Small Business Restructuring
Have you setup your business as a sole trader because it was the cheapest option available at the time? Has your business grown and you are now wishing that you setup as a company or trust? If you would like to know more about restructuring read on!
The good news is that for restructures on or after the 1st July 2016, the has ATO introduced roll-over relief measures to make it easier for small businesses to change the legal structure of their business.
What are some of the benefits of restructuring to a company or trust?
A company or a trust with a corporate beneficiary can offer you much better asset protection through limited liability. When you trade as a sole trader, a creditor may be able to access your personal assets to satisfy the debt, whereas when you operate through a company in most circumstances the liability is limited to the unpaid capital of the shares (usually $0). However, if the directors of a company trade during insolvency or sign director guarantees they can become personally liable. Also, directors can be personally liable for unpaid superannuation guarantee charge and PAYG withholding.
If you need to grow your business, a company can encourage investment by offering shares in the company to third parties. A sole trader is limited to raising additional capital from lenders.
The company tax rate for small businesses is currently 27.5%. If you operate through a trust, the beneficiaries are taxed at their personal marginal tax rates (or company tax rate of 30% for a corporate beneficiary). Sole traders pay tax depending on their personal marginal tax rate (they may be eligible for small business tax offset which can reduce the tax you pay by up to $1000).
A company enjoys “perpetual succession”. As a company is a distinct legal entity it can survive the death of its members and directors. Trusts on the other hand, usually have a specific life – usually the statutory period of 80 years. A business operated by a sole trader does not enjoy “perpetual succession”. When the sole trader dies, the assets of the business are dealt with under the sole trader’s estate plan.
What type of assets are eligible for the subdivision 328-G roll-over relief?
Am I eligible for the ATO small business restructure rollover relief?
You need to be able to satisfy the conditions set out subdivision 328-430 as follows:
The transfer of the asset by the transferor is, or is part of a genuine restructure
The transferee and transferor must satisfy the Small Business Entity (“SBE’) requirement
The transfer does not materially affect which individual, or individuals, have the ultimate economic ownership of the asset and (if relevant) each individual’s hare of that ultimate economic ownership
The asset satisfies the active asset test at the time of the transfer
Both the transferee and transferor must satisfy the residency requirement
The transferee and transferor choose to apply the roll-over to the asset transferred
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