What Capital Gains Tax Rollovers are available?
Circumstances regularly arise whereby a business’ legal structure is no longer appropriate or beneficial for the business. Commonly, this occurs for businesses operating through an Australian trust structure who would prefer to operate as a corporate. We have seen this occur for a number of reasons including:
- Better alignment with the business’ ultimate strategy and succession;
- Support commercial reasons such as dealing with customers;
- Stakeholder and financial objectives;
- International expansion;
- Access to government grants; and
- Working capital considerations.
The move to a corporate structure can also result in incidental benefits to the business, such as the ability to form a tax consolidated group to enable single entity tax returns to be lodged. This is also deemed by the ATO to be a valid reason to restructure.
Capital Gains Tax Considerations
It is usually the case that the restructure of a business from a trust to a company would result in a gain (usually a ‘Capital Gain’) and as such, incur Capital Gains Tax (“CGT”). This is generally a result of the market value of the business’ goodwill being greater than the cost base for the business’ assets, including what the business originally paid for the goodwill (commonly nil where the business started as a new business).
The use of a ‘CGT rollover’ often allows for the CGT resulting from a restructure to be deferred. There are a number of rollovers available and the choice of which rollover to use will depend on the specific circumstances and objectives of the business.
Potential CGT Rollovers
1. Subdivision 122-A ITAA1997 – Disposal or Creation of Assets by an Individual or Trustee to Wholly-owned Company
An asset or all the assets of a business operated by an individual or through a trust structure are sold to a newly incorporated company which is wholly owned by the existing trust. This allows for working capital to be retained within a corporate structure and profits to be paid to ultimate shareholders (via the trust) at the discretion of the Directors. In this rollover, the trust continues to remain part of the overall structure.
2. Subdivision 124-N – Disposal of Assets by a Trust to a Company
All assets of a unit trust or fixed trust are transferred to a newly incorporated company (or one that has never engaged in commercial activities) which replaces the existing trust. The consideration to the unitholders for the sale of the business assets is shares in the company. The business continues operations in the form of a company and the trust must be vested within 6 months. This rollover applies where the transferee company is owned by the beneficial owners of the trust (where trust assets are rolled across sibling entities.) Whereas Subdivision 122-A applies where the transferee company is owned by the transferor trust (where trust assets are rolled down the chain).
3. Section 328-G – Small Business Restructure Rollover
Assets of the trust (where the small business entity criteria has been satisfied) are sold to a company and any CGT is deferred. This rollover results in a similar end structure to engaging a Subdivision 124-N rollover. We note that due to the current economic environment, more businesses may satisfy the criteria.
4. Subdivision 615 – Exchange of Units in a Unit Trust for Shares in a Company
This restructure rollover does not restructure the unit trust into a company, but interposes a company between the unit trust and the unitholders (become shareholders). Unitholders sell their units in the trust to a company in exchange for shares in that company. The business can continue to operate in the existing unit trust, however profits are retained in the company. Further, forming an Income Tax Consolidated Group may assist in compliance with Division 7A in circumstances where profits are retained in the interposed company and lent to the unit trust member of the group. Tax consolidation also may ease the administration burden by allowing lodgement of a single entity tax return instead of multiple returns.
5. Small Business Capital Gains Tax Concessions
Business Assets of the trust (where the small business entity criteria has been satisfied) are sold to a company and one or more of the following concessions may be utilised to reduce or defer any CGT:
- 15 Year Exemption;
- 50% Active Asset Reduction;
- Retirement Exemption; and
- Small Business Rollover Relief.
Utilising a CGT Rollover
As you can see there are a number of rollover options available that can assist you in achieving your desired end state. The objective of these rollovers is to reduce the tax burden in transitioning your business into a more appropriate structure.
Application of CGT rollovers and the Small Business Entity CGT concessions are, however, frequently subjected to review by the ATO. For high profile transactions where public/financial press attention is likely, then consideration should be given to seeking a pre-transaction private ruling from the ATO.
Therefore, it is recommended in circumstances where a rollover and/or restructure is being considered, that appropriate tax advice is sought and comprehensive supporting documentation is kept on file to support decisions made and actions taken. This not only will safeguard your business and you as an owner, it will ensure you have taken the most optimal rollover option for your company.
Every business and situation is unique. This is a just a snapshot of certain CGT rollover options for a business looking to transition from an Australian trust to a corporate. There will be, of course, other taxes to consider when undertaking a restructure: income tax, GST, stamp duty – just to name a few.