On 9 October 2020, the Commissioner of State Revenue (the Commissioner) released Public Ruling DA000.16.1 (the Public Ruling) which introduces an administrative arrangement that provides an exemption from duty on certain small business restructures. Effectively, the exemption set out in the Public Ruling assist typical ‘mum and dad businesses' currently trading through sole traders, partnerships or discretionary trusts to corporatise their structures (which may assist with the expansion of a business, attracting investment, succession planning or simply to gain access to a broader range of tax benefits moving forward, including the new small business corporate tax rate of 26%).
Below, we provide a brief overview of the exemptions outlined in the Public Ruling and their applications.
While the Duties Act 2001 (Qld) (Duties Act) already provides exemptions for some corporate restructures (in particular, see Chapter 10, Part 1 of the Duties Act), those exemptions have historically not been available for structures commonly utilised by small business groups, such as sole traders, partnerships and discretionary trusts and therefore small business restructures were typically liable to pay transfer duty on reorganisation of their entities and assets. However, the recently released Public Ruling provides the Commissioner with power to broaden the exemptions already available for corporate restructures, extending them to provide an exemption from transfer duty for transfers of small business property (including motor vehicles) that are undertaken as part of an eligible restructure of small business entities.
What are small business entities and small business property?
The Public Ruling provides that the following entities are small business entities:
- partnerships, and
- discretionary trusts.
For the exemption to apply, the small business entity must carry on a business in Queensland (i.e. providing goods or services to Queensland customers) and have an annual turnover of less than $5,000,000. While the Public Ruling does not specify the turnover test any further, it is likely that it will be applied for the preceding 12 months to the proposed transfer of small business assets.
Assets will be small business assets where they are actively used to carry on the business of the small business entity. The assets must be directly utilised in the business, and do not include passive investments.
When will the exemption apply?
The exemption will apply when, as part of a small business restructure involving the transfer of small business property, the property is transferred from the small business entity to a newly registered unlisted corporation (or an unlisted corporation that has been dormant since its registration) of which the individual is a shareholder, and where all the partners of the partnership, or all beneficiaries of the discretionary trust, are shareholders of the new company.
Secondly, the Public Ruling imposes a threshold maximum dutiable value of $10,000,000 for the relevant dutiable property being transferred, for the exemption to apply (in accordance with standard dutiable value calculation principles, although the Commissioner may accept book value as dutiable value).
The exemption will apply to the dutiable value of the assets the subject of the transaction to the lesser extent of:
- the individual's interest, partner's partnership interest or beneficiary's trust interest in the property immediately before the transfer, or
- the individual's, partner's or beneficiary's shareholding interest in the newly registered or dormant unlisted company immediately after the transfer.
For example, where assets are being transferred from a partnership with two equal partners, to a newly incorporated company where those partners also take an equal shareholding in the new company, the exemption will apply to reduce the duty liability to nil. However, if the partnership interests, once converted to shareholding interests are not in the same proportions (such as going from a 50/50 partnership interest to a 60/40 shareholding interest), the 60% shareholder will only receive the exemption to the extent of the 50% interest they previously held in the assets when they were assets of the partnerhip.
Further, if an eligible transaction qualifies for an exemption from transfer duty, the same transaction will also qualify for an exemption from vehicle registration duty (if it is applicable).
The exemption introduced in the Public Ruling will apply to transactions entered into on and from 7 September 2020. We would expect legislative appropriate amendments to the Duties Act (with likely retrospective effect back to 7 September 2020) will likely be passed in the coming months.
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.