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What Are the Tax Implications of Restructuring Your Business?

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A business may change its business structure for a range of reasons. For example, your business may be expanding or bringing on other investors and a different business structure may be more suitable. However, it is important to consider the impact that restructuring your business will have on the tax your business pays. This article will discuss the reasons a business may restructure and importantly, the tax consequences and the available concessions.

What Are Some Reasons for Restructuring Your Business?

There are four common ways to structure your business:

  1. sole trader;
  2. partnership;
  3. company; or
  4. trust.

Restructuring a business can happen in the early days of the business or after a few years. The most common reasons to restructure include:

  • expanding or changing your business model;
  • bringing in other business partners and investors;
  • asset protection when your business is engaged in riskier work; and
  • setting up a long term tax effective structure, including planning for future exits.

Four Common Ways Restructuring Your Business May Impact Your Tax Liability

1. Capital Gains Tax (CGT)

When you restructure your business, the tax office may consider that you have disposed of (e.g. sold) some of your assets. As a result, you may need to pay CGT, meaning that you will be taxed on the amount of money you have gained from the asset unless a concession or exemption applies. Broadly, a CGT asset covers any kind of property and includes:

  • land and buildings;
  • shares in a company or units in a unit trust;
  • the right to enforce contractual rights (e.g. restraints of trade); and
  • business goodwill.

An example is shares in a company. When you restructure, even though you may not be selling the shares, by changing ownership or cancelling the shares, you are considered to have disposed of a CGT asset. If the shares have increased in value, you may have to pay tax on this gain.

CGT Rollover Relief

However, in some cases, you may be eligible for CGT rollover relief. This allows your business to defer or disregard a capital gain or loss. The table below explains the three main categories of CGT rollover relief.

Replacement-Asset Rollovers This allows your business to postpone making a capital gain or loss. In this instance, your business will end ownership of one CGT asset (the original asset) and the business will acquire another CGT asset (the replacement asset). Normally, ending ownership of the original asset would mean you would have to pay tax on any capital gain. However, if you purchase a replacement asset, you postpone the tax payment until you dispose of the replacement asset.
Same-Asset Rollovers This allows one of your business entities to transfer a CGT asset to another entity without needing to pay tax, such as another company. Any capital gain or loss is deferred until the second company disposes of the CGT asset.
Scrip for Scrip Rollovers If you own shares in a company and that company merges or is taken over by another company, you may need to pay tax. Companies don’t always offer cash when they carry out a takeover bid and may offer you either scrip (shares) or a combination of cash and scrip. Whether you need to pay tax will depend on the structure of the merger or takeover. But if a scrip for scrip rollover relief applies, then you can defer paying tax until you dispose of the replacement shares that the takeover company gave you.

2. Small Business CGT Concessions

Definition of a ‘Small Business’

To be eligible for small business concessions, you must satisfy the definition of a small business entity (SBE). An entity is an SBE if it has an aggregated (i.e. combined) turnover of less than $2 million. This includes the turnovers of any associated companies or entities of your business.

If your entity is not an SBE, you may still qualify for these concessions if you have net assets of no more than $6 million. Note that this value excludes various ‘big ticket’ items such as:

  • an individual’s main residence;
  • superannuation interests; and
  • purely personal assets (e.g. a holiday home that you do not rent out or Airbnb).

Summary of Small Business Concessions

If the small business concessions apply to you, they can reduce or even eliminate the tax that you may need to pay on a capital gain. The table below sets out the various small business concessions.

Concession Explanation
The 15-Year Exemption Eligible taxpayers do not have to pay CGT if they satisfy various requirements. For example:
  • your business must have operated for at least 15 years; and
  • the relevant taxpayer (or a CGT concession stakeholder) is over 55 years old and retiring.
50% Active Asset Reduction This allows a small business to halve the amount of CGT it needs to pay. It applies to an asset that you are using in your business. This concession applies alongside the general 50% CGT discount (where available). As a result, the value of the capital gain that you need to pay tax on decreases by a combined 75%.
Small Business Retirement Exemption This allows eligible taxpayers to reduce their capital gain up to the $500,000 lifetime limit. However, individuals under 55-years-old must contribute any money from the disposal of an asset to a complying superannuation fund
Small Business Rollover Relief Small businesses can automatically defer paying tax for two years. If you acquire a replacement asset during this time, you can defer this payment further.

3. Goods and Services Tax

When you restructure your business, if you dispose or sell certain assets, you may need to pay CGT. However, there are some exceptions, including if it qualifies as a ‘supply of a going concern’.

A supply of a going concern is when the person selling the asset provides everything necessary to allow the business to continue operating. The kind of asset sale is GST free meaning that the seller does not need to pay GST when they are selling it.

4. Bonus Issues vs Share Split

What is a Share Split?

A share split occurs when a company increases the number of shares issued. Share splits often take place before additional investments are made in the company. If this occurs, every shareholder will receive additional shares but the overall value of the company does not change. However, you will not need to pay CGT.

What is a Bonus Issue?

A bonus issue occurs when a company provides bonus shares in proportion to the number of shares a shareholder has. You may have to pay CGT on these bonus shares.

For example, Bob acquired 1000 shares at $1 each. Bob was then issued with 1000 bonus shares. The cost base has reduced from $1 per share to $0.5 per share. This will be important when calculating the gain or loss after disposing of the shares.

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Key Takeaways

If you have outgrown your original business structure and there is a more appropriate business structure to suit your goals and plans, you may wish to consider restructuring. As such, it is important to assess the tax consequences such as whether you will need to pay Capital Gains Tax. When you are in the process of determining how to restructure, consider the concessions that you may be able to access. After assessing the various restructuring options, you will be in a position to weigh the upfront tax cost (if any) against the ongoing commercial and tax benefits of the proposed structure.

If you have any questions about restructuring your business, you can contact LegalVision’s taxation lawyers on 1300 544 755 or fill out the form on this page.

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