Tax Restructuring Using

1 Tax Restructuring Using CGT Rollovers & Small Business CGT Concessions Jacci Mandersloot Director MC Tax Advisors 1. Introduction Why restructure & what rollovers are available? Common Capital Gains Tax rollovers Small Business Restructure Rollover Small Business CGT Concessions Case Studies Why may a client need to restructure? Improve tax efficiency or flexibility - distribution of income, access to 50% CGT. discount, access to R&D or innovation concessions, Division 7A management Expanding business or investment interests Want to merge or introduce new equity Risk concerns - asset protection Succession planning / Estate planning Exit plans / long-term goals Meeting industry or regulatory requirements 2. Capital gains tax and other rollovers Types of CGT rollovers: Division 122- transfer or creation of assets in wholly-owned company Division 124- replacement asset rollovers Division 125 demerger relief Division 126 same asset rollovers Division 615 business restructures Can provide deferral of capital gain tax and balancing charges on disposal or creation of assets.

2 As a general rule, the original cost base of the relevant asset is retained, as well as the acquisition date (for limited purposes, pre-CGT status and 50% CGT. discount). This can apply differently under each rollover. Other rollovers: Division 328- G small business restructure rollover Division 152 small business rollover Rollovers to corporate structure Subdivisions 122-A/122-B. Disposal by individual / trust / partnership of a single CGT asset, or all the assets of a business, to a company in which they own all the shares. Key requirements: Only consideration for the transfer can be the issue of shares in the acquiring company and an assumption of liabilities in respect of the assets transferred. Note: ATOID 2004/94 - this requirement also satisfied if no consideration provided Market value of shares issued must equal market value of assets transferred less any liabilities assumed. Depreciable assets can also be rolled over under a whole business rollover, but not trading stock.

3 3. Rollovers to corporate structure Subdivisions 122-A/122-B. Watchouts If don't transfer all business assets must use single asset rollovers and meet requirements on an asset by asset basis. Assumption of liabilities capped at cost base of assets being transferred. (Trade debtors from the provision of services may have no cost base - ATOID 2005/211). No stamp duty reconstruction relief Restart acquisition date for small business 15-year exemption When you might use it: Corporatise a structure for external investment or to meet regulatory requirements Create a consolidated group and separate assets or business lines Management of Division 7A. Subdivisions 122-A/122-B Case Study Your client conducts a manufacturing business in a discretionary trust, X Trust. The client wants to build up the business and there is the potential for third-party investment. X Trust has significant UPEs owed to individuals and corporate beneficiaries and is struggling to manage its Division 7A requirements due to the need to retain cash flow for the business.

4 The business assets include valuable internally generated goodwill, as well as cash, trade debtors and creditors, manufacturing equipment and trading stock. You recommend they move to a corporate structure by utilising a subdivision 122-A. rollover 4. Rollovers to corporate structure Subdivisions 122-A/122-B. Assets to be transferred - All business assets Asset/Liability Cost/WDV Market value Cash 200,000 200,000. Trade debtors 500,000 500,000. Trading stock 1,000,000 1,000,000. Goodwill 0 3,000,000. Plant & Equipment 800,000 1,000,000. Liabilities / employee entitlements (1,000,000) (1,000,000). Loan (refinanced from UPE) (1,500,000) (1,500,000). Net assets Nil 3,200,000. Rollovers to corporate structure Subdivisions 122-A/122-B. Rollover assets to X Co Outcomes: under 122-A and No immediate income tax section 40-340. Trust implications for eligible assets X. Assets retain original cost base & date of acquisition 100%.

5 Cost base of shares based on underlying assets & liabilities is nominal Beneficiary X Co Co Transfer of UPEs/Loans from Trust to X Co no Division 7A. Loan Loan Structure facilitates third-party investment (Note: Applies to all trust types, including unit trust). 5. Division 615 Business restructures Interposition of a holding company between shareholders and a company/unit trust OR. Amalgamation of multiple companies /unit trusts with same equityholding under a single holding company Key requirements: Original company/unit trust must have more than one equityholder Original equityholders dispose of their interests and only receive shares in interposed company in return. The percentage of shares received, and their relative market value, must equal that of their original equityholding Interposed company must become sole equityholder of original company/unit trust Original equityholders must own all the shares in the interposed company.

6 Refer Taxation ruling TR 97/18. Division 615 Business restructures Watchouts Can't be used by a company or unit trust with only a single equityholder (look at Using scrip-for-scrip rollover instead). If amalgamating ownership of multiple entities, each entity needs to have identical ownership percentages. Stamp duty corporate reconstruction relief can only apply on a single interposition (relevant for certain land-rich entities). When you might use it: Interpose a holding company to allow retained profits to be moved out of operating companies for asset protection purposes Centralise shareholding of multiple sister entities, and enable tax consolidation 6. Division 615 Business restructures Outcomes: No income tax implications Acquisition date and cost base of interests in subsidiaries held Trust Trust by Holdco based on underlying X Y assets and liabilities Interpose Acquisition date and cost base new holding of shares received in Holdco company HoldCo by Trust X and Trust Y equal to original interests Structure facilitates formation of tax consolidated group Co 1 Co 2 Unit Trust (Note: Trust X and Y must own same percentage of each of Co 1, Co 2 and Unit Trust).

7 Subdivision 124-N - Disposal of assets by unit trust to a company Transfer of assets from a unit trust to a new company with the same equityholders Key requirements: Trust must transfer all assets, other than those it needs to pay its debts CGT Event E4 must be able to apply to all interests in the trust Company has not previously operated, unless it is the trustee of the trust The shareholders must hold the same percentage interest in the new company as they held in the unit trust The unit trust must be vested within 6 months of the transfer of assets Both entities must choose the rollover to apply. Separate rollover applies for unitholder. 7. Subdivision 124-N disposal of assets by unit trust to a company Watchouts: Trusts won't be eligible if they have an interest with only a discretionary income entitlement ( hybrid trusts'). Stamp duty When you might use it: Wish to keep structure simple can corporatise a unit trust without needing to maintain the original entity (in contrast to preceding rollovers).

8 Outcomes: Asset rollover - same tax outcome as whole business rollover under 122-A. Equity rollover same tax outcome as business restructure rollover under 615. Scrip for scrip rollover subdivision 124-M. Company acquires shares in another company in return for the issue of shares in the acquiring company. Can also apply for units or options. Key requirements (company): Acquiring company must become owner of at least 80% of voting shares in target All voting shareholders must be able to participate All shares of same type' ( the same share class) must be able to participate on the same terms Replacement shares must be issued in acquirer or its ultimate holding company If non-arm's length / both entities < 300 members - replacement interests must have the same market value and same kind of rights and obligations 8. Scrip for scrip rollover Subdivision 124-M. Watchouts: May need valuations of the acquiring company and its target to ensure the replacement shares issued have the same market value as the shares acquired.

9 If receive part shares and part scrip, rollover only applies proportionately Does not apply to pre-CGT shares or if another rollover applies When you might use it: Third party takeover or merger of two businesses Interpose a holding company where ineligible for Div 615 as only one shareholder Outcomes: Original shareholder transfers cost base to new shares to extent of rollover Tests apply to determine if acquiring company obtains uplift in cost base, otherwise also adopts cost base of original shares Subdivision 328-G Small business restructure rollover Allows assets to be transferred from one structure to a more appropriate structure. Tax relief extends to capital assets, trading stock, revenue assets and Division 7A. Key requirements: Must be a small business entity' aggregated business turnover <= $10m Transferred assets must be active' (refer small business CGT concessions). This does not extend to shares in an active company or trust.

10 Restructure must be genuine'. Individual with the ultimate economic ownership' of the business must remain the same. 9. Subdivision 328-G Small business restructure rollover Genuine restructure - Guidance in LCR 2016 /3. Undertaken mainly for commercial purposes rather than unduly tax driven. Likely structure to have adopted if had received appropriate advice on establishment. Not genuine if to prepare for sale or for succession planning purposes. Safe-harbour rule if no change in ultimate economic ownership and business use of asset maintained for 3 years. Ultimate economic ownership Must not change the individual/s share of ultimate economic ownership of the assets. This is traced through a partnership, company or trust. Alternative test if transferor and/or transferee is a non-fixed trust that has made a Family Trust Election. Every individual with ultimate economic ownership of the assets before and after the transfer must be a member of the Family Group.