A common issue for many small businesses is the entity they started with is no longer suitable for their current business. A common example may be a sole owner or friends who set up a business in their backyard and over the years its income, assets, liabilities and risks have grown.
Such individuals would be liable for any failings associated with their business and this may expose not only their business to creditors but also their personal assets.
A company structure has plenty of benefits for a business but one of them is the ability to limit the fallout of an event to the company and its assets and not those of the individuals. There are of course exceptions to such protection of individuals (e.g. director’s exposure re: insolvent trading, fraud, director liability for employee entitlements, WH&S, guarantees, etc…) We have previously detailed in our Asset Structuring articles the benefits of having the correct structure in place.
However, when transferring your sole owner operated business, partnership or trust business into a company you have to consider the benefits and costs of doing it. Two notable expenses can be Capital Gains Tax (Federal) and Stamp Duty (State).
In relation to CGT there are various small business concessions, such as:
- 15 year active asset exemption;
- 50% active asset reduction;
- Retirement exemption;
- Small business restructure rollover; and
- Rollover relief.
These concessions enabled small business some relief, deferral or reduction in the amount of any CGT they would have paid in transferring their business assets to a company. Obviously, there are requirements to be met and advice should be obtained to ensure you do not pay more CGT than required.
However, at Queensland State level there was a disconnect between such relief when it came to paying stamp duty on transferring your business assets from an individual, trust or partnership to a company.
Duty in Qld is payable on certain transactions (there are exemptions and exceptions) and it is on a sliding scale and can be charged at the highest level at 5.75%. However, thanks to a recent Office of State Revenue (Qld) Public Ruling (DA000.16.1), this expense can now be avoided for eligible transactions from small business owners, partnerships and trusts.
The starting criteria is that you (individual/trust/partnership) must have a business that:
- Holds small business property and carries on a business that is conducted on or from a place in Queensland, or the conduct of which consists wholly or partly of supplying land, money, credit or goods or any interest in them, or providing any service, to Queensland customers;
- Has an annual turnover of not more than $5 million;
- The transaction to transfer the assets was entered into on and from 7 September 2020; and
- The acquirer of such assets is:
- from the individual to a newly registered unlisted corporation or an unlisted corporation that has been dormant since its registration, of which the individual is a shareholder;
- from those partners to a newly registered unlisted corporation or an unlisted corporation that has been dormant since its registration, of which all partners of the partnership are shareholders; or
- from the trustee to a newly registered unlisted corporation or an unlisted corporation that has been dormant since its registration, of which all beneficiaries of the trust are shareholders. A “beneficiary”, of a discretionary trust, is a taker in default of an appointment by the trustee.
Is this exemption a big deal?
Assume you are eligible, and you have $9M of small business assets and your turnover is $4M a year and you want to transfer your business to a company, then this exemption could save you nearly $500,000 in stamp duty.
Does it provide any flexibility?
An interesting thing to note is that when you transfer the assets to a company from a partnership or a trust you do not have to hold shares in the company in the same percentages you held it in the trust or partnership.
A partnership comprises four partners: A, B, C and D. The partners have partnership interests of 40%, 20%, 20% and 20% respectively. The partnership directly holds small business property and carries on a business. The partners register a new company. However, the partner’s share interests in the company are 25%, 25%, 25% and 25% respectively. The partners then transfer the small business property to the company.
Assuming the transaction is an eligible transaction, the transfer duty exemption will be calculated as follows:
- For A—transfer duty will not be imposed on 25% of the dutiable value of the small business property, because A’s share interest in the company immediately after the transfer is 25%, compared to their original 40% partnership interest.
- For B, C and D respectively—transfer duty will not be imposed on 20% of the dutiable value of the small business property (totalling 60%), because each of their partnership interests immediately before the transfer was 20%; whereas each of their share interests immediately after the transfer is 25%.
- Accordingly, when totalled, transfer duty will not be imposed on 85% of the dutiable value of the small business property. Transfer duty will be imposed on the remaining 15% of the dutiable value of the small business property.
Like all restructures, there are plenty of requirements and pros and cons to consider and CGT and stamp duty is but only part of your decision-making process. However, if you are a small business owned by a sole proprietor, trust or partnership then now is the time to consider whether you should restructure into a company.
NB: This article highlights the recent duty exemption issued in Qld. Different duty and exemption criteria will apply in other jurisdictions. If you need assistance in other States, then our offices can assist tailor the advice to your needs.
For more information please contact an author or any member of our Restructuring, Turnaround & Insolvency team.
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.