Cloning Around: The New Small Business Roll-over
Late last year the Federal Government released an Exposure Draft of legislation which will, if and when enacted, introduce a new Subdivision 328-G, titled “Restructures of Small Businesses” into the Income Tax Assessment Act 1997. It provides for a roll-over on a transfer of assets not resulting in a change to an individual’s “ultimate economic ownership” (“UEO”).
The measure, originally proposed in the 2015-16 Federal Budget, is intended to apply to transfers of assets on or after 1 July 2016.
Importantly, proposed Subdivision 328-G may mean the resurrection of the “cloning” of certain non-fixed (i.e. discretionary, or “family”) trusts.
How will it work?
The roll-over will apply where:
- each party to the transfer is:
- a small business entity (“SBE”) that satisfies the maximum net asset value (“MNAV”) test; or
- an affiliate of, or an entity that is connected with, such an entity;
and the transferee is not an exempt entity (such as a charity) or a complying super fund;
- the relevant asset(s) either:
- are CGT assets used in a business carried on by the SBE; or
- (if the relevant party is an affiliate or connected entity of the SBE) satisfy either subsection 152-10(1A) or (1B) (which deem the “used in business” condition to be satisfied indirectly through use by your affiliate or connected entity);
- the transferor transfers one or more CGT assets, or all of the assets of its business, for no consideration, to the transferee (both of whom are Australian tax residents) and the transaction is part of a restructure of the business that has the effect of either (or both):
- changing the type or any of the entities through which the business (or a part of it) is carried on; or
- changing the number of entities through which the business (or part of it) is operated; and
- the transaction does not have the effect of changing an individual’s UEO of the asset (or any individual’s share of the UEO) and any individual with UEO after the transfer is an Australian tax resident.
The asset will then be deemed to have been disposed of for consideration at which neither a capital gain nor loss will be incurred.
Ultimate economic ownership
The new roll-over is intended to benefit business owners wishing to implement a more efficient structure – not to enable the transfer of valuable assets to other individuals – hence the requirement for UEO (which can only be held by individuals) to remain unchanged before and after the transfer.
Identifying who holds the UEO in an asset through interposed companies, unit trusts and partnerships will (according to the accompanying Explanatory Memoranda) be “relatively straight forward” because “the degree to which they can benefit from the asset will be expressly set out in the documents and agreements that support the business”.
The draft legislation contains specific provisions dealing with discretionary trusts, prescribing that UEO will not change if:
- just before or after the transaction took effect, the asset was included in the property of a non-fixed trust that was a “Family Trust”; and
- every individual with UEO before and after the transfer was a member of that trust’s “Family Group”.
Consequently, discretionary trusts may access the roll-over simply by making a “Family Trust Election”, whereby its Family Group members will be UEOs of its assets.
“Family Trust”, “Family Group” and “Family Trust Election” are defined in Schedule 2F to the Income Tax Assessment Act 1936, which prescribes the rules by which a trust may carry forward losses.
Pre-CGT assets will retain their exempt status in the hands of the transferee following the transfer.
Access threshold – different to Division 152
Some news commentary has incorrectly reported that the roll-over will apply to SBEs or entities that satisfy the MNAV test. Intuitively, it would make sense that taxpayers satisfying either test should be able to access the allowances – as is the case with the Division 152 small business concessions, for example.
However, the legislation is clear – the parties must be SBEs (i.e. satisfying the $2 million aggregated turnover test) and satisfy the MNAV “$6 million” test. The hurdle is therefore higher than that enabling access to Division 152.
Cloning? Well, sort of…
Significantly, the new rules will enable trustees of discretionary trusts to transfer active assets to other discretionary trusts without triggering capital gains.
Whilst not strictly “cloning”, the concession is notable because such transfers have triggered CGT consequences since the repeal of the “trust cloning” exception in 2008.
Proposed Subdivision 328-G will therefore be of interest to small and family business groups currently utilising trust structures, providing welcome flexibility when separating ownership for business or family reasons.
The new rules will also provide opportunities for small businesses to shift to a more efficient business structure, by (for instance) making demergers easier.
Additionally, the changes may facilitate (if strict requirements are satisfied) the “break up” of small businesses operating through trusts which are in danger of failing the MNAV test, enabling future access to the small business concessions.
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