The new small business rollover rules contained in the Tax Law Amendment (Small Business Restructure Roll-over) Bill 2016 were enacted on 8 March, and will become available from 1 July 2016. Many summaries have been written giving a general outline of how this law will allow small businesses to move the ownership of their business between companies, partnerships and trusts without triggering any capital gain, balancing charge or profit on the disposal of trading stock.
Now that it is law, it is time that some analysis is done about the practical outcomes that will arise.
The key concepts in this law are two-fold.
The first key concept is that this is a business rollover for small businesses only. This means that only businesses with current year or prior year turnover of less than $2m are eligible. Part of the services that a prudent and thoughtful adviser should be providing to their client from now on will need to include a consideration of whether a business structure should change as it grows. Such consideration should now occur no later than the year that the $2m turnover level is exceeded by a business, as the opportunity for an income tax free restructure will cease thereafter.
The second key concept is the need for a genuine restructure and the related safe harbour. This new rollover is only available for situations where there is a genuine restructure. It must occur between entities that are connected with the small business entity, or which are affiliates of a small business entity.
If three years pass from when the rollover occurs and during that entire time there is no change to the ultimate economic ownership of the significant business assets, those assets continue to be active assets and there is no significant or material private use of those assets, then there is a legislated presumption that the motives for the restructure fall within the meaning of a genuine restructure.
The Explanatory Memorandum to the bill draws a distinction between a genuine restructure and artificial or inappropriately tax-driven schemes, and helpfully lists out some factors indicating that a motive of a genuine restructure exists in order to assist taxpayers and advisors. Also, the Commissioner has issued a draft view about what he believes falls within the phrase ‘genuine restructure of an ongoing business’ in LCG 2016/D3. He expands upon the examples in the law in a way which is helpful; however his comments about the safe harbour are very limited.
The key comment made is that he believes that Part IVA can be used to override the safe harbour.
Much time will pass before the courts have an opportunity to review that opinion, and so uncertainty exists about whether a safe harbour legislated by Federal Parliament makes a taxpayer safe, or whether it is a legislative mirage that the Commissioner can override.
You don’t need to be a fortune teller to know that the ATO should expect to receive a number of private binding ruling applications as taxpayers seek to find out how this law will be applied!