In 2016, the government introduced “The Small Business Restructures roll-over Bill 2016” as part of the small business scheme governed by the Tax Office.
Before the passing of this regulation, many small businesses struggled to save capital gains tax when transferring their assets to another business entity in which they owned.
For example, if a small business entity purchased an office building in 2010 for $400,000, and then in 2016, the entity transferred the asset to an associated business structure, and the market value at the time was $1,000,000.00.
Effective way to save capital gain tax
Before the passing of the Bill, the entity will need to pay a capital gains tax of up to $251,632 between the cost base and the market value of the building.
If they are allowed to apply the small business restructure concession and meet all of the conditions, then it would effectively mean the transfer can take place, and a significant amount of tax will be saved.
With the Small Business Restructure Roll Over Bill 2016 which came into effect on 1 July 2016, small businesses are now allowed more flexibility in changing to a more suitable legal structure without paying any tax on the transfer.
It means that if the small business meets certain conditions, then it will be able to move the underlying business asset to another business structure without paying any capital gains tax, and it would be a huge cost saving for any small business.
The assumption is that the transferee would acquire the underlying asset at the cost base, and the transferor would dispose the asset at the cost base.
However, to be eligible for this concession, businesses need to meet certain conditions as stipulated by the Bill, which include the following
- The transferor and the transferee must be small business entities, and they must be tax residents
- They must apply the rollover provision about the asset transferred
- The roll-over rule cannot apply to and from tax-exempt entities or complying super fund
- The CGT asset involved must be the active asset. However, non-CGT assets can also include trading stock, revenue assets, and depreciable assets.
- The restructure must be a genuine business restructure
- After the rollover, it will not change the ultimate economic ownership of the asset involved.
To fulfill the first condition of a small business entity, the entities involved must have an aggregated turnover of less than $ 2 million. Also, it is important to note that it does not just apply to the small business entity, but also can apply to the following.
- An entity that is affiliated with a small business entity
- An entity that is connected with a small business entity
- A partner in a partnership that is a small business entity
Hence, even if the holding entity that holds the business asset is not a trading business, however, if it is related or connected to a small business entity, then it is fine.
How to minimise capital gains tax
This might be particularly relevant under asset ownership under different family members.
If the husband holds the business asset through one entity structure, and the spouse uses it via a different entity structure to run a small business.
The other important definition for the rollover provision is that the asset must be an active asset, meaning that assets used, or held ready for use, in the course of carrying on business. Hence if the asset is not an active asset, then the restructure provision will not be applicable.
Many businesses, nevertheless, have raised the question of whether to transfer assets to a trust or a self-managed superannuation fund. Transferring assets to a trust can be eligible for the concession while transfer to SMSF may not be a viable option.
Also, after the transfer, it is important to note that if the underlying asset has pre-cgt status, it will remain pre-CGT status after the transfer, hence if the transferee sells the asset in the future, it does not have to pay capital gains tax.
However, if it is a posted CGT asset, then after the transferee acquires the asset, then the 12 months ownership will start from the time when the transferee acquires the asset. For 15 yeas exemption then the date will be the time when the transferor receives the assets.
To obtain more advice. Hence, it is critical to approach a good accountant who can help you work out your eligibility and recommend suitable structures so that your business can minimize your tax liability. At EndureGo, John the CPA-qualified tax accountant is more than happy to help you with your capital gain tax. Talk to us today about how to save Capital Gains Tax position
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Disclaimer: this article aims to provide general information and does not apply to a specific person or event. Please do not regard this article as legal or professional advice under any circumstances.