Given the Australian Taxation Office’s (ATO) evolving approach to debt management, understanding the tax implications of business restructuring is more important than ever.
The ATO currently manages a massive $66.6 billion debt book, a figure that grew significantly due to tax deferrals and other measures introduced during the COVID-19 support years. Small business restructuring cases now see the ATO accepting write-offs of up to 90% of debt value—an unprecedented step in this challenging financial climate.
The tax implications of business restructuring matter more today than ever before. Recent changes to Australian tax law have brought new possibilities. Small business entities now enjoy a turnover threshold that increased from $2 million to $10 million, which opens up fresh opportunities for tax relief. Corporate tax rates stand at 30%, while certain base rate entities benefit from a lower 25% rate. Your business’s financial outcomes could improve substantially with the right restructuring advice and guidance.
At FP Lawyers, we specialise in both tax law and business advisory, offering personalised services to help individuals and businesses navigate all areas of Australian tax law. With this article, we’ll provide a roadmap through the tax considerations, obligations and opportunities that come with restructuring your business. You’ll also learn how to stay compliant while making the most of available tax benefits.
What is Business Restructuring
Companies restructure their business to enhance efficiency and sustainability by reorganising their financial, operational or legal frameworks. Your business structure might not match your current needs or financial situation, which makes restructuring necessary.
The restructuring process varies based on your company’s size and circumstances. The Australian corporate restructuring framework provides several options:
- Informal workouts with optional safe harbour provisions
- Small business restructuring for debts under $1.53 million
- Schemes of arrangement for both solvent and insolvent companies
- Voluntary administration
- Simplified liquidation processes
Companies often restructure to tackle operational challenges or create growth opportunities. Some common reasons include raising capital through equity or debt, expanding into new markets, facilitating mergers and acquisitions and planning for leadership succession.
The restructuring process necessitates a careful review of tax obligations, employee entitlements and relationships with creditors. Small business owners can stay in control of their company while they work with restructuring practitioners to create viable plans through the simplified debt restructuring process.
The Corporations Act 2001 governs this process through three distinct regimes: Part 5.1 covers schemes of arrangement, Part 5.3A deals with voluntary administration and Part 5.3B handles small business restructuring. Professional guidance helps companies direct these complex regulatory requirements effectively.
Key Tax Considerations in Business Restructuring
Tax planning plays a vital role in business restructuring. Business owners must consider their tax obligations and available concessions carefully. The Australian taxation system applies different tax implications based on the restructure type and entities involved.
Income Tax Implications
Small business with aggregated turnover less than $50m for the previous income year are eligible for the base rate corporate tax of 25%. The tax treatment of transferred assets needs close attention, including trading stock and revenue assets. The transferee inherits the tax cost of transferred assets from the transferor. This ensures both parties avoid gains or losses under the transfer.
Capital Gains Tax (CGT)
CGT decisions are the foundations of restructuring choices. Small businesses have access to several CGT concessions. These include the 15-year exemption, 50% active asset reduction and retirement exemption up to $764,495.12 lifetime limit. The small business restructure rollover lets eligible entities defer gains or losses while transferring active assets between entities.
Goods and Services Tax (GST)
Asset transfers trigger GST implications. However, exemptions exist if transfers qualify as a “supply of going concern”. If all the essential components needed to continue operating the business are transferred, the transaction may be GST-free.
Fringe Benefits Tax (FBT)
Business asset changes are central to restructuring, but FBT also plays a role when employee benefits are affected. Since April 1, 2024, the FBT rate has been 47%, aligning with the top marginal income tax rate.
State Taxes and Duties
Each jurisdiction has its own state-based taxes and duties, with many offering exemptions for certain corporate restructures. From February 1, 2024, eligible transactions receive a 90% reduction in duty that would otherwise be payable.
Compliance and Reporting Requirements
Documentation and reporting obligations are the foundations of successful business restructuring. The ATO has specific compliance requirements that businesses need to follow during the restructuring process.
ATO Reporting
Businesses need to have substantial compliance with tax lodgment obligations before implementing a restructuring plan. After this, they must submit all returns, notices, statements and applications required under taxation laws to the ATO. Market valuations should be determined close to restructuring time. Complex issues need independent valuations.
Small business restructuring needs more reporting requirements than general restructuring. The Australian Business Register requires businesses to notify the ATO about changes to their details and business type within 28 days.
Documentation
Complete documentation is vital to verify and maintain compliance. These essential documents include:
- A detailed restructuring plan identifying company property and specifying how it will be handled
- A restructuring proposal statement with creditor schedules
- Certification from the restructuring practitioner regarding eligibility and plan viability
Tax governance principles should address high-risk valuations for market valuations. Independent assessments might be required where appropriate. Businesses might need formal private rulings from the ATO if they think about complex restructures, especially when the risk level exceeds acceptable thresholds.
Common Tax Mistakes to Avoid During Restructuring
Avoiding tax mistakes is critical for successful business restructuring. Here are some of the most common mistakes businesses make:
- Many businesses try to reduce their tax obligations by submitting understated Business Activity Statements (BAS). If the BAS needs to be amended outside the three-month reporting period, the ATO could issue a lockdown Director Penalty Notice (DPN).
- Businesses should hold off on Superannuation Guarantee Charge (SGC) payments until they appoint a Small Business Restructuring practitioner. This is a big deal as it means that the ATO’s practice of allocating payments to the oldest debt first might not match the priority payments needed for restructuring eligibility.
- There’s another reason to think about DPN payments. Company directors face personal liability when taxes aren’t remitted on time. Directors can minimise their personal liability by ensuring correct payment application by following these steps:
- Making personal funds payments to the company first, then directing funds to the director’s DPN account
- Ensuring company payments go directly to the director’s DPN account
- Asking the ATO to confirm exact priority SGC debt amounts before making payments
- Market valuations need careful attention during restructuring. These valuations should happen close to restructuring time, and complex issues need independent assessments. The ATO’s early informal advice or formal private rulings become vital when risk levels rise above acceptable thresholds.
Legal Support and Tax Advice for Restructuring
Businesses need qualified tax practitioners who know both tax law and restructuring processes to achieve the best results.
The ATO suggests getting external advice when tax benefits look significant. A second opinion is beneficial, especially if the restructuring benefits appear too good to be true or raise red flags about compliance.
But first, you should engage with the ATO early on through informal discussions or formal private rulings. This will help clear up any tax implications and remove doubt about how specific laws affect your situation. The ATO’s detailed guidance on market valuations should be used close to the period of restructuring.
Third-party experts you can consult include:
- Tax practitioners can help ensure your business is compliant with the Tax Agent Services Act 2009’s regulatory framework. These experts help with everything from structuring decisions to handling stamp duty and goods and services tax implications.
- Legal support becomes instrumental when dealing with constitutional issues, challenging public rulings or asking for tax refunds. Professional advisers guide businesses through safe harbour provisions that protect them while they develop and implement restructuring plans.
Conclusion
Business restructuring brings unique challenges and opportunities in Australia’s tax landscape. ATO statistics paint an encouraging picture, with 91% of well-planned proposals getting approved. These proposals cover corporate tax rates, CGT concessions, GST implications and state-based duties.
To maximise benefits and ensure a smooth restructuring process, businesses must maintain proper documentation and closely monitor market valuations, superannuation obligations and director penalties.
Having the support of an expert tax practitioner will help you navigate the complex requirements of business restructuring. At FP Lawyers, our team of specialist tax lawyers in Brisbane offer personalised services to help individuals and businesses navigate all areas of Australian tax law. Book a consultation with FP Lawyers today to explore restructuring options for your business.
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