Posted on June 7, 2017 by Christabelle Harris
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:
- 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’
- The rollover must be part of a “genuine restructure” (as opposed to an artificial or tax-driven scheme)
- There must not be any change to the ultimate economic ownership of the asset transferred
- The asset to be transferred is an active asset at the time of transfer
- The transferor, transferee and ultimate owners of the assets are required to be Australian tax residents
- A transferee cannot be an exempt entity or a complying superannuation entity; and
- 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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Posted on by Christabelle Harris
In general, your main residence (your home) is exempt from Capital Gains Tax (CGT). There are some questions however which clients must consider when selling their single largest asset.
When is the disposal of a ‘dwelling’ exempt from CGT?
The disposal of a dwelling is exempt from CGT if you’re an individual and the dwelling was your main residence during your ‘ownership period’. When considering whether a dwelling is your main residence, the following factors may be relevant:
- The length of time you live there – there is no minimum time a person has to live in a home before it is considered to be their main residence;
- Whether you’re family lives there with you;
- Whether you have moved your personal belongings into the home;
- The address to which your mail is delivered;
- Your address on the electoral roll;
- The connection of services (for example, phone, gas or electricity).
What if the dwelling was my main residence for only part of the time?
If a CGT event happens to a dwelling you acquired on or after 20 September 1985, and that dwelling was not your main residence for the whole time you owned it, you receive only a partial exemption. This partial exemption is calculated by dividing the number of days in your ownership period when the dwelling was not your main residence by the total number of days the dwelling was owned.
For example:
Andrew bought a house on one hectare of land under a contract that was settled on 1 July 1990 and moved in immediately. On 1 July 1993, he moved out and began to rent out the house. A contract for the sale of the house was signed on 1 July 2015 and settled on 31 August 2015 and Andrew made a capital gain of $100,000. As he is entitled to a partial exemption, Andrew’s taxable capital gain is as follows:
$100,000 x 8,098/9,194 = $88,079
If you start using part or all of your main residence to produce income for the first time after 20 August 1996, a special rule affects the way you calculate your capital gain or capital loss. In this case, you are taken to have acquired the dwelling at its market value at the time you first used it to produce income.
For example:
Erin purchased a home in July 2000 for $280,000. The home was her main residence until she moved into a new home on 1 August 2003. On 2 August 2003, she commenced to rent out the old home. At that time, the market value of the old home was $450,000. On 14 April 2016, Erin sold the old home for $496,000. Erin is taken to have acquired the old home for $450,000 on 2 August 2003 and calculates her capital gain to be $46,000.
Can I move out of my main residence but return later and still call it my main residence?
For the purposes of capital gains tax and the main residence exemption it is important to note that when you choose to treat a dwelling as your main residence after you move out you cannot treat any other dwelling as your main residence for that same period of time.
If this dwelling is then used to produce income (for example, as an investment property) you can choose to treat it as your main residence for up to six years after you cease living in it.
You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence. This means that if you move back into the property before the first six-year period of absence has expired, then the six-year rule starts again.
The ATO does not specify a minimum length of time you are required to live in the dwelling to re-establish the property as your main residence in order to reset the six-year absence rule. Determining if a dwelling is your main residence is always going to be based on the individual circumstances and facts of each case
Do CGT exemptions apply to adjacent land?
A CGT exemption will apply for up to 2 hectares, including land under the dwelling. The adjacent land must be used primarily for private or domestic purposes in association with the dwelling. It must be noted that the land does not have to directly adjoin the dwelling but it must be disposed under the same CGT event as the dwelling. Any land that is beyond 2 hectares will not be exempt from CGT.
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