Tax restructuring using CGT rollovers

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Tax restructuring using CGT rollovers
Tax Minimisation
Partner & Head of Tax
April 6, 2021
minute read

Minimise the amount of tax you pay when restructuring your business

It’s natural that your business evolves over time. Personal circumstances change. Your product offering can develop, or new owners might buy in to the business.

Perhaps your sole trader business has grown to levels you never expected, and the current structure is no longer appropriate for your size. Alternately, you might have the misfortune of receiving bad business advice when starting out, and the correct structure was never implemented in the first place.

If your business isn’t operating as efficiently as it could be, or you’re restricted in your growth, poor structuring is often the root cause.

Liston Newton Advisory are here to help your business operate as efficiently and effectively as possible, whatever your situation. Get in touch with us today to discuss your situation, and see how the right structure will enable your business to thrive.

What you need to know about CGT (capital gains tax)

If you’re left with the arduous task of restructuring your business, you need to be aware of the tax implications of this process. Most importantly, capital gains tax (CGT).

After all, most businesses will carry some form of value. So any change in the ownership of an asset like this gives rise to a CGT event.

But for business owners looking to restructure in this manner, there is relief in sight. There are options available for CGT rollover relief to help avoid the eye-watering tax bills associated with selling a large asset like this.

Small Business Restructure Relief

small business restructure

The ATO introduced Small Business Restructure Relief as a way to help small business who had grown beyond their initial structure. It allows them to successfully restructure without incurring any tax liabilities.

It came about because the ATO acknowledged that some small businesses either never expected their current level of growth, or they initially received poor business advice.

This relief method allows the small business to effectively transfer its assets to a new entity and ignore any CGT consequences. It’s not a complete exemption from CGT; it’s essentially a deferment, as the original cost base of the transferred assets is inherited by the new entity.

Who is eligible for Small Business Restructure Relief?

The rollover is available to each entity involved in the transfer, so long as each entity meets one of the following criteria. Each of these entities must be either a small business, or an entity that is affiliated or connected with a small business. So any small business with a turnover of less than $10 million is eligible.

More specifically, the following rules apply:

  • It must be part of a genuine restructure
  • There must be no change in ultimate economic ownership
  • Both parties must be Australian residents
  • Both parties must consent to using the relief

So this means that the rollover must be completed for reasons other than being purely tax-driven. The same taxpayers must also own the assets after the restructure as they did before the rollover.

So you couldn’t use the relief to restructure from a sole trader to a company, and then on-sell the business purely to receive a concessional tax rate on the sale. But you could use the relief in your business restructure if you restructured in order to facilitate the growth of your business.

Small business CGT concessions

Another set of concessions available to small business owners are the small business CGT concessions. There are four concessions available to business owners, and your personal circumstances will determine which ones you’re eligible for.

Unlike the Restructure Relief, these concessions can exempt a CGT event entirely, not just defer it.

There is a set of eligibility criteria that the business must pass in order for these concessions to be accessed, which are much stricter than the restructure relief. A misstep in any one of these can negate your eligibility, so we recommend you consult with an experienced tax agent before utilising any of the concessions.

Active Asset Reduction

This works to reduce your taxable gain by 50%, and is usually available to all business owners once the basic conditions are met. To qualify as an active asset, your business must have been active for at least half of the time you’ve owned it. If you’ve owned it for over 15 years, it must have been an active asset for 7.5 years.

15-year Exemption

If you’ve owned your business continuously for 15 years or more, you’re 55 or older, and you’re retiring, you qualify for this exemption. It allows you to eliminate the entire capital gain made on your business.

Retirement Exemption

This exemption doesn’t actually require you to be retiring. If you’re under 55, you can disregard up to $500k of your capital gain if you contribute that amount to your nominated super fund. If you’re over 55, you don’t need to do this, but the $500k lifetime limit still applies.

Rollover Concession

The final option available to business owners is the rollover concession. This concession gives you two years to find an eligible replacement asset, with any money being spent on that asset reducing your capital gain. This is an ideal concession for the business owner who sells their business with the expectation of buying a replacement business.

Other rollover relief available

The ATO has other provisions available for small business owners that don’t qualify for the small business CGT concessions.

Scrip for scrip rollover

This is available where shares in a company are exchanged for shares in the buying out the original company.

Transfer of assets from a sole trader or partnership to a wholly-owned company

Available under sections 122A and 122B of the Tax Act 1997, sole traders and partnerships can restructure to a corporate entity without incurring any CGT. This acts as an alternative to the concessions outlined above.

There are other issues to be aware of

It’s not just tax implications that you should be aware of when restructuring your business. Check to make sure there aren’t any GST or stamp duty issues either. For stamp duty, this will vary depending on which state you’re in, so make sure you get the right advice for where your business is based.

The final word

Restructuring an existing business can be a complicated process. It’s certainly a complicated area of taxation. But it’s a necessary process for many business owners.

The ATO provisions can be dense, and difficult to navigate if you’re not sure what to look out for. There may be hidden aspects that negate all the work you’ve put into it, and render the restructure as a taxable event regardless.

As a business owner, you may even be eligible for a number of different types of rollover relief, each with its varying immediate and future tax implications. Getting the right advice is key to ensuring your restructure complies with the current legislation, and that you’re using the best avenue available to you. Choosing the right method now will save you big-time later down the track.

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