QUEENSLAND TRANSFER DUTY EXEMPTION FOR SMALL BUSINESS RESTRUCTURES
Small businesses looking to restructure have long since enjoyed CGT relief when transferring their business assets from a sole trader, partnership or discretionary trust to a company structure. The same has not been true when it comes to transfer duty. Transfer duty is often an influential factor when considering undertaking a restructure. For example, a transfer of business assets valued at $1.4 million (which, in Queensland, includes the value of any goodwill, employee liabilities etc) results in a $60,000 duty liability. In our experience, transfer duty has been a deterrent to some small businesses who view the duty cost as outweighing any benefits from a tax, estate planning or asset protection perspective of the restructure.
The Office of Statue Revenue has recently released an administrative arrangement that provides an exemption to small businesses undertaking a restructure from a sole trader, partnership or discretionary trust to a company structure. This moves us a step closer to some unity between the two regimes and presents advisors with an opportunity to engage (or re-engage) with their clients and consider whether now is the right time to restructure.
The administrative arrangement provides that the Duties Act will be applied as if it provides for an exemption from transfer duty for Eligible Transactions entered into on and from 7 September 2020.
An Eligible Transaction is one where Small Business Property held by the Existing Entity (being a Small Business Entity) is transferred to a new registered unlisted corporation (or unlisted corporation that has been dormant since its registration) (New Entity) where the Relevant Persons in the Existing Entity are shareholders. Where:
Existing Entity means an individual, a partnership, or a discretionary trust.
Relevant Persons means:
- In respect of an individual – the individual
- In respect of a partnership – the partners of the partnership
- In respect of a discretionary trust – is a taker in default of an appointment by the trustee, other than a last taker in default of appointment that is a person decided under the Succession Act 1981 or a charitable institution.
From 28 June 2021 Relevant Person in respect of a discretionary trust also includes the trustee of that discretionary trust where it is the sole shareholder of the unlisted corporation. That is, the exemption now also applies to transfers from the trustee of a discretionary trust to an unlisted corporation of which the trustee is the sole shareholder.
Small Business Entity means an Existing Entity that directly holds Small Business Property and carries on a business that:
- is conducted from a place in Queensland or supplies goods or services to Queensland customers; and
- has an annual turnover of not more than $5 million, though it does specify when turnover is to be determined it is likely that it will be applied in the preceding 12 months before the transfer.
Small Business Property means dutiable property that is actively used by the Existing Entity in carrying on the business and cannot exceed the dutiable value of $10 million. The Commissioner may accept book value as dutiable value.
The exemption will apply to the lesser extent of the Relevant Person’s interest in the Existing Entity and the New Entity.
For example, where a sole proprietor transfers Small Business Property to a New Entity where he/she holds only 50% of the shareholdings, the exemption will only apply to 50% of the Small Business Property being transferred. Therefore, transfer duty is payable on the transfer of the remaining 50% of the Small Business Property. Alternatively, if the sole proprietor held 100% of the shareholdings in the New Entity, there would be no transfer duty payable.
Where the exemption is applied to transfer duty it will also apply to vehicle duty.
ISSUES TO CONSIDER
There are a range of issues to consider including:
- The interaction with the CGT rollovers – noting that since 28 June 2021 there is better matching of the duty exemption with the CGT rollovers.
- The income tax and capital gains tax implications of the Small Business Property now being owned by the New Entity.
- The identity of the directors of the New Entity, noting potential liability issues for directors.
- The asset protection implications of a restructure, particularly where the Existing Entity is a discretionary trust.
- The estate planning issues of a restructure, again, particularly where the Existing Entity is a discretionary trust.
- Neal Dallas and Victoria Mercer can assist advisers and their clients who might be contemplating restructures, including those seeking to take advantage of the administrative arrangement.