As the new financial year is upon us I thought that I would share some of the BIG changes, that have been recently legislated* that come into effect from 1 July 2016.
*The May 2016 Budget announcements are not included in any of the changes as they are yet to be legislated.
New tax rules for property sales over $2 million
Australian residents buying or selling real property with a market value of $2 million or more need to be aware of new rules which come into effect on 1 July 2016.
Anyone selling a “Taxable Australian Property*” with a market value of $2 million or more needs to obtain a Clearance Certificate from the ATO and provide it to the buyer by the settlement date, or the buyer will be required to withhold 10% of the sales price and pay this to the ATO.
While the ATO indicates that “It is easy to obtain a Clearance Certificate” the form is lengthy and must be completed by each vendor if jointly owned. The ATO commits to turning around the certificates within 14 days but, just to be sure, an application for a Clearance Certificate can be lodged in anticipation of an eventual sale of property – a transaction date need not be known. Clearance Certificates are valid for 12 months from issue, and must be valid at the time it is made available to the buyer. Note that the ATO may withdraw the Clearance Certificate. Where a purchaser has, in good faith, not withheld from the purchase price on the basis of being provided with a Clearance Certificate prior to settlement, the purchaser will have met their obligations under the withholding rules.
A purchaser that fails to withhold an amount required to be withheld from the purchase price must pay the ATO a penalty equal to the amount they failed to withhold, on top of the 100% that may have been paid to the vendor. The purchaser will also be subject to the general interest charge on any amounts not paid by the required date.
*Beware that the legislation also catches an indirect Australian real property interest (that is, a membership interest of 10% or more in an entity whose underlying value is principally derived from Australian real property). This includes shares in a company that owns land or a building erected on that land, where the ownership of the shares gives a right to occupy that land or building (that is, a company title interest in real property)
Small Business Rollover Relief
On 8 March 2016 the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 received Royal Asset.
This Bill provides small businesses with a new roll-over for gains and losses arising from the transfer of CGT assets, trading stock, revenue assets and depreciating assets as part of a change in the legal structure of the business.
The amendments are designed to make it easier for small business owners to undertake a “genuine” restructure by allowing them to defer gains or losses that would otherwise be realised when business assets are transferred from one entity to another. The new small business roll-over is in addition to roll-over relief currently available where an individual, trustee, or partner transfers assets to, or creates assets in, a company in the course of incorporating their business – thus simplifying the existing Small Business Capital Gains Tax concessions.
To be eligible for the roll-over:
- each party to the transfer must be either a small business entity ($2mil turnover test), or connected with a small business entity, for the income year during which the transfer occurred;
- there is no change in the ultimate economic ownership of any of the significant assets of the business (other than trading stock) that were transferred under the transaction;
- those significant assets continue to be active assets;
- there is no significant or material use of those significant assets for private purposes; and
- both the transferor and transferee must be residents of Australia.
The potential to fix inappropriate structuring choices, or to gain asset protection by transferring passive assets out of a business entity, has now become a little easier.
Tax incentives for Early Stage Investors
The Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 was passed by both houses of Parliament and received Royal Assent on 5 May 2016.
This bill is designed to promote investment in qualifying start-ups by providing the following tax concessions for investors:
- 20% non-refundable tax offset on investments, capped at $200,000 per investor per year, and
- Concessional capital gains tax treatment on the eventual sale of the shares in the start-up.
Tax offset for investment
The incentives are available for investors in eligible companies, known as an Early Stage Innovation Company (or “ESIC”), if that company:
- Meets the conditions outlined in the legislation with regard to Innovation and commercialisation risk ( with a requirement to meet a 100 point innovation test);
- Was incorporated during the last 3 income years or, if incorporated between 3 and 6 years, did not incur more than $1mil in total in the last 3 income years;
- Has total expenses of $1 mil or less and has assessable income of $200,000 or less in the previous income year, and
- Is not listed on any stock exchange
The tax incentives are available to all types of investors, regardless of the entity type and residency, however there are a number of conditions and restrictions, including:
- The $200,000 non-refundable tax offset is only available for “sophisticated investors” as defined in section 708 of the Corporations Act 2001. Other investors (“non-sophisticated” investors) are limited to investing amounts of $50,000 in any one income year;
- The investment must be in new shares issued, not shares acquired from an existing investor;
- The issue of the shares cannot constitute an acquisition of ESS interests under an Employee Share Scheme;
- The tax incentive will not be available for any investors who are considered to be able to exercise a level of control or influence over the decision making of the ESIC or its associated entities; and
- An investor cannot hold more than 30 per cent of the equity interests in the ESIC, or any entities ‘connected with’ the ESIC.
The maximum offset for an investor entity and its affiliates in any income year is $200,000 less the sum of any previously claimed tax offsets carried forward into the income year
The tax offset is non-refundable, so it is of no immediate benefit to an entity without an income tax liability. However, the tax offset may be carried forward to future years.
CGT treatment on the sale of shares in qualifying ESICs
There are CGT concessions for investors that have continuously held a qualifying share in an ESIC, as follows:
- For shares held between 12 months and less than ten years – the investor may disregard a capital gain arising from the share. Capital losses are also disregarded.
- For shares held for at least ten years – the cost base of the shares will be adjusted to the market value on the ten year anniversary date. As such only the incremental gains (or losses) in value after 10 years will be taxable.
However, where the shares are held for less than 12 months, an investor will taxed on any capital gain as normal but must disregard any capital losses. This measure is designed to ensure that an investment is for the long term and that the tax incentives are not manipulated.
Abolition of Stamp Duty on the transfer of Business Assets
And, finally, Duty on the transfer of business assets or a declaration of trust over ‘business assets’ (other than land) will be abolished from 1 July 2016. The following types of property cease to be dutiable property from 1 July 2016:
- A business asset, being, at any relevant time:
i. The goodwill of a business, if the business supplied in NSW, or provided services in NSW, to a customer of the business, or
ii. Intellectual property that has been used or exploited in NSW, or
iii. A statutory licence or permission under a Commonwealth law if the rights under the licence or permission have been exercised in NSW
- A statutory licence or permission under a NSW law (for example a taxi licence or water access licence)
- A gaming machine entitlement within the meaning of the Gaming Machines Act 2001
Western Australia and Queensland remain the only states (and Northern Territory the only Territory) to continue to charge Duty on the sale of business assets.
This change has been long awaited by business for the last 10 years. The abolition of Stamp Duty removes that last impediment to business transactions and restructures. As a result we expect to see some significant professional business restructures that were previously delayed.