Sustainability

Organisations are entrusted with significant power and have the ability to have a major effect on the economy, community and the environment. As such they need to be accountable for their actions, and reporting is one method for discharging this accountability.

However, traditional financial reporting is not designed to communicate to a broad range of users and specifically focuses on the shareholders and debt-holders, which are only two out of numerous stakeholders to an organisation. As such, these reports are commonly criticised as being narrow in scope in that they emphasise historical accounting profit and do not tell the full extent of the organisations broader impacts.

It now common for organisations to produce their sustainability progress as well as their financial results in a report called an annual report. A number of stock exchanges throughout the world, including Johannesburg, Singapore, Kuala Lumpur & Sao Paulo require listed companies to report on their sustainability issues or explain why they have omitted this information. In Australia it is not a requirement for listed companies to report on their sustainability issues but with increasing customer and community demands that want organisations to be liable for their actions on how they obtain their profits, many do produce an annual report.

There are three key components to producing a sustainability report and that is environmental, social and economic sustainability.

Environmental sustainability involves making responsible decisions and taking actions that are in the interests of protecting the natural world with particular emphasis on preserving the environment to support human life. Examples of environmental sustainability include;

• Climate Change: The change in global and regional climate patterns is directly linked with emission of carbon dioxide and other greenhouse gases resulting from the use of fossil fuels.
• Waste: Waste is a by-product of production that cannot be reprocessed, recovered or purified. As global commercial activities escalates, more waste is produced and discarded or released into the environment in a manner that can cause harmful change.
• Biodiversity: Ecosystems are complex and interdependent on each other, so when a business affects one element of an ecosystem, this can result in profound changes to other parts of that system.

Social sustainability can be understood as the ability of a system to continue to function at a reasonable level of social well-being. An organisation is socially sustainable when its activities not only meet the needs of its current stakeholders but also support the ability of future generations to maintain healthy communities. Examples of social sustainability include;

• Ethical Trading: Unethical trading practises may include corruption, anti-competitive behaviour, bribery, aggressive or predatory pricing, unethical marketing or unfair uses of power in markets.
• Supply Chain Management: Many multinational organisations have extensive and complex supply chains for their products. There are increasing demands for corporations to be more accountable, not only for their own activities, but also for those of the companies that supply them.

Economic sustainability is an organisation using available resources efficiently and responsibly so the organisation can continue to function over a number of years at a given level of activity. The impression is to promote the use of those resources in a way that provides long term benefits. Examples of economic sustainability include;

• Long-term viability of businesses: Reporting and financial systems are geared more towards short term. This leads to biased decision-making and a failure to manage businesses for the longer term. This has generated demands for more attention to be paid to the performance and activities of businesses in the long term.
• Stability of the economic system: The Global Financial Crisis showed how complex and interconnected our economic systems are. Economic systems are an integral part of human communities and breakdowns can have widespread consequences. Corporate behaviour can play a large role in creating a stable economic system.

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Small Business Restructures

The Tax Laws Amendment (Small Business Restructure Roll-Over) Act 2016 received royal assent on the 8th March 2016. From 1st July 2016 the legislation allows Small Businesses to transfer active assets, including CGT assets, trading stock, revenue and depreciating assets, to one or more other entities without incurring income tax liabilities.

Broadly, the roll-over can apply where a small business entity transfers an active asset of the business to another small business entity as part of a “genuine” business restructure.

To be eligible for the Small Business Restructure roll-over the following criteria must be met:

1. The transferor and transferee are required to be:
   • A ‘small business entity’ (an entity with an aggregated turnover of less than ten million); or
   • An entity who is an affiliate of, or connected with, a ‘small business entity’
2. The rollover must be part of a “genuine restructure” (as opposed to an artificial or tax-driven scheme)
3. There must not be any change to the ultimate economic ownership of the asset transferred
4. The asset to be transferred is an active asset at the time of transfer
5. The transferor, transferee and ultimate owners of the assets are required to be Australian tax residents
6. A transferee cannot be an exempt entity or a complying superannuation entity; and
7. The transferor is required to choose to apply the roll-over.

After the roll-over, any gains that would have otherwise eventuated by the transferor are disregarded. The transferee is taken to have acquired the assets ‘roll-over cost’, which generally is the cost base of the asset, however this can vary depending on the type of asset acquired.

The “genuine restructure” criteria will be satisfied where three years after the roll-over; there is no change in ultimate economic ownership of any of the significant assets of the business that were transferred, the assets continue to be active assets and there is no significant or material use of those significant assets for private purposes.

Please be aware that there are other considerations when considering a change in business structure and transfer of assets, including Duty and GST that may be applicable to the transaction.

This legislation provides opportunities for clients who may have ‘out grown’ their initial business structure. It will significantly reduce costs associated with changing structures and transferring assets to new entities. This allows business owners a chance to rectify any past structure setups where proper advice was not sought. However, clients must consider their eligibility carefully to ensure the transaction will be deemed as part of a ‘genuine restructure’, not one that is just an arrangement to ensure a more favorable tax outcome on the potential sale of CGT assets.

Please contact our office if you would like further information on the legislation and whether you may benefit from the roll-over relief.

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