Australia: Separating business and personal property, and the application of the CGT roll-overs

Business owners who undertake arrangements to separate their business and personal assets may be able to avail themselves of CGT roll-overs to disregard or defer the capital gains tax that would otherwise arise. Previously, CGT relief was available if the business owner transferred their business assets to a company. Under the recently introduced small business restructure roll-over, however, business owners can now transfer their business assets to a trust without paying CGT, provided the business has an aggregate annual turnover of less than $2 million.

Importance of separating business and personal property

It is prudent to keep business and personal assets separate for a range of different reasons, including for asset protection and tax mitigation purposes. If business assets are held in your name, it is more likely that personal assets (including assets owned jointly) may be used to recover debts belonging to your business if you are unable to repay them. On the other hand, holding business assets in a separate entity can reduce the exposure of your personal assets to creditors' claims. If you are unsure whether your assets are adequately protected, consider our Asset Protection Checklist at this link

There are also many tax advantages of keeping business and personal assets apart. Business owners, for instance, can benefit from the lower tax rates applying to different asset holding structures such as companies or trusts, and tax incentives and concessions may be available including the Research & Development tax offset and Early Stage Innovation Company investor tax incentives, which are only available to companies.

On the other hand, the 50% CGT discount for assets owned for more than one year is only available if the assets are not held in a company. If such assets are not used as part of the business, the CGT small business concessions will not apply either. There may also be adverse tax consequences if personal use assets are held by a company. Division 7A of the Income Tax Assessment Act 1997 (ITAA97), for instance, can operate to treat the provision of assets of a private company to a shareholder (or an associate) for personal use or enjoyment as a receipt of income for tax purposes. These assets would normally not be subject to tax.

Finally, it is more difficult to work out an individual's tax return if business and personal assets are mixed. This may lead to wrangles with the tax office if it is later determined that a person has not been correctly reporting their tax obligations. There are therefore good reasons for keeping personal assets and the assets of a business separate.

How to separate business and personal property

The most effective method for separating business assets from personal assets is by setting up an entity such as a company or a trust. The assets of the business are then transferred to that entity. The entity has a separate legal identity to the owner of the business and therefore creates a buffer between the assets of the business and the personal assets of the owner. Whilst the process of setting up and maintaining a company may involve increased administrative and compliance costs, the benefits may be considerable later down the track.

Application of the CGT roll-over provisions

Individuals who undertake arrangements to separate their business and personal assets would ordinarily face adverse CGT consequences. However, there are a number of CGT roll-over provisions that may be available to allow business owners to defer or disregard the amount of CGT arising.

One example is the recently introduced small business restructure roll-over under Div 328-G of the ITAA97. Under this roll-over, if a person transfers business assets to a company, trust or partnership, they may be able to disregard any capital gains or losses that would otherwise arise as a consequence of the transaction. The pre-CGT status of any assets is also preserved.

Be aware, however, that certain conditions must be satisfied before it can be determined that the roll-over applies, including the requirement that the business has an aggregate annual turnover of less than $2 million. If the business has an aggregate annual turnover of more than $2 million, the business owner may instead elect to apply the Div 122-A roll-over, which provides CGT relief where CGT assets of a business are transferred to a company.

To illustrate the application of these roll-overs, assume a person runs a business as a sole trader. They decide to incorporate the business to take advantage of the 30% tax rate applying to companies and to shrink the pool of assets that may be exposed to creditors' claims. Accordingly, they dispose of all the business assets to a company and then become the sole shareholder of the company. The business owner may elect to apply the roll-over in Div 328-G or Div 122-A so that they do not have to pay capital gains tax on the transfer of assets to the company.

Usefully, legal and other costs relating to the transfer of assets and company incorporation may be deductible.

It is important to note that other taxes such as stamp duty and GST may apply where assets are transferred, even though the business owner is both the transferor and the owner of the transferee. The "sale of a going concern" GST exemption may be available; however, the business owner's intention to apply the exemption must be stated in a written agreement prior to the transaction.

If your business does not meet the criteria under the above restructuring roll-over provisions, there may be other CGT concessions available that Pointon Partners can discuss with you.

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Jonathan B Slade
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