Estate Planning & Business Structuring - Advantageous Changes

Recent state legislative changes to the Duties Act have extended certain exemptions to apply in a wider set of circumstances.

Federal changes in the tax legislation have implemented small business reforms increasing the opportunities for CGT roll-over relief.

Also, recent state budget announcements have included grants for estate planning.

Duties Changes

Previously

Prior to 1 July 2016 only interests in primary production businesses that were transferred to successive generations by way of gift were exempt from duty. In the event that consideration was paid in relation to such a transfer, transfer duty was applied. This significantly restricted cost effective methods of transferring primary production business assets to successive generations prior to death. In practice, the requirement that the transfer must be by way of gift limited the availability of this exemption.

Now

From 1 July 2016 the Duties and Other Legislation Amendment Act 2016 (“the Act”) has extended the scope of the exemption by removing the requirement for transfers of primary production business assets to be by way of gift.

A primary production business refers to the business of agriculture, pasturage or dairy farming.

The concession will now be available for all transfers (whether by gift or for consideration) where:

• The dutiable property being transferred is either:
  • Land used to carry on a primary production business; and/or
  • Personal property, such as plant and equipment (including livestock) used in a primary production business. However, water allocations are excluded.

Further, if the dutiable property includes residential land located next to the land used for the relevant primary production business the unencumbered value of the residential land will be treated as nil for duty purposes.

• The transferor is a “defined relative” of the transferee. The transferor will be a “defined relative” of the transferee where the transferee is the transferor’s spouse or any of the following people related to the transferor or the transferor’s spouse:
  • Parent;
  • Grand parent;
  • Brother or sister;
  • Nephew or niece;
  • Child or grand child;
  • Aunt or uncle; or
  • The spouse of any of the above people.
• The primary production business utilising the dutiable property is carried on by the relevant defined relative (the transferor) whether alone or with others; and
• The primary production business is intended to be carried on by the transferee whether alone or with others.

The concession may be available for:

1. The direct transfer or agreement for the transfer of the dutiable property;
2. Partnership acquisitions if the partnership carrying on the primary production business is a family partnership;
3. Trust acquisitions if the trust carrying on the primary production business is a family trust;
4. Trust creations if the trust carrying on the primary production business is a family trust.

What should I do?

Primary production families that have succession or estate plans focusing on gifting of relevant business property are encouraged to discuss this issue further with one of our lawyers to investigate whether the extension of the exemption can be utilised to provide more favourable outcomes.

CGT Rollover Relief Changes

Small Business Restructure Rollover Relief

From 1 July 2016, the Income Tax Assessment Act 1997 (Cth) (“ITAA97”) has been extended to provide small businesses with income tax relief where they are restructured.

Object

The legislation provides that the object of Subdivision 328-G of ITAA97 is to facilitate flexibility for owners of small business entities to restructure their businesses and the holding of their business assets while disregarding tax gain and losses that would otherwise arise.

Conditions

Roll-over relief will be available where assets of the transferor are transferred to the transferee(s) and:

1. the transaction is a part of a genuine restructure of an ongoing business;
2. the transferee and transferor(s) are small business entities and are not exempt entities or complying superannuation funds;
3. the transaction does not materially change an individual’s “ultimate economical ownership” of the asset (and if there are more that one individuals – each individual’s share of that ultimate economical ownership);
4. the assets are active assets of the business; and
5. the transferee and transferor(s) elects to apply Subdivision 328-G of ITAA97.

The ATO has recently released LCG 2016/3 (“the Guidelines”) to provide guidance on the issue of a “genuine restructure”. The Guidelines provide examples of circumstances that will results in a genuine restructure (e.g. asset protection, maintaining essential employees, raising new capital and simplifying affairs) and those that will not (e.g. disposal of a business, succession planning and extraction of wealth from a business). The Guidelines also list the following indicia as indicators of a genuine restructure:

• bona fide commercial arrangement undertaken to: facilitate growth, innovation and diversification, adapt to changed conditions, reduce administrative burdens, compliance costs and/or cash flow impediments;
• restructure of the business, opposed to a divestment;
• maintenance of the economic ownership of the business and its assets (in certain circumstances a family trust election may be utilised where the transferee is a discretionary trust); and
• continuity of operations e.g. use of the transferred assets as active assets, employment of key personnel and production, supplies, sales or service.

A safe harbour mechanism applies in relation to the genuine restructure requirement where, for three (3) years following the roll-over:

• there has been no change in the ultimate economical ownership in any of the business’s significant assets (excluding stock);
• the significant assets continue to be active assets; and
• the significant assets are not materially used for private purposes.

Other Considerations

Although the Commissioner of Taxation acknowledges that tax considerations are factors that can be taken into account when considering a restructure, the restructure for the purpose of Subdivision 328-G cannot be artificially or unduly tax driven. The Commissioner may apply the general anti-avoidance provisions found in Part IVA of the Income Tax Assessment Act 1936 (Cth) to a transaction if he considers that the transaction is not for the purpose of a genuine restructure.

The roll-over relief provisions do not extend to stamp duty or GST (however the going concern exemption may be applied in relation to GST).

Finally, where there is no consideration passing between the transferee and the transferor, and the transferor is:

• a company – consideration should be given to the clawback provisions found in the Corporations Act 2001 (Cth);
• an individual – consideration should be given to the clawback provisions found in the Bankruptcy Act 1966 (Cth); and
• a trust – consideration should be given to the terms of the trust to ensure that trust assets can be divested without consideration.

Future Information

Small business owners are encouraged to discuss the potential application of the above roll-over provisions further with one of our lawyers to determine whether a different entity type would be more suited to their business and whether the above provisions would apply to any proposed roll-over.

State Funding – Succession Planning

Recent State Budget announcements confirmed funding has been allocated for grants of up to $2,500.00 for primary producers to obtain advice on Succession Planning. The fine print is yet to be finalised. It is anticipated this will be in place by the end of the year which may provide significant benefits for primary producers. There is also expected to be funds available for financial counselling and mediation for primary producers regarding financial matters and succession planning.

If you are interested in any of the above, please do not hesitate to contact our Estate Planning and Commercial Law divisions at wilson/ryan/grose.