Australia: Tax time! New tax laws for franchisors to keep in mind

Last Updated: 24 April 2017
Article by Andrew Spalding and Adam Smith

Most Read Contributor in Australia, April 2017

A new financial year often brings with it change to our tax laws – and 2016 is no exception. On 1 July a raft of changes were made, both at a State and Federal level, to a variety of tax laws. In this article, we consider some of the key tax changes that are likely to impact franchise networks.

Small Business Restructure Rollover

The Tax Laws Amendment (Small Business Restructure Rollover) Act 2016 (Cth) was passed by Federal Parliament. The new legislation provides significant flexibility for small businesses to restructure their business without the obstacle of paying income tax, effective 1 July 2016.

This legislation forms part of the federal Government's small businesses tax package which was announced in the previous Budget. Other Budget measures which were part of that package include the immediate deductibility of certain expenses, FBT benefits, employee share scheme reforms and a cut to the tax rate applying to small businesses.

What is the impact of the rollover?

A small business owner may now:

  • defer gains or losses on a transfer of business assets to another entity; and
  • obtain a rollover for gains and losses arising from the transfer of active assets that are CGT (capital gains tax) assets, trading stock, revenue assets or depreciating assets between entities as part of a genuine restructure of an ongoing business.

These rules are in addition to the existing CGT rollover rules which all businesses can access.

Who can benefit from the rollover?

To be eligible for the roll-over, each party to the transfer must be either a "small business entity" or a relevant related party. Broadly, an entity is a "small business entity" if it carries on a business and the combined annual turnover of the entity, and other entities that are affiliated or connected with it, is less than $2 million. Importantly, the new rules extend to the restructure of discretionary trusts.

Businesses should always seek professional advice before restructuring their business as per the rollover, however this change is certainly something to consider if your business is a "small business" and you are considering some form of restructure.

Abolition of some NSW duties

On and from 1 July 2016, mortgage duty, marketable securities duty and transfer duty on non-real property business assets was abolished in New South Wales. These changes bring NSW into line with most of the other States and Territories of Australia.

Summary of changes

Amounts secured by a mortgage that is executed on or after 1 July 2016 will not be liable to duty. NSW was the last remaining Australian jurisdiction to charge mortgage duty.

The following types of property ceased to be subject to duty if transferred pursuant to an agreement entered into on or after 1 July 2016:

  • a 'business asset', which is specifically defined as the goodwill of a NSW business, the intellectual property of a NSW business, or a statutory licence or permission under a Commonwealth law if the right is exercised in NSW;
  • a statutory licence or permission under a NSW law (eg a tax licence); and
  • a gaming machine entitlement within the meaning of the Gaming Machines Act 2001 (NSW).

NSW marketable securities duty was abolished for agreements entered into on or after 1 July 2016 to transfer shares in a NSW company or units in a NSW unit trust scheme.

What is the impact of the change?

The abolition of mortgage duty means that finance can be obtained without the added cost of mortgage duty.

The abolition of NSW marketable securities duty will also reduce the cost of buying and selling NSW companies and NSW unit trusts (but such transactions will still be subject to the landholder duty rules).

The biggest change is the abolition of NSW duty on the transfer of 'business assets', being primarily goodwill and intellectual property that is attributable to NSW. This will significantly reduce the amount of duty that is payable on the sale of NSW businesses. Generally, for contracts entered into on or after 1 July 2016, NSW duty will only be imposed on land and interests in land in NSW (including leasehold interests and fixtures), and certain goods transferred as part of an arrangement concerning land in NSW.

Stamp duty law are complicated and the above is only a summary of the changes. It is always important to get specific, professional tax advice about the duty implications of a potential transaction. We recommend obtaining such advice early in the transaction so that you are well aware of the tax implications of the transaction and can consider that advice accordingly.

New foreign resident capital gains tax withholding rules

If you enter into a sale and purchase agreement with a foreign vendor on or after 1 July 2016 you need to consider whether the new foreign resident capital gains withholding payment rules (New Withholding Rules) will apply.

Summary of New Withholding Rules

The New Withholding Rules apply where the vendor is a foreign resident (but can also apply in some circumstances where the vendor is an Australian resident).

Broadly, these rules require a purchaser to withhold and remit to the ATO 10 per cent of the gross purchase price on the:

  1. acquisition of a "Taxable Australian Real Property" (TARP) which is Australian real property (including a lease) and mining interests (ie. a mining, quarrying or prospecting right if the minerals, petroleum or quarry materials are situated in Australia) with a market value of $2 million or more, if the vendor does not provide to the purchaser on or before settlement a valid clearance certificate obtained from the ATO;
  2. acquisition of shares in a company, or units in a unit trust, where:
    1. the interest that the vendor has in the company or the unit trust is an "indirect Australian real property interest" (IARPI) (ie. the vendor together with its associates has a 10 per cent or more interest and 50 per cent or more of the market value of assets of the company or unit trust are TARP); and
    2. the vendor does not provide a written declaration that:
      • the vendor is an Australian tax resident; or
      • the vendor's interest it is disposing of is not an IARPI; and

    the purchaser does not know this declaration to be false; and

  1. the grant or transfer of a call option to acquire TARP or an IARPI where the grantor or transferor does not provide a written declaration referred to in paragraph (2)(b) above.

What is the impact of the new rules?

If you are looking to enter into any form of transaction referred to above, you need to consider the New Withholding Rules. In a franchising context, the most relevant situation is likely to be where a franchisor seeks to acquire assets from a foreign vendor. While there are some exceptions to the rules, franchisors should be cognisant of the rules if dealing with any foreign vendors.

The changes set out above are not all of the tax changes that came into effect on 1 July. However, these are some of the key changes that are likely to impact on franchisors and their networks.

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