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Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016

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2013-2014-2015-2016

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Tax laws amendment (small business restructure roll-over) bill 2016

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the

Minister for Small Business and Assistant Treasurer, the Hon Kelly O’Dwyer MP)



Table of contents

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1               Small business restructure roll-overs................................ 5

Chapter 2               Statement of Compatibility with Human Rights............ 23

Index................................................................................................................. 24

 

Do not remove section break.



 

The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

CGT

capital gains tax

ITAA 1997

Income Tax Assessment Act 1997

ITAA 1936

Income Tax Assessment Act 1936



Small business restructure roll-overs

This Bill amends the Income Tax Assessment Act 1997 to provide greater flexibility for small businesses to change their legal structure.

The amendments make it easier for small business owners to restructure by allowing them to defer gains or losses that would otherwise be made from transferring business assets from one entity to another as part of a genuine restructure.

The new small business roll-over is in addition to roll-overs currently available where an individual, trustee or partner transfers assets to, or creates assets in, a company in the course of incorporating their business.

Date of effect : The amendments apply to:

•        transfers of depreciating assets, where the balancing adjustment event arising from the transfer occurs on or after 1 July 2016;

•        transfers of trading stock or revenue assets, where the transfer occurs on or after 1 July 2016; and

•        transfers of capital gains tax (CGT) assets, where the CGT event arising from the transfer occurs on or after 1 July 2016.

Proposal announced : This measure was announced on 12 May 2015 in the 2015-16 Budget.

Financial impact : The measure has the following revenue implications over the forward estimates:

2015-16

2016-17

2017-18

2018-19

0.0

0.0

-$20.0m

-$20.0m

Human rights implications : This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights — Chapter 2, paragraphs 2.1 to 2.6.

Compliance cost impact : This measure is will result in a reduction in average annual regulatory compliance costs of $0.76 million.



Chapter 1          

Small business restructure roll-overs

Outline of chapter

1.1                   This Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide greater flexibility for small businesses owners to change the legal structure of their business.

1.2                   The amendments make it easier for small business owners to restructure by allowing them to defer gains or losses that would otherwise be realised when business assets are transferred from one entity to another.

1.3                   The new small business roll-over is in addition to roll-overs currently available where an individual, trustee, or partner transfers assets to, or creates assets in, a company in the course of incorporating their business.

1.4                   All references to legislative provisions in this chapter are references to the ITAA 1997 unless otherwise stated.

Context of amendments

1.5                   In Australia, small businesses may operate as sole traders, partnerships, trusts, companies or any combination of these. A small business owner may take a number of factors into account in determining which structure is the most appropriate for their business, including tax issues, personal liability, access to equity capital, and compliance costs.

1.6                   The most appropriate structure for a small business may change over time, or a new small business may choose an initial legal structure that it later finds to be inappropriate. Restructuring into a more appropriate legal structure may help a business to:

•        continue to develop and grow;

•        avoid unnecessary compliance costs;

•        enhance business efficiency;

•        move to a more efficient structure for tax purposes; or

•        adapt to current conditions.

1.7                   However, where a restructure requires business assets to be transferred from one entity to another, such as from a company to a trust, significant income tax liabilities may arise at the time of the transfer. The impact of these liabilities on cash flow and available capital may create an impediment to restructuring.

1.8                   Currently, roll-over relief is available in limited circumstances for business restructures. For example, roll-overs are available for restructures involving the transfer of a capital gains tax (CGT) asset, or all the assets of a business, from an individual, trustee, or partner to a wholly owned company (Subdivisions 122-A and 122-B). However, no roll-over is available, for example, for a restructure that transfers business assets from a company to a sole trader, partnership, or trust.

1.9                   As part of its Growing Jobs and Small Business package in the 2015-16 Budget, the Government announced that it would introduce a roll-over to allow small businesses to change legal structure without attracting CGT liability at that time.

1.10               The amendments made by this Bill extend the relief to transfer of trading stock, revenue assets, and depreciating assets, to provide greater flexibility for small business restructures.

1.11               The amendments have been developed in consultation with small business tax advisors and other key stakeholders.

Summary of new law

1.12               This Bill provides small businesses with a new roll-over for gains and losses arising from the transfer of CGT assets, trading stock, revenue assets and depreciating assets as part of a restructure of a small business. This provides small businesses with the flexibility to change their legal structure without realising an income tax liability on the transfer of those assets.

1.13               The tax cost/s of the transferred asset or assets is rolled over from the entity that transferred the asset or assets (the transferor) to the entity to which the asset or assets are transferred (the transferee). This is achieved by providing that, for the purposes of applying the income tax law:

•        the transferor is taken to have received an amount which approximates the ‘tax cost’ of the asset to them (that is, the amount the income tax law recognises as the transferor’s cost); and

•        the transferee is taken to have acquired each asset for the amount that equals the transferor’s tax cost for the asset just before the transfer.

1.14               Generally, the roll-over applies to transfers that do not result in a change in the ultimate economic ownership of the assets.

Comparison of key features of new law and current law

New law

Current law

In addition to the existing roll-overs, a roll-over is available for small businesses to transfer active assets to or from different legal entities as part of a genuine restructure of an ongoing business.

Roll-overs are available for businesses to transfer assets:

•        from an individual, trustee or partner to a wholly owned company (Division 122); or

•        from a trust to a company (Subdivision 124-N).

A roll-over is also available where an interest holder exchanges shares in a company or units in a unit trust for shares in another company as part of a restructure (Division 615).

Detailed explanation of new law

1.15               This Bill amends the ITAA 1997 to allow small businesses to defer the recognition of gains or losses that may arise from a transfer of business assets under a genuine restructure of their business.

1.16               This will facilitate flexibility by removing income tax impediments that might arise for small business owners wishing to change the legal entity or entities running the business to a more suitable structure. [Schedule 1, item 1, section 328-425]

1.17               Subdivision 328-G will provide an optional roll-over where a small business entity transfers an active asset of the business to another small business entity as part of a genuine business restructure, without changing the ultimate economic ownership of the asset. The roll-over may also be available for assets that are used by the small business entity but held by an entity connected with the small business entity, an entity for which the small business entity is an affiliate or, if the small business entity is a partnership, a partner of that partnership. This ensures that partners and other ‘passive entities’ within a small business structure that are not themselves small business entities (because they do not carry on business themselves - see section 328-110) can access the roll-over. [Schedule 1, item 1, paragraph 328-430(1)(b)]

1.18               The roll-over will apply to gains and losses arising from the transfer of active assets that are CGT assets, depreciating assets, trading stock or revenue assets between entities as part of a genuine restructure of an ongoing business.

When a roll-over is available

Genuine restructure

1.19               The first criterion for eligibility for the roll-over is that the transfer of the asset is, or is a part of, a genuine restructure of an ongoing business. This principle has been adopted to cover the range of potential transferor-transferee combinations and the wide range of fact situations to which the roll-over will apply. [Schedule 1, item 1, paragraph 328-430(1)(a)]

1.20               The genuine restructure principle distinguishes genuine restructures from artificial or inappropriately tax-driven schemes. This acknowledges that while tax considerations are significant factors in small business structuring, a minority of taxpayers and advisers may try to manipulate the operation of a ‘black letter’ provision of the tax law to achieve an inappropriate or uneconomic tax outcome.

1.21               Whether a restructure is ‘genuine’ is a question of fact that is determined having regard to all of the facts and circumstances surrounding the restructure.

1.22               Examples of factors that would indicate a genuine restructure include:

•        it is a bona fide commercial arrangement undertaken to enhance business efficiency;

•        the business continues to operate following the transfer, through a different entity structure but under the same ultimate economic ownership;

•        the transferred assets continue to be used in the business;

•        the restructure results in a structure likely to have been adopted had the business owners obtained appropriate professional advice when setting up the business;

•        the restructure is not artificial or unduly tax driven; and

•        it is not a divestment or preliminary step to facilitate the economic realisation of assets.

Safe harbour

1.23               To provide certainty to small businesses using the roll-over, a ‘safe harbour’ rule is included. A small business will be taken to satisfy the requirement that the transaction is, or is a part of, a genuine restructure of an ongoing business where, for three years following the roll-over:

•        there is no change in the ultimate economic ownership of any of the significant assets of the business (other than trading stock) that were transferred under the transaction;

•        those significant assets continue to be active assets; and

•        there is no significant or material use of those significant assets for private purposes.

[Schedule 1, item 1, section 328-435]

1.24               This does not limit the circumstances in which a transaction is, or is a part of, a genuine restructure of an ongoing business.

1.25               If a small business does not meet the requirements of the safe harbour, it can still access the roll-over by satisfying the general principle that the transaction is, or is a part of, a genuine restructure of an ongoing business.

Entities that can access the roll-over

1.26               To be eligible for the roll-over, each party to the transfer must be either:

•        a small business entity for the income year during which the transfer occurred;

•        an entity that has an affiliate that is a small business entity for that income year;

•        connected with an entity that is a small business entity for that income year; or

•        a partner in a partnership that is a small business entity for that income year.

[Schedule 1, item 1, paragraph 328-430(1)(b)]

1.27               An entity is a small business entity if it meets the requirements under Subdivision 328-C. Broadly, this requires that the entity carry on a business and that the combined annual turnover of the entity, and other entities that are affiliated or connected with it, is less than $2 million.

1.28               Some entities hold assets used by another entity in a small business. For example, the significant assets of a small business may be held in an entity other than the one carrying on the business, in order to protect those assets from legal action against the entity carrying on the business. This roll-over extends eligibility to those passive entities where they:

•        have an affiliate that is a small business entity for that income year;

•        are connected with an entity that is a small business entity for that income year; or

•        are a partner of a partnership that is a small business entity.

Ultimate economic ownership

1.29               To be eligible for the roll-over the transaction must not have the effect of changing the ultimate economic ownership of transferred assets in a material way. The ultimate economic owners of an asset are the individuals who, directly or indirectly, beneficially own an asset. [Schedule 1, item 1, paragraph 328-430(1)(c)]

1.30               Ultimate economic ownership of an asset can only be held by natural persons. Therefore, where a company, partnership or trust owns an asset it will be the natural person owners of the interests in these interposed entities that will ultimately benefit economically from that asset.

1.31               If there is more than one individual who is an ultimate economic owner of an asset, there is an additional requirement that each of those individuals’ shares of that ultimate economic ownership be materially unchanged, maintaining the same proportionate ownership in the asset. [Schedule 1, item 1, subparagraph 328-430(1)(c)(ii)]

Example 1.1  

Penny runs a small furniture manufacturing business as a sole trader. She wishes to run the business through a unit trust.

Penny sets up the Just Me Unit Trust for this purpose, with herself as sole unit holder, and transfers the active assets of the business to the trust. This would not result in a change in ultimate economic ownership of those assets.

Example 1.2  

Amy, Anna and Adrian run a delivery business as equal partners and want to transfer their interests in the assets of the partnership to a company. Anna and Adrian are a couple.

Amy, Anna and Adrian establish a company, whereby 300 identical shares are issued. 100 shares are issued to Amy, 150 shares are issued to Anna, and 50 shares are issued to Adrian. This is because Adrian has other income and Anna and Adrian, as a couple, want to lower their overall income tax bill.

While this doesn’t change the individuals who have the ultimate economic ownership of the asset, there is a change in the proportionate share of that ultimate economic ownership. Accordingly, Amy, Anna and Adrian cannot use the small business restructure roll-over.

However, if the shares were distributed equally between the partners, the ultimate economic ownership of the assets would be unchanged, and Amy, Anna and Adrian could use the roll-over, subject to satisfying the other conditions.

Discretionary trusts

1.32               The roll-over is restricted to circumstances where there has been no material change in the ultimate economic ownership of assets as a result of the transfer of the assets.

1.33               Identifying those individuals who will benefit economically from the assets of a company, partnership or fixed trust is relatively straight forward, although the ultimate economic ownership of an asset will be a question of fact to be ascertained based on the circumstances of the particular case.

1.34               In some cases, non-fixed (discretionary) trusts may be able to meet the requirements for ultimate economic ownership on their facts. For example, a trust may be non-fixed for the purposes of the income tax law but, because there is no practical change in which individuals economically benefit from the assets before and after the roll-over, there will not have been a change in ultimate economic ownership on the facts.

1.35               However in other cases the nature of a non-fixed trust may mean that it is not possible to determine proportionate ultimate economic ownership of the assets of the trust. Therefore if a non-fixed trust seeking to use the roll-over (either as transferor or transferee) is a family trust, they may instead meet an alternative ultimate economic ownership test. This is intended to provide additional flexibility to small family businesses carried on through non-fixed trusts by allowing them to meet the requirement to maintain proportionate ultimate economic ownership of the assets if the ultimate economic ownership of those assets remains within the family.

1.36               To meet this alternative test, every individual who had ultimate economic ownership of the transferred asset before the transfer, and every individual who has ultimate economic ownership of the transferred asset after the transfer, must be members of the family group relating to the family trust. [Schedule 1, item 1, section 328-440]

Example 1.3  

Chris and Victoria are husband and wife and are the only shareholders in Puppy Co, with each owning one share with a cost base of $2 per share.

Puppy Co has successfully carried on a puppy training school and has acquired significant assets including puppy boarding facilities, a vehicle, and goodwill.

Victoria and Chris wish to transfer the puppy boarding premises from Puppy Co to a recently settled discretionary trust, the Fluffy Trust, which will lease the premises to Puppy Co. The family trust election is made nominating Victoria as the primary individual controlling the trust. Victoria and Chris are members of Victoria’s family group.

For the purpose of the roll-over, there will not be a change in the ultimate economic ownership of the premises as a result of the transfer of the asset from Puppy Co to the Fluffy Trust. Therefore, assuming that the other requirements are also met, the roll-over would be available in respect of the transfer.

Eligible assets

1.37               Where a party to the transfer is itself a small business entity, the asset being transferred must be a CGT asset that is an active asset. Active asset is defined in section 152-40, and broadly includes assets used in a business. [Schedule 1, item 1, subparagraph 328-430(1)(d)(i)]

1.38               Where a party to the transaction is not a small business entity, but is either:

•        an entity that has an affiliate that is a small business entity; or

•        an entity that is connected with a small business entity,

then the asset must be an active asset that satisfies subsection 152-10(1A), which, among other things, requires that the relevant small business entity carries on business in relation to the asset. [Schedule 1, item 1, subparagraph 328-430(1)(d)(ii)]

1.39               Where a party to the transaction is not a small business entity but is a partner in a partnership that is a small business entity, the asset must be:

•        an active asset; and

•        an interest in the asset of the partnership.

[Schedule 1, item 1, subparagraphs 328-430(1)(d)(iii)]

Example 1.4  

Continuing Example 1.3 above, the business premises are an active asset of the business carried on by Puppy Co, and will satisfy subsection 152-10(1A) in the hands of the Fluffy Trust. The premises can be transferred to the Fluffy Trust, provided the other requirements of the roll-over are satisfied.

1.40               Assets such as loans to shareholders of a company are not active assets of the business carried on by the creditor. A purported transfer of such assets to the debtor shareholder, or trust liable to pay the unpaid distribution could potentially defeat the operation of Division 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). The roll-over cannot be used for such transfers.

Example 1.5  

Mr and Mrs Smith are directors and shareholders of private company ABC Pty Ltd. They each own 50 shares in ABC Pty Ltd, which operates the family business of a milk bar.

Due to the administrative burden of operating a private company, Mr and Mrs Smith decide to restructure their business affairs. They use the small business restructure roll-over and transfer all plant and equipment of the milk bar to a newly formed partnership.

A complying Division 7A loan for $50,000 to Mr Smith also exists in the balance sheet of ABC Pty Ltd. The Division 7A loan cannot be transferred to the partnership as it not an active asset, and the normal operation of Division 7A continues to apply in respect of the loan.

Residency

1.41               To be eligible for the roll-over, both the transferor and the transferee of the assets must be residents of Australia. [Schedule 1, item 1, paragraph 328-430(1)(e)]

1.42               The income tax law uses different residency tests for different kinds of entities. The transferor and transferee must meet whichever residency test applies to them.

•        If the entity is an individual or a company - the entity must be an Australian resident.

•        If the entity is a trust - the entity must be a resident trust for CGT purposes.

•        If the entity is a partnership (other than a corporate limited partnership) - at least one of the partners must be an Australian resident.

•        If the entity is a corporate limited partnership - the entity must, under section 94T of the ITAA 1936, be a resident for the purposes of the income tax law.

[Schedule 1, item 1, section 328-445]

Choosing to apply the roll-over

1.43               The transferor and transferee must both choose to apply the roll-over. This choice affects the tax consequences of the transaction for both the transferor and transferee. [Schedule 1, item 1, paragraph 328-430(1)(f)] .

Exempt entities and complying superannuation entities

1.44               The roll-over will not apply to a transfer to or from an exempt entity or complying superannuation entity [Schedule 1, item 1, subsection 328-430(2)] . Exempt entity and complying superannuation entity are defined in subsection 995-1(1).

Effect of the roll-over

Transfers not to affect income tax position

1.45               As with other roll-overs, the small business restructure roll-over is intended to be tax-neutral, in the sense that no income tax consequences arise from the transfer of the asset(s). This will provide small businesses with the flexibility to change their legal structure without the cash flow problems that may arise from realising an income tax liability on the transfer of assets to a different entity. [Schedule 1, item 1, section 328-450]

1.46               The roll-over can be used for transfers from and to a range of different entity types, and such transfers may trigger various provisions under the existing income tax law. For example a transfer of an asset by a company to a shareholder may be an assessable dividend under section 44 of the ITAA 1936 or Division 7A.

1.47               Section 328-450 ensures that there are tax neutral consequences for a transfer that qualifies for the roll-over, by ‘switching off’ the application of the existing income tax law. [Schedule 1, item 1, section 328-450]

1.48               This does not mean that the transfer is deemed not to happen, or that downstream income tax consequences of the transfer will also be ‘switched off’. [Schedule 1, item 1, subsection 328-450(2)]

1.49               Nor will the amendments affect a tax liability arising under another Commonwealth taxing statute (for example fringe benefits tax or goods and services tax), or any liability for stamp duty under State legislation.

Part IVA of the ITAA 1936

1.50               Section 328-450 does not prevent Part IVA of the ITAA 1936, containing the general anti-avoidance provisions of the taxation law, from applying to a scheme involving the application of the roll-over.

Effect of the restructure on transferred cost of assets

1.51               The income tax law will apply to the transferor as if the transfer takes place for the asset’s roll-over cost . The roll-over cost is essentially the transferor’s cost of the asset for income tax purposes, such that the transfer would result in no gain or loss for the transferor. The transferee will be taken to have acquired each asset for an amount that equals the transferor’s cost just before the transfer. [Schedule 1, items 1 and 7, section 328-455, definition of ‘roll-over cost’ in subsection 995-1(1)]

1.52               The income tax law may apply different costs to an asset depending on which rules apply to that asset, and this affects the roll-over cost.

CGT assets

1.53               To the extent that a gain or loss on the asset is calculated under the CGT provisions (Parts 3-1 and 3-3), the relevant cost for income tax purposes is the transferor’s cost base for the asset. For the transfer of a CGT asset, the income tax law will apply under the roll-over as if the asset had been transferred for an amount equal to the cost base of the asset. [Schedule 1, item 1, paragraph 328-455(2)(a)]

Pre-CGT assets

1.54               Pre-CGT assets transferred under the roll-over will retain their pre-CGT status in the hands of the transferee. [Schedule 1, item 1, section  328-460]

Discount capital gains

1.55               Capital gains made from a CGT asset may be discounted where the entity making the capital gain acquired the asset at least 12 months before the CGT event triggering the capital gain happened (Subdivision 115-A). For the purpose of determining whether a capital gain may be discounted under Subdivision 115-A, a transferee receiving an asset under the roll-over is treated as having acquired the CGT asset at the time of the transfer.

1.56               That is, the time period for eligibility for the CGT discount will recommence from the time of the transfer. This is consistent with the policy intent of the roll-over, which is to make it easier for small business owners to change the legal entity or entities that run the business in the course of a genuine restructure of an ongoing business. The policy is not to facilitate the transfer of assets to an entity that is entitled to the CGT discount shortly before the sale of the asset.

Trading stock

1.57               Under a genuine restructure, assets that are trading stock of the transferor will be held as trading stock by the transferee. The transferee will inherit the transferor’s cost and other attributes of the assets as the transferor just before the transfer. This is to ensure that any deductions claimed by the transferor up to the date of the transfer are taken into account.

1.58               To the extent that the asset is trading stock of the transferor, (as defined in subsection 70-10(1)), the roll-over cost for income tax purposes is:

•        the cost of the item for the transferor at the time of the transfer; or

•        if the transferor held the item as trading stock at the start of the income year, the value of the item for the transferor at that time.

[Schedule 1, item 1, paragraph 328-455(2)(b)]

1.59               This will ensure that the transferor incurs no income tax liability as a result of the transfer.

Revenue assets

1.60               To the extent that an asset is a revenue asset, the roll-over cost is the amount that would result in the transferor not making a profit or loss on the transfer. The transferee will inherit the same cost attributes as the transferor just before the transfer.

Depreciating assets

1.61               Roll-over relief will be available for depreciating assets under section 40-340 where a roll-over under the new Subdivision 328-G would be available in relation to the asset if the asset were not a depreciating asset. [Schedule 1, item 2, item 8 of the table in subsection 40-340(1)]

1.62               This prevents an amount being included in or deducted from the transferor’s assessable income because of a balancing adjustment event (subsection 40-345(1)). Instead, the transferee can deduct the decline in value of the depreciating asset using the same method and effective life (or remaining effective life if that method is the prime cost method) as the transferor was using (subsection 40-345(2)).

1.63               Roll-over relief is also available for pooled assets. [Schedule 1, item 6, paragraph 328-243(1A)(c)]  

Example 1.6

Jack and Jill are husband and wife and are the only shareholders in Pail Co, with each owning one share with a cost base of $100. Pail Co has successfully carried on a water hauling business. The assets of the business are a hauling truck and goodwill. The company has no liabilities, and all profits have been distributed.

Pail Co is a small business entity for the income year.

When setting up their business, Jack and Jill did not seek any professional advice and did not consider the compliance costs of operating their business through a company.

They now wish to run the hauling operation directly as partners.

Using the small business restructure roll-over, Pail Co can transfer all of the business assets to Jack and Jill as assets of the Jack and Jill partnership. The partnership is also a small business entity for the income year.

The goodwill is a CGT asset with a market value of $30,000. Pail Co’s cost base for this asset, and therefore the roll-over cost, of the goodwill, is zero. Pail Co is taken to have transferred the goodwill to Jack and Jill in equal shares for $0, and Jack and Jill are taken to have acquired their shares of the goodwill for this amount.

The hauling truck is a depreciating asset with a market value of $15,000. At the time of the transfer, Pail Co had already claimed depreciation deductions of 50 per cent of the original cost of the truck, and the market value of the truck exceeds its adjustable value. Since the truck receives roll-over relief under section 40-340, no amount will be included in Pail Co’s assessable income as a result of a balancing adjustment.

Jack and Jill will be able to continue to deduct the decline in value of the depreciating asset using the same method and effective life that Pail Co was using, to the extent of their respective interests in the partnership.

New membership interests issued as consideration for the transfer

1.64               Where membership interests are issued in consideration for the transfer of a roll-over asset or assets, the cost base and reduced cost base of those new membership interests is worked out based on the sum of the roll-over costs and adjustable values of the roll-over assets, less any liabilities that the transferee undertakes to discharge in respect of those assets, divided by the number of new membership interests. [Schedule 1, item 1, section 328-465]  

Example 1.7  

Edamame Pty Ltd transfers three assets that it owns to the Soy Trust in circumstances that qualify for rollover:

•        a CGT asset having a cost base of $100,000;

•        a second CGT asset having a cost base of $1 million; and

•        a depreciating asset having an adjustable value of $400,000.

The Soy Trust issues 10 units to Edamame Pty Ltd in exchange for the transfer.

The cost base and reduced cost base of each unit is $150,000 [($100,000 + $1 million + $ 400,000)/10].

Membership interests affected by transfers

1.65               Consistent with the object of allowing small business owners flexibility to change their legal structure, the roll-over does not require that market value consideration, or any consideration, be given in exchange for the transferred assets. A transferor and transferee may, for example, agree to transfer the assets at cost in order to eliminate any future unrealised gains on membership interests held in the transferor entity. Where an asset transfer is made at other than market value, decreases and increases in the market values of any interests that are held in the transferor and transferee can result.

1.66               An integrity rule (the loss denial rule) is included to ensure that a capital loss on any direct or indirect membership interest in the transferor or transferee that is made subsequent to the rollover will be disregarded, except to the extent that the taxpayer can demonstrate that the loss is reasonably attributable to something other than the roll-over transaction. The rule applies to capital losses that would not, apart from the roll-over transaction, have been made. For example, the owner of membership interests in a transferor entity cannot realise an artificial loss on disposal of those interests following the transfer for no consideration of the roll-over assets. [Schedule 1, item 1, section 328-470]

1.67               The loss denial rule has no operation where no membership interests in the transferor or transferee exist, for example in the case of a sole trader or discretionary trust.

1.68               Moreover most small businesses that are eligible for the small business restructure roll-over are expected to be owned and operated by their initial owners. In such cases the cost bases and reduced cost bases for any membership interests are unlikely to be significant, and the loss denial rule will have little or no practical operation.

1.69               An integrity concern can however arise where the transfer of value from an entity could result in the creation of tax losses on later disposal of the membership interests. The loss denial rule addresses this concern without imposing additional complexity or significant compliance costs for small businesses.

1.70               The rule operates in addition to the ‘genuine restructure’ requirement for roll-over. Restructuring to obtain timing advantages or other significant tax benefits in relation to membership interests and other interests in the entities involved in the transaction may in particular cases mean that the genuine restructure requirement is failed.

1.71               The loss denial rule applies to capital losses on new membership interests issued as consideration for a transfer under the roll-over, as well as to existing membership interests.

Example 1.8

The Dance Partnership transfers an asset having an acquisition cost of $400,000 and market value of $500,000 to Studio Pty Ltd, and the small business restructure roll-over applies to the transfer. Immediately prior to the transfer, Studio Pty Ltd had existing assets of $700,000 and 18 ordinary shares on issue.

Studio Pty Ltd issues one share each to Riley and Michelle, the partners in the Dance Partnership, as consideration for the transfer.

For both Riley and Michelle, the cost base and reduced cost base for their new share will be $200,000, and the post issue market value of that share will be $60,000 (section 328-465).

To claim a capital loss on subsequent disposal, Riley and Michelle would need to establish that the loss is attributable to something other than the roll-over transaction which includes, relevantly, the issue of the shares and allocation of a $200,000 reduced cost base for those shares.

As the difference of $140,000 between the market value and the cost base of each share is attributable to the roll-over transaction, Riley and Michelle will be unable to claim a loss to that extent on any subsequent disposal of the shares.

Small business restructures involving assets already subject to small business roll-over

1.72               Where the transferor has previously chosen to apply a small business roll-over under Subdivision 152-E, and a replacement asset is transferred under this roll-over, the transferee is taken to have made the choice for the purposes of CGT events J2, J5 and J6. [Schedule 1, item 1, section 328-475]

Effect on 15 year CGT exemption

1.73               For the purpose of determining eligibility for the 15 year CGT exemption for small businesses, the transferee will be taken as having acquired the asset whether the transferor acquired it. [Schedule 1, item 4, subsection 152-115(3)]

Consequential amendments

1.74               References to the roll-over have been included in guidance material in the ITAA 1997, and in a similar rollover in Division 122. [Schedule 1, items 3 and 5, section 122-15 and item 6B in the table in subsection 328-10(1)]

Application and transitional provisions

1.75               The amendments made by this Bill apply to:

•        transfers of depreciating assets, where the balancing adjustment event arising from the transfer occurs on or after 1 July 2016;

•        transfers of trading stock or revenue assets, where the transfer occurs on or after 1 July 2016; and

•        transfers of CGT assets, where the CGT event arising from the transfer occurs on or after 1 July 2016.

[Schedule 1, item 8]

 



Chapter 2          

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016

2.1                   This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

2.2                   This Bill amends the Income Tax Assessment Act 1997 to provide greater flexibility for small businesses to change their legal structure.

2.3                   The amendments make it easier for small business owners to restructure by allowing them to defer gains or losses that would otherwise be made from transferring business assets from one entity to another as part of a genuine restructure.

2.4                   The new small business roll-over is in addition to roll-overs currently available where a sole trader or partner in a partnership transfers assets to, or creates assets in, a company in the course of a business restructure.

Human rights implications

2.5                   This Bill does not engage any of the applicable rights or freedoms.

Conclusion

2.6                   This Bill is compatible with human rights as it does not raise any human rights issues.

Do not remove section brea



Schedule 1:  Small business restructure rollovers

Bill reference

Paragraph number

Item 1, section 328-425

1.16

Item 1, paragraph 328-430(1)(a)

1.19

Item 1, paragraph 328-430(1)(b)

1.17, 1.26

Item 1, paragraph 328-430(1)(c)

1.29

Item 1, subparagraph 328-430(1)(d)(i)

1.37

Item 1, subparagraph 328-430(1)(d)(ii)

1.38

Item 1, subparagraphs 328-430(1)(d)(iii)

1.39

Item 1, paragraph 328-430(1)(e)

1.41

Item 1, paragraph 328-430(1)(f)

1.43

Item 1, subsection 328-430(2)

1.44

Item 1, section 328-435

1.23

Item 1, section 328-440

1.36

Item 1, subparagraph 328-430(1)(c)(ii)

1.31

Item 1, section 328-445

1.42

Item 1, section 328-450

1.45, 1.47

Item 1, subsection 328-450(2)

1.48

Item 1, section 328-460

1.54

Item 1, paragraph 328-455(2)(a)

1.53

Item 1, paragraph 328-455(2)(b)

1.58

Item 1, section 328-465

1.64

Item 1, section 328-470

1.66

Item 1, section 328-475

1.72

Items 1 and 7, section 328-455, definition of ‘roll-over cost’ in subsection 995-1(1)

1.51

Item 2, item 8 of the table in subsection 40-340(1)

1.61

Items 3 and 5, section 122-15 and item 6B in the table in subsection 328-10(1)

1.74

Item 4, subsection 152-115(3)

1.73

Item 6, paragraph 328-243(1A)(c)

1.63

Item 8

1.75