When the Small Business Restructure Rollover (SBRR) was introduced from 1 July 2016 it promised to enable relief to Small Businesses who needed to restructure to take the next step in their business journey.
The first key plank of the SBRR is that it applied to Small Businesses with a turnover of less than $10 million, not the $2 million threshold that has become a legacy condition within the Small Business CGT concessions. There is also no net asset value test, so the asset value of the Small Business is irrelevant in determining the entities’ ability to access the SBRR.
Furthermore, the SBRR offered unprecedented business asset transfers, in that the business assts could be transferred between numerous entities including:
- into and out of a Company;
- between Trusts;
- from individuals to Trusts.
So far so good. So why haven’t we been using the SBRR as much as we thought we would or indeed as much as the Government thought we would?
The key reason in our eyes is the key condition that the SBRR must be undertaken for reasons that constitute a “genuine restructure”.
Unfortunately for such a crucial condition this term is not defined in the legislation and therefore requires consideration of its ordinary meaning and importantly, the Commissioner’s understanding of the term’s ordinary meaning.
The Explanatory Memorandum[1] provided examples of factors that would indicate a genuine restructure, which include the following:
- 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.
The Commissioner then added to that in the Law Companion Guide LCG 2016/3, where he acknowledges that tax considerations are factors that can be taken into account under a genuine small business restructure[2]. However, a restructure that is contrived or unduly tax driven will not constitute a genuine restructure[3]. Other factors which tend to indicate that a restructure is not a ‘genuine restructure of an ongoing business’ include:
- where the restructure is a preliminary step to facilitate the economic realisation of assets, or takes place in the course of a winding down to transfer wealth between generations;
- where the restructure effects an extraction of wealth from the assets of the business (including accumulated profits) for personal investment or consumption or is otherwise designed for use outside of the business;
- where artificial losses are created or there is a bringing forward of their recognition;
- the restructure effects a permanent non-recognition of a gain or the creation of artificial timing advantages, and/or
- there are other tax outcomes that do not reflect economic reality[4].
So where does a restructure for succession purposes fit into the SBRR conditions?
The highlighted point above is where taxpayers and their advisers have to be careful. Short term succession plans where business assets are transferred into another entity that is quickly sold or control is transferred to other parties will likely fall foul of the ATO given the view that the restructure was undertaken to facilitate the sale of assets rather than to “enhance business efficiency”.
However longer term successions where key employee or family members are introduced into a new business structure implemented through the use of the SBRR, have a stronger argument that the restructure, primarily the introduction of key employees or family members, was done to grow or enhance the business, especially where control remains with the original owners and they continue in that role for at least the medium term.
If you have any questions on applying the SBRR for your clients, please contact Sean Pearce or Ross Prosper.
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[1] Paragraph 1.12 of the Explanatory Memorandum to the Tax Laws Amendment (Small Business Restructure Roll-over) Act 2016
[2] Paragraph 8 of LCG 2016/3
[3] Paragraph 9 of LCG 2016/3
[4] Paragraph 10 of LCG 2016/3