Small businesses can change their legal structures without incurring income tax liability because of the small business restructure rollover. Small businesses have different reasons why they would want to restructure their business: some want to minimise tax and compliance issues while some want to provide greater asset protection or raise new capital. It’s best to talk to a business accountant to find out which structure is most suitable for your goals.
The small business restructure applies to the transfer of active assets such as trading stock, CGT assets, depreciating assets and revenue assets. These are used or held ready for use during the course of business operations. To be able to rollover, the transfer of assets should be part of a genuine restructure, not just an artificial or inappropriately tax-driven scheme. The restructure should be reasonably expected to provide benefits to the business owners in terms of an efficient conduct of the business.
A genuine restructure of an ongoing business has a bona fide arrangement undertaken in an honest and real sense to facilitate innovation, diversification and growth, to adapt to changed conditions or to reduce compliance costs, cash flow impediments or administrative burdens. The business’ economic ownership and its restructured assets must also be maintained and the owners must continue to operate through a different structure through its continued use of the transferred assets as active assets of the business, employment continuity and production, sales, supplies and services continuity.
To be able to rollover, the transaction should not change the ultimate economic ownership of transferred assets. The ultimate economic owners of an asset are those who directly or indirectly own an asset. For multiple owners, each individual’s share of ultimate economic ownership should be maintained as well.
Discretionary or family trusts may be eligible for ultimate economic ownership when there is no practical change where individuals economically benefit from the assets before or after the transfer. Family trusts may meet the requirements when the trustee has made a family trust election and each individual who had ultimate economic ownership after the transfer has to be family members of the family related to the trust.
You should consult with the experts to receive proper advice and make sure that resettlement doesn’t occur. The rollover offers opportunities for small businesses to change their structure without income tax liabilities but there may still be consequences to consider like GST and stamp duty.
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