The ATO has made a draft determination, under the Commissioner's "remedial power" in the Taxation Administration Act 1953, which proposes to modify how the small business restructure rollover (SBRR) operates.
When the determination is finalised, it will modify s 40-340 of the Income Tax Assessment Act 1997 (ITAA 1997) so that where it provides balancing adjustment rollover relief for a depreciating asset under an SBRR, it "has effect as if it also provided that the disposal of the asset has no direct consequences under the income tax law".
Under Subdiv 328-G of ITAA 1997, the SBRR is available in relation to the transfer of CGT assets, trading stock and revenue assets as part of a genuine business restructure. Generally, the SBRR's effect is that no direct income tax consequences arise from the transfer of the small business's assets, and their tax costs are rolled over to the transferee. However, for a depreciating asset, the benefit of the SBRR is provided under item 8 of the table in s 40-340(1). This provides rollover relief from the balancing adjustment event that happens on the transfer of the asset.
The main concern behind the modification (as reflected in the following example) appears to be the potential for a transfer to give rise to a dividend in the transferee's hands.
Fiona owns all of the shares in Orange Country Pty Ltd, which is a small business entity. Fiona decides to restructure her business to operate as a sole trader. She causes the company to transfer all of its assets, including an item of depreciable plant, to the sole trader entity for no consideration.
Under the capital allowance provisions, Orange Country Pty Ltd is taken to receive market value consideration for the transfer of plant. The company is entitled to choose the rollover and defer the tax consequences from the balancing adjustment event.
If the depreciable plant is paid out of profits derived by Orange Country Pty Ltd, Fiona's assessable income will include the market value of the plant, under s 44 of the Income Tax Assessment Act 1936 (ITAA 1936). Alternatively, the amount would be an assessable deemed dividend under s 109C of ITAA 1936