Dr Mark Pizzacalla Board Member 2 INSTITUTE OF PUBLIC ACCOUNTANTS - PDF document

10/05/2017 Small business restructures 1 THE BOARD OF TAXATION Dr Mark Pizzacalla Board Member 2 INSTITUTE OF PUBLIC ACCOUNTANTS 2017 TASMANIA CONGRESS SMALL BUSINESS RESTRUCTURE ROLL-OVERS Dr Mark Pizzacalla Board Member, Board of Taxation Partner, BDO Email: mark.pizzacalla@bdo.com.au Mobile: +61 413 048 440 Small Business Restructure Roll-overs 3 1

10/05/2017 The content of this presentation is of a general nature only, and should not be used or treated as professional advice. The presentation does not take into account your particular objectives, situations or needs. As a result, it may not be appropriate to your particular circumstances, and should not be relied upon. You should rely on your own enquiries, together with professional advice that takes into account your particular circumstances, in making any decisions concerning your own interests. The presentation materials do not constitute the provision of financial advice. Small Business Restructure Roll-overs 4 NOT ALL CONCESSIONS WORK! • Simplified tax system • Entrepreneur’s tax off-set • Trading stock • [Goodwill concessions in former 118-250?] Small Business Restructure Roll-overs 5 SMALL BUSINESS LIFE-CYCLE MODEL Small Business Restructure Roll-overs 6 2

10/05/2017 FACTORS IN DETERMINING STRUCTURE • Access To Capital • Compliance Costs • Flexibility • Personal Liability • Tax Small Business Restructure Roll-overs 7 WHY CHANGE STRUCTURE? • Continue To Grow/Develop • Unnecessary Compliance Costs • Enhance Business Efficiency • Move Into More Efficient Structure • Adapt To Current Conditions Small Business Restructure Roll-overs 8 SMALL BUSINESS RESTRUCTURE ROLL-OVER • Small business package 2015-2016 Budget • Royal Assent: 8 March 2016 • Effective date: 1 July 2016 • In addition to existing roll-overs • Provide small business owners greater flexibility to change structures • Defer gains/losses Small Business Restructure Roll-overs 9 3

10/05/2017 WHAT ARE THE ELIGIBILITY CONDITIONS? ALL OF THE FOLLOWING 6 CONDITIONS MUST BE MET: (1) Transfer of asset must be part of a “genuine restructure of an ongoing business” (2) Each party to transfer must be: a) SBE for income year when the transfer occurred; b) Entity who has an affiliate that is a SBE for that income year; c) Entity who is connected with an entity that is a SBE for that income year; or d) Entity which is a partner in a partnership that is a SBE for that income year; (3) Transaction must not materially change the ultimate economic ownership that an individual has in the asset (4) Asset must be an active business asset at the time of transfer (5) Transferor and transferee must be Australian residents for tax purposes (6) Transferor and transferee must each choose to apply for the roll-over to the assets transferred Note: The roll- over applies on an “asset -by- asset” basis. Small Business Restructure Roll-overs 10 EFFECT OF THE ROLL-OVER ASSET TYPE TRANSFEROR TRANSFEREE Pre-CGT asset Tax free Retains pre-CGT status Discount Capital Gains Cost base Acquire CGT asset as at transfer (CGT Asset) time at cost base (refresh happens!) Acquire Transferor’s cost and Trading stock Cost, or if item held at start of the income year, value at start of other attributes income year Acquires Transferor’s cost Revenue assets Amount that results in no profit or loss attributes Acquires transferor’s Depreciating assets Roll-over relief under s.40-340 Cost which would result in a nil depreciation method and balancing adjustment effective life Small Business Restructure Roll-overs 11 GENUINE RESTRUCTURE - MEANING • Integrity Measure • Question Of Fact • Positive Factors – Bona fide commercial arrangement – Business continues under same ultimate economic ownership – Transferred assets continue to be used – New structure is the one likely to have been adopted originally – Restructure not artificial/unduly tax driven Small Business Restructure Roll-overs 12 4

10/05/2017 GENUINE RESTRUCTURE – SAFE HARBOUR PROVISO IS THAT FOR 3 YEARS FOLLOWING THE ROLL-OVER: • No change in the ultimate economic ownership of any of the significant assets of the business that were transferred (except trading stock) • Those significant assets continue to be active assets • No significant or material use of those significant assets for private purposes Small Business Restructure Roll-overs 13 GENUINE RESTRUCTURE - PRACTICAL ISSUES • ATO guidance on a ‘genuine’ restructure – LCG 2016/3 • The first private ruling on ‘genuine’ – making a business more attractive to potential investors and protect assets from business risk • Safe harbour documentation? Small Business Restructure Roll-overs 14 GENUINE RESTRUCTURE: EXAMPLE 1 TRUST COMPANY GENUINE RESTRUCTURE BUSINESS BUSINESS Small Business Restructure Roll-overs 15 5

10/05/2017 NOT A GENUINE RESTRUCTURE: EXAMPLE 2 COMPANY PURCHASER ‘NOT’ GENUINE SALE RESTRUCTURE (12 MONTHS LATER) BUSINESS BUSINESS BUSINESS Small Business Restructure Roll-overs 16 GENUINE RESTRUCTURE: EXAMPLE 3 ‘ENTITY 1’ ‘ENTITY 1’ TRUST 100% ‘ENTITY 2’ ‘ENTITY 3’ ‘ENTITY 2’ GENUINE RESTRUCTURE ‘CLASS OF BUSINESS BUSINESS ‘CLASS OF ASSETS’ ASSETS’ Small Business Restructure Roll-overs 17 WHO CAN ACCESS ROLL-OVER? EACH PARTY TO TRANSFER MUST BE EITHER: • SBE for the income year during which the transfer occurred; • Entity that has an affiliate that is a SBE for that income year; • Connected with an entity that is a SBE for that income year; or • A partner in a partnership that is a SBE for that income year Small Business Restructure Roll-overs 18 6

10/05/2017 ULTIMATE ECONOMIC OWNERSHIP: EXAMPLE 1 Individual SOLE TRADER 100% Unit Trust BUSINESS BUSINESS Small Business Restructure Roll-overs 19 ULTIMATE ECONOMIC OWNERSHIP: EXAMPLE 2 PARTNER PARTNER PARTNER PARTNER PARTNER PARTNER 2 3 1 1 2 3 100% 150% 50% UNIT TRUST BUSINESS BUSINESS Small Business Restructure Roll-overs 20 ELIGIBILITY - PRACTICAL ISSUES • The Rules are very specific in application • The first private ruling on the alternate test – the alternate test is not satisfied when business assets are transferred from SBE to a company owned by a family trust • Published ATO guidance also highlights some practical considerations Small Business Restructure Roll-overs 21 7

10/05/2017 ALTERNATE TEST: PROBLEM 1 TRUST COMPANY BUSINESS BUSINESS Small Business Restructure Roll-overs 22 ALTERNATE TEST: PROBLEM 2 TRUST COMPANY COMPANY BUSINESS BUSINESS Small Business Restructure Roll-overs 23 ALTERNATE TEST: PROBLEM 3 TRUST COMPANY BUSINESS BUSINESS BUSINESS Small Business Restructure Roll-overs 24 8

10/05/2017 ALTERNATE TEST: PROBLEM 4 Small Business Restructure Roll-overs 25 ALTERNATE TEST: PROBLEM 5 TRUST COMPANY BUSINESS BUSINESS Small Business Restructure Roll-overs 26 ASSET TRANSFERRED MUST BE “ACTIVE ASSET” ACTIVE ASSETS ARE BROADLY ASSETS USED IN BUSINESS • If SBE; asset must be a CGT asset that is an active asset for CGT small business concessions • If not a SBE; asset must be an active asset under S.152-10(1A) Small Business Restructure Roll-overs 27 9

10/05/2017 RESIDENCY CONDITION • Both transferor and transferee must be Australian tax residents • Transferor and transferee must meet whichever residency test applies to them Small Business Restructure Roll-overs 28 CHOOSING TO APPLY THE ROLL-OVER • Both transferor and transferee must both choose to apply the roll-over • This choice affects tax consequences of the transaction for them Small Business Restructure Roll-overs 29 PRACTICAL EXAMPLE: COMPANY TO PARTNERSHIP JACK JILL JACK JILL 50% 50% PARTNERSHIP TRUCK CO ASSETS ASSETS TRUCK TRUCK $15K (TWDV $15K; MV$20K) GOODWILL $0 GOODWILL (MV$30K; CB$0) Small Business Restructure Roll-overs 30 10

10/05/2017 PRACTICAL EXAMPLE: ASSET PROTECTION COMPANY COMPANY TRUST BUSINESS BUSINESS BUSINESS LAND Small Business Restructure Roll-overs 31 SOME FINAL THOUGHTS • Purchase consideration • Long-term estate planning • Bankruptcy considerations – get in touch creditors and bank • Value shifting integrity rules • Corporations Law • Trust Deed Small Business Restructure Roll-overs 32 Dr Mark Pizzacalla OPEN Board Member, Board of Taxation Partner, BDO FORUM Email: mark.pizzacalla@bdo.com.au QUESTIONS? Mobile: +61 413 048 440 33 11

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