Queensland has some of the most restrictive stamp duty rules regarding restructures, which often prevents a business from restructuring its operations into the most optimum structure, particularly if the business is operated through a trust. We expect that there are many businesses in this predicament. If that is the primary reason why a business has baulked at restructuring, now may be the time to act.
There is quite a bit of detail, but the main takeaways are:
- An application for exemption must be made to the Office of State Revenue, it is not self assessable.
- The exemption applies to “corporatising” businesses, ie changing from sole proprietor, partnership or a discretionary trust, not the other way around.
- It does not seem to apply to unit trusts.
- The Queensland dutiable value must be $10m or less.
- The business must have an annual turnover of $5m or less.
- It does not apply to residential land or passive investment, and so will not be applicable to residential property investors.
- It appears to be a permanent exemption, and not a temporary one related to COVID-19.
We are well placed to assist businesses in applying for exemptions, having undertaken similar corporate restructures under the usual corporate reconstruction provisions in Queensland and all other States and Territories.
Our approach focuses on guiding clients through a restructure swiftly using a “whole of tax” and commercial approach. We provide guidance in relation to the optimum business structure, R&D opportunities, corporate and family tax implications and can manage all stamp duty disclosures required in Queensland (and elsewhere if relevant).
We provide some further details and insight below. However, please get in touch with your local Grant Thornton partner now if you think you could take advantage of this measure.
Similar to corporate reconstructions, a newly incorporated company or “dormant” company must be used to newly house the business. As with corporate reconstructions in Queensland, we generally favour a newly incorporated company to avoid unintentionally tripping up the strict meaning of “dormant”.
Dutiable value is usually a reference to market value. However, the ruling provides that the Commissioner may take the property’s book value as evidence of its unencumbered value. We expect that this is designed to avoid the time and expense of obtaining a valuation. However, the current value of intangible property such as goodwill and intellectual property is not usually reflected in a business’ financial statements. We think it unlikely that this discretion will extend to intangible property.
While the exemption seems to be clearly aimed at restructures, the criteria does not include a qualifying purpose, or disqualify a purpose for the reduction or avoidance of duty or another tax. While the general anti-avoidance provisions could be activated, it would seem that the exemption can apply to a pre-sale restructure, something which is not permitted under the Queensland corporate reconstruction provisions.
Pre and post association
There do not appear to be any pre or post association requirements, thereby perhaps allowing pre-sale restructures.
A partial exemption could be available if ownership levels change or new owners are introduced. In such a case, the exemption would apply to the extent that ownership does not change. This would be particularly useful for groups of business owners with a high degree (but not exact) common ownership.
Application for exemption – pre-determination/ruling?
The application for exemption is required to be in the form of a formal duty lodgement, which requires the completion of a Form D2.2. It does not appear to be as complicated or as onerous as a corporate reconstruction application. There is also no mention of a pre-determination or ruling procedure. Having regard to Queensland’s restrictive approach to private rulings, we expect that such an avenue will not be available.
Income tax relief
Existing general capital gains tax rollover concessions (available to businesses regardless of size) are available to assist in the transition of a business operated as a sole proprietor, partnership and/or discretionary trust that are designed to assist with the ‘corporatisation’ of business. Where the criteria required to access these concessions is satisfied it is possible to restructure the group without the imposition of income tax. It is important to note that the specific requirements for income tax rollover relief do not necessarily align with the Queensland Duty Exemptions so care must be taken to ensure that both sets of requirements are satisfied.
The respective mix of small business property is also relevant when considering the income tax implications, particularly for plant and equipment as these assets are generally taxed outside of the capital gains tax regime and may result in unintended tax consequences if not considered as part of a business reorganisation. This is particularly relevant in the current environment when considering the interaction with the immediate asset write off provisions that have been broadened further in the recent Federal Budget.
As a final point eligible small businesses for income tax purposes are also provided with additional rollover concessions that are subject to strict eligibility requirements that should also be considered as part of a tax effective group reorganisation.
R&D tax incentive reducing the cost of innovation
Moving from sole proprietor, partnership or a discretionary trust into a corporate structure will also allow small businesses to satisfy one of the R&D eligibility requirements – being an incorporate entity. Entities with an aggregated turnover of less than $20m and undertaking eligible R&D activities are able to access 43.5% refundable R&D tax offsets. This means if the company is in tax losses, they could get cash back of up to 43.5cents for every dollar spent on R&D.
Restructuring is also a good time to be thinking about IP identification, strategy and protection. With the push for Australia to grow out of the recession, companies should ensure they have a clear path on their commercialisation strategy.