempting to use the relief provided by the SBRR to facilitate the economic realisation of his interest in the business.
52. The SBRR is not available to You Beaut Pty Ltd and Ben Silverfox as these circumstances do not exhibit the hallmarks of a 'genuine restructure of an ongoing business'. This arrangement is undertaken as a preliminary step in the economic realisation of Ben Silverfox's business.
Example 6: Succession planning
55. Sometime later, but within three years, Nick retires and disposes of the shares in the Holding Co (which now holds the active assets of Chips only) to his first son and the shares in the new company to his other son, so that each of them can run their own restaurants separately.
56. Because Nick retires and disposed of his companies within the three-year period after the transfer of the active assets, he cannot use the safe harbour rule. Therefore, whether this restructure is a 'genuine restructure of an ongoing business' must still be considered.
59. The SBRR is not available to Nick and Holding Co, as the restructure is undertaken in the course of him winding down and facilitating a wealth transfer as opposed to a bona fide restructure of an ongoing business.
Example 7: Extraction of wealth from the business assets
63. Patricia, the controller of the group, causes the Peterson Trust to satisfy Peterson Pty Ltd's UPEs with the transfer of its active assets to Peterson Pty Ltd. It is assumed that the ultimate economic ownership requirement is satisfied. In effect, the business is transferred to Peterson Pty Ltd, and the SBRR is claimed.
64. Peterson Pty Ltd in turn transfers those active assets to a newly established trust, the Patricia Family Trust, and the SBRR is claimed again. The Patricia Family Trust subsequently seeks to dispose those assets, and transfer any related proceeds to Patricia as a capital distribution.
67. The arrangement results in a legal structure that largely replicates the original structure, but has the effect of extinguishing the UPEs on foot. This assists Patricia to divest the business in a manner that involves the extraction of accumulated profits accrued in the corporate tax environment without 'top up' tax ever being paid (that is, the difference between Patricia's marginal tax rate and the corporate rate).
68. There is no bona fide commercial arrangement undertaken with respect to the efficient operation of the business going forward. The series of transactions involving the transfer of assets effectively from the Peterson Trust to the Patricia Family Trust replicates the original structure and eliminates existing and impending tax liabilities. Furthermore, the Patricia Family Trust has divested the business. The arrangement is not undertaken to authentically restructure the way in which the business is conducted, but rather as a preliminary step to facilitate the economic realisation of assets. There are no commercial advantages outside of the undue tax considerations of this restructure.
70. Where the safe harbour rule is met before the Patricia Family Trust divests the business, the application of Part IVA of the ITAA 1936 will also need to be considered.
Example 8: Variation on Example 7 - 'genuine restructure of an ongoing business'
71. Altering the facts from Example 7, Patricia instead causes the Peterson Trust to transfer all the active assets of the business to Peterson Pty Ltd in satisfaction of the UPEs, and continues carrying on the business in the company without further asset transfers.
76. This variation delivers a benefit to Patricia in respect of the ongoing efficient conduct of her business. The restructure is not a preliminary step to facilitate the realisation of assets and Patricia has been relieved of the administrative and compliance burden involved in running the business through the original structure to focus on improving the business operations. This restructure satisfies the 'genuine restructure of an ongoing business' condition.
Commissioner of Taxation
24 March 2016
|Due date:||Friday, 29 April 2016|
|Contact officer:||Caroline Arman|
|Telephone:||(03) 9285 1885|
Australian Taxation Office
GPO Box 9977
Melbourne VIC 3001
Unless otherwise indicated, all legislative references in this Guideline are to the ITAA 1997 as amended by the Tax Laws Amendment (Small Business Restructure Roll over) Act 2016.
Paragraph 328-430(1)(a). The remaining paragraphs in subsection 328-430(1) set out further requirements for the SBRR to apply, including that the asset being transferred is an active asset, that the ultimate economic ownership of the asset does not materially change, and that the parties to the transaction both meet a residency requirement and choose for the SBRR to apply.
See section 328-435.
Section 272-90 of Schedule 2F to ITAA 1936.
The safe-harbour only operates to treat the restructure as being genuine for the purposes of paragraph 328-430(1)(a) and does not impact any consideration of the purpose and effect of the restructure for other tax purposes.
ITAA 1936 Pt IVA
ITAA 1997 328-430(1)(a)
ITAA 1997 328-435
ITAA 1997 Div 86
ITAA 1997 Subdiv 328-G
Tax Laws Amendment (Small Business Restructure Roll over) Act 2016