Five big opportunities for the new small business CGT rollover

Last week's article pointed out a number of big issues (largely negative) about the proposed small business rollover in Subdiv 328-G. However, it's not all doom and gloom: here are five opportunities that are now provided by the new proposed rollover relief.

An opening caveat

Firstly of course all of this comes with a caveat if the taxpayer is in a position to use the new rollover then they can already access the relief available under Div 152 to largely or totally wipe out any capital gains tax arising in respect of a disposal. Using Div 152 as a "rollover" to uplift a cost base to near $6m (and at the same time put some money into superannuation) is already a widely used and effective structuring tactic.

Assuming however that a taxpayer wishes to retain the pre-CGT status of an asset, cannot fund any cash payment at all, or cannot effectively use the concessions (for whatever reason, possibly including having already contributed money into a super fund and having hit its $500,000 retirement limit (or the non-concessional contribution lifetime cap) then here are five potential opportunities that are offered by the new rollover.

Opportunity 1 ‒ no more double shuffles with livestock

A taxpayer can move trading stock into a new entity without the hassle of using a "double shuffle" across commonly owned partnerships (refer section 70-100).

Opportunity 2 ‒ don’t worry about the L series events!

A taxpayer could shift assets (or even a group member) from one tax consolidated group to another tax consolidated group (where there is common ownership of both groups) without the complex calculations required where there is an exiting subsidiary or on acquisition. (Assuming of course that some consolidation relief is included in the final legislative package. Otherwise this could be more of an issue than an opportunity).

Opportunity 3 ‒ trust cloning and annual restructuring out of cash (for asset protection reasons)

Trust cloning is once again a real option ‒ and this includes possible stamp duty relief depending on the situs and nature of the assets transferred from one trust to another trust. What’s more, you don’t even need to worry about all the fiddly requirements like vesting date and settlor lining up.

Of course, assuming that cash is a "CGT asset" (refer paragraph 58 of Taxation Ruling TR 2004/18), it might instead be possible for a discretionary trust to simply transfer its cash CGT asset tax free to individuals via annual use of the rollover. Presumably the transferee would not have the trust's cost base in the cash so it is unlikely that any gain would arise on the disposal (ie. use) of the cash. Even if there is a low cost base for the cash, it might then be possible to hold onto the cash for such time as to crystallise the Div 115 discount in respect of any future capital gain that arose when a CGT event applied.

Care would need to be taken to ensure it is truly cash being physically dealt with rather than a chose in action debt.

Opportunity 4 ‒ two-stage restructuring

With the addition of an ability to roll assets into a discretionary trust, it is now open to a sole trader to transfer their business to a wholly owned company (either under a 122-A or the small business rollover) and then the individual can use the small business rollover to transfer the shares in that company into a discretionary trust.

A discretionary trust owning shares in a trading entity is a fairly effective "basic" structuring opportunity, and it’s convenient to have that option available without significant restructuring cost.

Opportunity 5 ‒ from one into many

As foreshadowed in last week's article it might be quite possible for an existing discretionary trust to split a number of its trust assets into multiple bundles to separate trusts (or to individuals who could then transfer onto other discretionary trusts in a two- step process).

This could have the effect, especially after a few years had passed, of breaking up a business nearing the $6m threshold into a number of smaller sub-businesses each of which might well be able to access the small business CGT concessions in the future.

Hopefully there is some food for thought in all of this. It remains to be seen what final form the legislation will take after consultation. Some or all of these opportunities may prove to be mere wishful thinking at this stage.

Thanks to Rosalie Cattermole, Senior Associate at Hopgood Ganim for her comments on a draft of this article.

This article was first published in Thomson Reuters Weekly Tax Bulletin, Issue 49, 20 November 2015