A company may wish to 'restructure’ for a number of different reasons. Some of these include:
to raise capital;
in preparation for sale of all or part of its business;
to enable it to float; and
for asset protection.
Restructuring can often give rise to potential capital gains tax ("CGT") problems. However the Tax Act contains a number of specific exemptions from CGT (rollover relief) where there is a restructure involving a company.
Some rollovers are common and fairly straight forward whilst others are less known and more complex. One of the more well known forms of rollover is where an individual transfers an asset to a company. This form of rollover relief is worth remembering as often individuals commence business in their own name or in a partnership of individuals and as the business grows they wish to transfer to an entity such as a company or trust however to do so could trigger a significant capital gain.
It is possible for an individual, partnership or a trust to transfer assets (including a business) to a company and obtain rollover relief. However it is not possible to obtain rollover relief where assets or a business are transferred by an individual to a trust.
These rollovers should be kept in mind as an individual who carries on business may wish to transfer the business to a company to obtain limited liability or because they wish to admit a business partner but rather than operating as a partnership of individuals they decide to operate through a company. Before admitting the partner the individual can rollover the business into a company without any CGT implications and then either sell shares to the incoming partner or the company can issue shares to the incoming partner, depending on whether working capital is needed in the business and whether the taxpayer wishes to trigger a capital gain.
A number of different forms of rollover relief are also available where a company is already in existence. These forms of rollover relief can be used for SME's.
Where a business is carried on in a company and builds up significant assets, or the company owns more than one business, it may be desirable to separate the assets and the business or to separate the businesses into different entities for asset protection purposes. Alternatively the owners may intend to expand their empire and acquire more businesses and desire to have each business in a separate company with a common holding company with the intention of consolidating the group of companies for tax purposes.
In these circumstances the rollover relief in Division 124-G of the Tax Act can be utilised. This allows a new company (the head company) to be interposed between the shareholders and the current company. Once a head company has been interposed the two companies can consolidate for tax purposes and assets can then be transferred from the subsidiary to the head company without CGT consequences. The end result is that the assets are in one company and the business in the subsidiary, thus providing asset protection should the business get into financial difficulty. Even though the shareholders have swapped their shares in the current company for shares in the head company there is no CGT.
A similar strategy can be utilised where two or more businesses operate in the one company and it is desired to separate the businesses into separate companies.
It is also possible to effect a similar rollover where the assets are held by a unit trust. The unitholders can exchange their units in the unit trust for shares in a company and the company ends up owning the unit trust.
Where taxpayers operate through a unit trust and decide they would rather operate in a company structure instead then there are a number of different ways the restructure into a company can be undertaken.
Often the preferred restructuring alternative is to use rollover relief under Division 124-N. Under this rollover relief all the assets of the unit trust are transferred to a company in which the unitholders own shares in the same proportions as they own their units. Once the rollover is completed the unit trust is wound up. So effectively the unit trust is being replaced by a company without any CGT consequences occurring to either the unit holders or the unit trust.
This rollover relief is usually associated with a public company takeover. However the rollover is also available for private companies not just public companies and can be useful where the owners of two businesses wish to merge.
Relief from CGT is also available where a company group (or a trust group) restructures so that the subsidiary entity is no longer wholly owned by the head entity. For example, where A and B own all the shares in Company 1 and Company 1 in turn wholly owns Company 2. After the demerger A and B will own all the shares in Company 1 and all the shares in Company 2. Company 2 will no longer be a subsidiary of Company 1. Again if undertaken properly there will be relief from CGT.
In addition to the demerger of a company group the rules can also apply to the demerger of a trust group where a unit trust owns units in another unit trust. Care must be taken when considering a demerger as there are a number of special rules and traps that can apply to deny the tax relief. However the demerger relief rules do provide an opportunity to restructure a company or trust group without adverse tax consequences applying.
Summary
Taxpayers will often wish to change their business structure. Whilst restructuring can often lead to CGT and other tax problems there is scope to avoid or minimise these problems if the restructure is undertaken properly. There may also be relief from stamp duty.
Care must be taken when restructuring as the Tax Act also contains a number of anti avoidance provisions that need to be negotiated.
