Facts
Your client operates a business in a discretionary Trust T. Trust T has made a family trust election (FTE). The eventual end to the grand-fathering of the sub-trust arrangement means making principal repayments under Division 7A will push your client into a higher marginal rate of tax. The tax implication is particularly impactful as the business requires significant working capital. Your client wishes to restructure to a trading company C so that the working capital can be retained at the corporate tax rate.
Question
Scenario 1 - if Company C is wholly owned by a different discretionary Trust X – can CGT rollover apply? Scenario 2 - if Company C is wholly owned by Trust T – can CGT rollover apply?
Answer
Scenario 1 – No. Scenario 2 – Yes.
Tax Tip
Scenario 1 No CGT rollover provisions apply in this scenario. It is important to note that the small business restructures rollover, contained in subdivision 328-G ITAA 1997, does not apply. This is because the facts fail the ultimate economic ownership requirements in respect of discretionary trusts – per section 328-440 ITAA 1997. In particular, section 328-440(b)(ii) requires that: just after the transaction takes effect, the asset is included in the property of a non-fixed trust that is a family trust In this scenario, the asset, being the business, is included in the property of Company C and is not property of Trust T. The property of Trust T are shares in Company C but not the business itself. Therefore, section 328-440(b)(ii) is not satisfied. The fact Trust T has made a FTE does not mean that 328-440(b)(ii) is satisfied. Scenario 2 Note, the facts in this scenario also fail section 328-440(b)(ii) for the same reasons as scenario 1. However, CGT rollover applies in this scenario because of the application of a different CGT rollover provision, being subdivision 122-A ITAA 1997 (about disposal or creation of assets by an individual or trustee to a wholly-owned company). Stamp duty consideration It is important to consider your relevant state’s stamp duty laws as there is a transfer of a business asset from Trust T to Company C. We understand some states have abolished stamp duty on business transfers and other states have specific exemptions that may, or may not, apply. If you would like to receive up to date tax tips directly to your email, subscribe below.
Comments