From a tax practitioner’s point of view one, of the first thing to consider when providing proactive tax advice is what entities should be utilised to the taxpayer’s best advantage? For example, if two individuals commence in business together what would be the best structure? There may a be a choice of operating as a partnership, a corporate entity or perhaps even via the remarkably handy and flexible discretionary trust.

However, this is just the beginning of the story. This is because what may be considered to be tax efficient today may not be appropriate a few years down the line when circumstances have changed.  Additionally, the structure should also take into consideration other important matters such as asset protection, estate planning and succession and preparation for an eventual sale of the business or securing further investment.

If we are left with an unwieldy and inefficient tax structure, how do we change things? The short answer is, not easily!

Transfers between entities

One might ask what is to prevent transfers between entities in common ownership, surely this is tax neutral? Unfortunately, this is not the ATO’s view and, even when there are no proceeds involved, such a transfer is likely to prove costly to unwary taxpayers. Common amongst the myriad of tax traps is the potential exposure to unwanted stamp duty and capital gains tax (CGT) liabilities.

Stamp duty

Stamp duty is levied state by state so must be considered on this basis. If we consider New South Wales and Queensland for example there are differing approaches to stamp duty both in the rates applied and to which assets are included.

And the little one said “rollover” ….

Embedded within the current tax legislation is a whole raft of capital gains tax “rollover” reliefs designed to take the pain out of restructuring a taxpayer’s affairs. In particular, rollover reliefs seek to defer the recognition of CGT on the happening of a CGT event. This is effectively accomplished by the use of a rollover such that a CGT event happening to a CGT asset is ignored, with the deferred capital gain being taxable at a later time. Usually the deferred capital gain “attaches” itself to the replacement asset and crystallises at the time of that asset’s subsequent disposal.

So far, so good! However, the requirements of meeting the conditions for the rollover relief can often be quite restrictive and onerous. Any restructuring that is undertaken which makes use of the rollover provisions should be carefully considered with attention paid to any future disadvantages which may arise.

The Outlook

The ATO  provided further details on the much heralded small business restructure rollover relief. This relief will apply to transfers of assets occurring on or after 1 July 2016. The new relief has been designed to make it ‘easier’ for small business owners to restructure their businesses by allowing them to defer or transfer gains or losses that would otherwise be realised. Although the final details of the legislation have yet to be released, the restructure rollover relief should allow multiple restructuring opportunities without the cost inherent in the currently available options. One highlight is that the relief is expected to be available on an asset by asset basis as well as for the whole business. This should allow the splitting of trusts which is currently very problematic. Watch this space!

What about when business is no longer considered small?

The end game for many small businesses is that they become big businesses. For tax purpose (and this is somewhat of a simplification) a business is no longer small when its annual turnover exceeds $2 million. For a business with low margins this may not be a very high threshold. It is to be hoped that the ATO will extend the potential relief measures to those businesses that have prospered to such an extent that they are no longer considered “small”. Unfortunately, the ATO has not flagged anything at this stage.

Conclusion

It is clear that the “one size fits all” approach is not advisable when considering an appropriate tax structure. Each particular set of circumstances must be judged on its own merits and weighed together with the appropriate non-tax considerations. The structure should be reviewed and, if necessary, updated periodically.

If at all possible, maximum flexibility should be built into an arrangement to reflect those changes which may be reasonably anticipated. This requires that the correct advice be obtained and acted upon. It should also be emphasised that this article has focused on tax considerations only and it is important to consider all aspects of why a particular structure should be chosen.

Information correct as of publish July 2016