The New Small Business Restructure Rollover- Opportunities and Threats

The new Small Business Restructure Rollover (SBRR) applies from 1 July 2016 and its objective is to provide greater flexibility for small business owners to restructure their businesses and the ownership of their business assets without having to deal with the tax and CGT implications of the movement of assets.

Moving business assets from an individual sole trader to a company or a trust, from a company to a trust or vice versa, will be much easier under the new SBRR however the devil is still in the detail and we have identified the following issues that still remain unclear:

Genuine Restructure

The first condition that needs to be satisfied in order to access the SBRR is that the transaction must be part of a “genuine restructure of an ongoing business”.

The legislation defined this to include a “bona fide commercial arrangement” undertaken to “enhance business efficiency”. The ATO has attempted to further explain the phrase “genuine restructure” in Law Companion Guideline LCG 2016/D 3 stating that:

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.”

The ATO has provided some examples in their Guidelines of what circumstances would constitute a genuine restructure of an ongoing business. Importantly they accept the following as genuine restructures:

    • Transfers for bona fide asset protection reasons, such as protecting assets against the risk of being sued;
    • Moving the business from a trust to a company so as to allot shares to key employees;
    • Moving the business to a company to allow for a new capital contribution by an incoming shareholder; and
    • Moving the business out of a company or trust back to an individual to simply their affairs.

On the flipside, the ATO provide the following examples of what are NOT genuine restructures:

    • Moving business assets from a company back to a sole trader as a precursor to a sale of the business;
    • Separating businesses to enable them to split between children as part of succession plans; and
    • Moving business assets for purposes not associated with the efficient operation of the business going forward.

In a welcome move, the legislation does provide a safe harbour for “genuine restructures” where for three years after the asset is transferred, the assets remain held by the new entity, continue to be used by the business and do not have any material private use. The safe harbour effectively deems the transfer to qualify as a “genuine restructure” such that is satisfies the first condition.

However, in LCG 2016/D3 the ATO states that whilst a taxpayer may qualify for the safe harbour rule that does not stop the ATO from seeking to apply the general anti-avoidance provisions of Part IVA where the ATO believes the asset transfer is motivated primarily by tax reasons.

Without further guidance from the ATO, and ultimately the Courts, as to the meaning of the term “genuine restructure” and the protections offered within the safe harbour, there will remain significant risk in applying the rollover, certainly without either a Reasonably Arguable Position prepared by a tax advisor, or even a Private Ruling obtained from the ATO.

We expect further guidance from the ATO after the SBRR’s introduction on 1 July 2016.

Source: MKT Taxation Advisors

 

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