Overview Having decided to go into business, one of the most important initial decisions is to choose the structure through which you will operate – sole trader, company, trust, partnership, or a combination of these. In making this decision, a number of factors need to be considered including minimising your tax liability, asset protection, access to equity capital, and compliance costs. The Problem The most appropriate structure for a small business may change over time, or a new small business may choose an initial structure that it later finds to be inappropriate. For instance, for reasons of simplicity and minimisation of start-up costs, a number of small businesses commence as sole traders. However, as their business grows, they often wish to change to a more tax-effective structure (such as a trust). Aside from tax minimisation, restructuring into a more appropriate operating structure may help a business to: • Provide protection from personal liability • Continue to develop and grow (e.g. taking on new business partners by changing from a sole trader to a company) • Minimise compliance costs • Enhance business efficiency • Adapt to current conditions Under the current law, where a business restructures and assets are transferred from the old operating structure to the new structure (e.g. from a company to a trust), significant tax liabilities may arise at the time of transfer and therefore create a disincentive to restructure. Currently, for business restructures, tax relief is only available in limited circumstances (e.g. when converting to a company structure). This deficiency in the current law means significant tax liabilities could arise upon restructure, or a business could just choose to continue to operate under the existing inappropriate structure in order to avoid these tax liabilities. In both cases, this is an unsatisfactory outcome. New Law To remedy this, a new law was passed by Federal Parliament in February allowing small businesses to change their operating structure from 1 July 2016 without incurring income tax or capital gains tax (CGT) liabilities. The new law provides an optional rollover (deferring any CGT liability or any income tax liability until the asset is eventually sold) where a small business transfers an active asset of the business to another small business as part of a genuine business restructure, without changing the ultimate economic ownership of the asset. The intent and effect of the new law is to make the change of structure tax neutral for the transfer of CGT assets, trading stock, revenue assets and depreciating assets. FINANCE A new law was passed by Federal Parliament in February allowing small businesses to change their operating structure from 1 July 2016 without incurring income tax or capital gains tax pindaramagazine.com.au Pindara Magazine 111
Pindara Private Hospital Magazine - Issue Seven
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