A recent public ruling from the Office of State Revenue (Public Ruling DA000.16.1 Administrative Arrangement – Duty Exemptions for Eligible Small Business Reconstructions) provides a significant business restructure rollover opportunity for businesses in Queensland wishing to move into a company structure.
In a nutshell, the Public Ruling provides for an exemption for transfer duty that would ordinarily be payable on a transfer of small business property to a company by a small business entity. Such small business entities include discretionary trusts, partnerships and sole traders into companies. For reasons unknown, it does not include unit trusts.
Note that the transfer duty exemption only works one way – transferring business assets into a company and not out of a company into an alternative structure (or another company).
This exemption will be of particular interest to clients in structures that they may have outgrown or which may no longer be suitable for them. For example, where taxation or investment issues arise as a result of a business being held within a discretionary trust structure.
Many such businesses may previously have explored the possibility of a restructure into an incorporated entity with their advisors but may have been put off by the Capital Gains Tax (CGT) or transfer duty consequences of doing so. The exemption partially addresses these issues.
A transfer is eligible if it meets certain criteria relating to the property, transferor and transferee:
- Property – the property to be transferred must be “small business property”, which is defined as property:
- that is actively used by a small business entity to carry on that entity's business;
- the dutiable value of which must not exceed $10 million.
- Transferor – the transferor must be a ‘small business entity', which is defined as an entity that:
- holds small business property (as defined above);
- carries on a business that is conducted from a place in Queensland or the conduct of which consists of the supply of land money credit or goods to Queensland customers; and
- has an annual turnover of not more than $5 million.
- Transferee – The transferee must be an unlisted “cleanskin” company and never have owned any assets, had any liabilities, been a party to any agreement or issued or sold any shares or rights relating to shares. Newly incorporated or dormant shelf companies are suitable for this purpose.
In order to receive the benefit of the exemption, there needs to be shared underlying ownership of the small business entity and the transferee company. The following examples illustrate how such interests are to be determined:
- two equal partners (ie, holding a 50% interest in the partnership) would need to each hold 50% of the shares in the company to benefit wholly from the exemption;
- default beneficiaries in a discretionary trust are deemed to hold interests in that trust in equal shares. If there were, for example, three default beneficiaries, each would need to hold 33.3% of the shares in the transferee company.
Where the underlying interests are different then duty will be payable to the extent of the difference (for example, if the shareholdings in the first example were 45% and 55% then duty would be payable only on the interest that has increased, being 5%.
There are a number of examples in the Public Ruling that illustrate its operation, which can be found here.
Interaction with Small Business Restructure Rollover
The exemption is likely to permit better access to restructure opportunities, in particular, the small business restructure rollover, which provides an exemption to incurring CGT on transactions conducted for corporate reconstruction purposes and in relation to which there is a significant overlap in the criteria for the duty exemption.
In many cases, such reconstructions may now be able to be undertaken by eligible Queensland small businesses at no tax or duty costs.
The eligibility requirements for the small business restructure rollover are as follows:
- Aggregated turnover of the transferor is less than $10 million;
- Each party is either a small business entity or affiliated, connected or in partnership with a small business entity;
- The assets being transferred are active assets; and
- There must be no change to the ultimate economic ownership. For the purposes of discretionary trusts, this is determined by which individuals, in a practical sense, economically benefit from the assets of the trust before and after the transfer.
Even where an applicable CGT exemption is not available, there may still be opportunities, particularly where business turnover has been significantly impacted in the current economic climate, to restructure at a significantly reduced tax and duty cost than may have been the case in previous years.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.