Small Business CGT Concessions opportunities for business

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1 Small Business CGT Concessions opportunities for business AUTUMN 2017 This edition ATO disclosure of tax debts to 3 credit reporting agencies Are your clients at risk of losing their assets 4 if they aren t registering their PPS Leases? Deductibility of commercial 5 website expenditure 6 Events to watch out for... With the limited ability for small businesses to restructure their affairs as they grow or circumstances change, the ability to access the Small Business CGT ( SBCGT ) concessions are an important consideration. The increasing difficulty in complying with tax provisions such as Division 7A has created further incentive to restructure. These concessions can also offer the ability for taxpayers to boost their superannuation balance. It is common for small businesses to have been structured in a manner that, as they expand, are no longer appropriate, whether this be due to lack of asset protection, tax inefficiencies, or difficulty in succession planning. More recently, the increasing difficulty in complying with Division 7A has led many businesses to seek to structure within a corporate environment. However, there is limited ability to remedy this through the various CGT rollovers provided, and many practitioners were disappointed when the highly anticipated small business restructure rollover did little to remedy this. As such, the SBCGT concessions remain the most accessible way in which small business taxpayers can restructure their ownership without adverse tax consequences. An increasing attraction of accessing the rules is also the ability to make superannuation contributions which are not subject to the annual contribution caps. >> continued page 2 Critical Point Network 1

2 Small Business CGT Concessions opportunities for business >> continued from page 1 How may the SBCGT concessions apply on an internal restructure? The SBCGT concessions can still apply where there is no third party purchase involved. If an asset is being sold to a related entity, the vendor will generally be deemed to have received market value consideration for the sale of that asset. If the vendor is able to satisfy the SBCGT requirements, this gain may be eligible for the small business 50% discount, the rollover or the retirement exemption. In order for the 15-year exemption to apply it is generally necessary for the disposal to occur with respect to the retirement of one the controllers of the business. As such, this concession may only be available if a small business owner is transferring their business to the next generation and is, at a minimum, significantly winding back their involvement. What are the superannuation contribution limits? It is expected that the new $100,000 annual non-concessional contributions cap will take effect from 1 July Contributions made from sale proceeds where the retirement or 15-year exemption applies are excluded from this cap and are instead subject to a lifetime CGT cap. The CGT cap amount is $1,415,000 for the 2017 income year. Case study: Restructuring for asset protection / succession planning Angela and Matthew are both over 55 years of age, and have operated a successful business within a discretionary trust for a number of years. The trust also owns the valuable business premises. Their two adult children have become involved in the business and it is expected to expand. They would like to transfer ownership of the business out of the trust to a company owned 50% each by two new discretionary trusts. It is expected this would result in a goodwill capital gain of $4m. This restructure does not qualify for the small business restructure rollover. The trust has retained a substantial portion of its profits each year to reinvest in the business, and has distributions owing to Angela and Matthew as well as to a corporate beneficiary. The distributions to the corporate beneficiary include pre-december 2009 balances, as well as balances under a sub-trust arrangement. Angela has made the maximum non-concessional contributions, but her superannuation fund balance is significantly less than Matthew. The business is valued at $5m. The trust will be able to satisfy the annual turnover test in the SBCGT concessions. What are the tax outcomes under the SBCGT concessions? If the trust were to dispose of the business to a new company for $5m, and the SBCGT concessions applied, this could be taxed as follows: The key outcomes of the restructure are: The ownership of the business has been separated from the building, and can more easily be passed onto the next generation. No income tax is payable on the transfer of the business. The cost base of the goodwill in the hands of the company should be $4m. The trust will be owed $5m by the new company, which can be repaid out of the company s post-tax profits. These funds can be used by the trust to repay its bank borrowings, the distributions owed to the corporate beneficiary, Matthew and Angela, as well as provide additional funding for other purposes. Angela has been able to significantly increase her superannuation fund balance. Conclusion It is important to note that there are many elements to consider when looking to restructure ownership of business, be they commercial, legal or tax, and we have only touched on some of these in this article. If, after consideration of all factors, a restructure is the best outcome for your client, and they are eligible for the SBCGT concessions, then you can provide further value to the process through the use of these provisions. Please contact Pitcher Partners if you would like assistance in applying the SBCGT concessions. Jacci Mandersloot Client Director Tax Consulting Telephone (03) Net capital gain $4m Less: 50% CGT discount Less: 50% small business reduction Less: Small business retirement exemption x 2 Net taxable gain ($2m) ($1m) ($1m) $Nil The $1m retirement exemption is able to be funded through a combination of cash reserves and bank borrowings. As Angela and Matthew are aged over 55, they can choose to receive the $1m payment personally, but Angela chooses to have her $500,000 paid to her superannuation account. This will not be taxed within the fund or counted against her non-concessional contribution cap. 2 Critical Point Network

3 ATO disclosure of tax debts to credit reporting agencies As part of the Federal Government s 2015/16 Mid-Year Economic and Fiscal Outlook, it was announced that from 1 July 2017 the Australian Taxation Office ( ATO ) will be allowed to disclose to credit rating agencies the tax debt information of businesses that have not engaged with the ATO to manage their debts. The measure will initially apply to businesses with an Australian Business Number (ABN) and a tax debt of more than $10,000 that is at least 90 days overdue. Taxpayers that have entered into a payment arrangement or have otherwise engaged with the ATO to manage their debts will not be affected. Whilst the ATO have long engaged external debt collectors to pursue small debts, this is the first time that the ATO will provide tax debt information to credit reporting agencies. As such, this represents a marked change in the ATO s procedures for managing tax debts. Currently the consequences for failing to pay tax debts include the imposition of penalties and general interest charge. These consequences may be viewed by some taxpayers as not overly significant, and have potentially resulted in some taxpayers treating payment of tax debt as less important than payment of other forms of debt. However, the new measure will have significant consequences as tax debt information reported by the ATO may remain on commercial credit files for five years, even if the debt is subsequently paid. Accordingly, taxpayers should carefully consider how they manage their tax debts in the future, particularly in the lead-up to 30 June. Peter Gillies National Tax Technical Director Telephone (03)

4 Are your clients at risk of losing their assets if they aren t registering their PPS Leases? If you have clients that are regularly engaged in the business of leasing or bailing assets, for example those in the short-term rental and hire industry, they are likely entering into PPS Leases which are subject to the security interest registration requirements of the PPSA. This means that if your clients fail to register their security interests on the Personal Property Securities Register (PPSR), in a timely manner, your clients risk losing their assets should the lessee or bailee enter into liquidation or voluntary administration. On 1 March 2017, the Personal Property Securities Amendment (PPS Leases) Bill 2017 (the Bill) was introduced into Parliament. The Bill proposes to amend the definition of PPS Lease in the Personal Property Securities Act 2009 (the PPSA). A comparison of when a lease or bailment transaction will be deemed to be a PPS Lease is summarised below: Term Current definition of a PPS Lease Proposed new definition of a PPS Lease Fixed / specified terms Where the term is for a period of more than one year Where the term is for a period of more than two years Indefinite terms Andrew Yeo Partner Business Recovery & Insolvency Telephone (03) When the lessee/bailee remains in uninterrupted possession of the goods for at least one year with the consent of the lessor/bailor When the lessee/bailee remains in uninterrupted possession of the goods for at least two years with the consent of the lessor/bailor Please note that the PPSA specifies a number of exceptions to the above criteria that should also be taken into account. On the plus side, there is a potential benefit to be gained by your clients should the Bill become law. Businesses in the short-term rental and hire industry will often enter into transactions which are for indefinite periods, even though many of those transactions are completed within one to two years. If you have clients in this category, the Bill has the potential to significantly reduce your clients administrative burden of registering security interests on the PPSR. Given the potential impact on your clients of failing to properly register their security interests, including the timing of those registrations, it is strongly recommended that legal advice be obtained with regard to whether specific transactions are in-substance security interests and/or PPS Leases, and the appropriate timing of the registration of those security interests by your clients. The PPSR is administered by the Australian Financial Security Authority head to For further information please do not hesitate to contact: Critical Point Network 4

5 Deductibility of commercial website expenditure Taxpayers often establish and maintain websites (called commercial websites ) in the course of carrying on their business. To assist taxpayers in determining whether such expenditure is deductible, the ATO have issued Taxation Ruling TR 2016/3 ( TR 2016/3 ). Depending on the circumstances, TR 2016/3 provides that expenditure relating to a commercial website can be treated in one of three ways: Deductible immediately (general deduction); Deductible over time (capital allowance); or Not deductible but can form part of the cost base of a CGT asset. In certain cases, expenditure may be apportioned, with part being immediately deductible and the balance deductible over time or included in the cost base of a CGT asset. The table below broadly summarises the treatment of certain expenses in relation to a commercial website. However, each case needs to be assessed on its own merits: Acquiring or developing a commercial website for a new or existing business Recurring operating costs Labour costs (employee or contractor expenses) excluding costs relating to a major enhancement Maintaining a website (routine or expected expenses) Modifying a website which adds minor functionality and enhancements Major upgrade adding new functionality Acquiring a domain name excluding recurring registration or licence fees Immediate Deduction Capital Twenty-five examples have been included in TR 2016/3 to assist taxpayer understanding. If commercial website expenditure does not qualify as a general deduction (that is, the amount is a capital outgoing), it may still be deductible over time if the expenditure is in relation to inhouse software. In-house software broadly includes software that allows the website owner to interact with the website users and to provide a user interface. It does not include downloadable software which the website user can use offline. Accordingly, the costs incurred by a company in engaging an IT developer to significantly upgrade software and improve website usability would typically constitute in-house software (per Example 17 of TR 2016/3). From 1 July 2015, expenditure concerning in-house software can generally be deducted over a five year period from the date that it is installed ready to use. In addition, in-house software expenses may be immediately deductible to small business entities for the income year ending 30 June 2017 (provided the expenditure is less than $20,000 per asset). Please contact your regular Pitcher Partners advisor if you require further information regarding the deductibility of commercial website expenditure and/or the meaning of in-house software. Peter Gillies National Tax Technical Director Telephone (03) Critical Point Network

6 Events to watch out for Registrations now open Professional Advisors Conference The CPN Professional Advisors Conference is an all-day conference which provides solicitors and accountants with expert advice and assistance on a range of topical and relevant issues. Please see below for the details of the upcoming CPN Professional Advisors Conference: Date Friday 16 June 2017 Venue River Room at Crown Melbourne, 8 Whiteman Street, Southbank Time 8.30am 4.00pm Drinks reception to follow at 4.00pm 5.00pm Registrations are now open head to to access the conference brochure and registration form. Breakfast Briefing Series We value your assets. Do you? CPN Contacts MELBOURNE Gess Rambaldi, Andrew Yeo or David Vasudevan Level 19, 15 William Street Melbourne VIC 3000 Telephone Facsimile partners@pitcher.com.au PERTH Daniel Bredenkamp Level 1, 914 Hay Street Perth WA 6000 Telephone Facsimile partners@pitcher-wa.com.au SYDNEY Scott Treatt Level 22, MLC Centre, 19 Martin Place Sydney NSW 2000 Telephone Facsimile partners@pitcher-nsw.com.au ADELAIDE Michael Basedow 160 Greenhill Road Parkside SA 5063 Telephone Facsimile partners@pitcher-sa.com.au Session 1 Date Tuesday 23 May 2017 Venue Pitcher Partners - L19, 15 William Street, Melbourne Session 2 Date Thursday 25 May 2017 Venue Pitcher Partners - L1, 80 Monash Drive, Dandenong South Time Cost 7.15am for 7.30am start 9.00am conclusion Members $40 and non-members $60 (GST inc.) For further details on this topic head to Things that make you go hmmm... NEWCASTLE Michael Minter The Glass House, Suite 4, Level Hannell Street Wickham NSW 2293 Telephone Facsimile newcastle@pitcher.com.au Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation. Critical Point Network is a business of Pitcher Partners Advisors Proprietary Limited ABN Critical Point Network is a registered trademark. The material contained in this publication is general commentary only for distribution to clients of Pitcher Partners. None of the material is, or should be regarded as advice. Accordingly, no person should rely on any of the contents of this publication without first obtaining specific advice from one of the Partners of Pitcher Partners. Pitcher Partners, its Principals & agents accept no responsibility to any person who acts or relies in any way on any of the material without first obtaining such specific advice. Pitcher Partners 2017 PrintPost Approved PP381827/0043 CPN Newsletter is printed on paper Certified Carbon Neutral. With 55% recycled fibre it is FSC Mixed Source Certified, sourced from sustainable plantation wood, Elemental Chlorine Free and manufactured by an ISO certified mill. Save the date BUSINESS RECOVERY AND INSOLVENCY CONFERENCE SEPTEMBER 2017 MARRIOTT RESORT & SPA, SURFERS PARADISE, QLD 6