By Kim Reynolds
2020 gave us all pause to think about many things and, due to the impact of COVID-19, the world had to modify behaviour quickly and sometimes radically in light of changed circumstances. It was the same for business as COVID-19 shut down some businesses while others needed to drastically change their operations to survive.
As we settle into 2021 now may be a good time for business owners to think about whether, in light of the many things 2020 taught us, current business structures are still suitable as we embark on the “new COVID normal”.
There are many things to consider when thinking about restructuring a business including the economic climate, asset protection, expansion opportunities, and succession and estate planning. While in the background there are always tax considerations.
Captial gains tax (CGT)
Of course, there may be times when triggering a tax cost is appropriate but when this is not the case various capital gains tax (CGT) rollovers are available to businesses and business owners. These include:
- those that relate to the transfer of business assets to companies – a capital gain arising from the transfer of business assets from an individual, trustee, partnership or unit trust to a company may be disregarded by applying one of the following rollovers:
- an asset or assets can be transferred from an individual or trustee to a wholly owned company (Subdivision 122-A).
- an asset or assets can be transferred from a partnership to a wholly owned company (Subdivision 122-B).
- if a business is operated in a unit trust structure, there are two rollover restructure options available which result in the assets of the unit trust being transferred to a company (Subdivision 122-A – where the unit trust will hold the shares in the company and Subdivision 124-N – where the unit holders will hold the shares in the company and the unit trust is wound up).
- those that relate to the transfer of membership interests in one entity for another, where a capital gain arising from the transfer can be disregarded by applying one of the following rollovers:
- shares can be eligible assets when applying either Subdivision 122-A or 122-B rollover (refer above).
- where circumstances require that the business assets remain within the structure, a holding company may be interposed between the shareholders and an existing company or trust (Division 615).
- a taxpayer can also choose to obtain a rollover when interests held in one entity (original entity) are exchanged by the taxpayer for replacement interests in another entity (the acquiring entity) (Division 124-M).
Small business restructure
In addition to these rollovers that are available to businesses of all sizes the Small Business Restructure Rollover (Subdivision 328-G) enables small business entities to restructure from company to company, company to trust or individual, partnership to company, or trust to trust without triggering CGT.
Each of the rollovers mentioned above have specific requirements to be satisfied and consequences for the parties involved. Therefore, parties involved in a restructure should always ensure the required transactions are documented, at the time of the restructure, ensuring that the relevant criteria are met, and consequences are understood.
In addition, any restructure will need to have legal effect, so legal advice will be required and, usually at a minimum, a contract for sale/transfer will be needed. Finally, other tax/duty implications that may arise, such as GST and transfer duty, will also need to be considered.
All of this may seem daunting at the outset but with careful planning and implementation management, the new structure should provide business owners with a structure to move forward that is both appropriate for the post 2020 commercial environment and has flexibility to adapt to future changes that may be in store.
With our wide ranging experts within Vincents we can assist you with any restructure planning, including tax advisory and valuation services and assisting with implementation of any new structure to manage administration and compliance matters.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.