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commissioner gets commercial on queensland small business duty relief

24 September 2021
john ioannou dominic moon
Read Time 3 mins reading time

Much to the delight of Queensland small businesses, Treasurer Cameron Dick announced on 7 September 2020 that his government would introduce a new small business restructure exemption from transfer duty and motor vehicle registration duty in Queensland.

This announcement was quickly followed by the release of an ‘administrative arrangement’ the form of a Public Ruling DA000.16.1 setting out the eligibility requirements of the exemption.

small business eligibility requirements

Originally, the small business restructure exemption applied to a transfer of ‘small business property’ to a company from any of the following small business entities:

  • an individual;
  • a discretionary trust; or
  • a partnership.

The exemption for individuals and partnerships essentially applied so that duty would not be assessed on interests that were retained by the original owners in the new company.

At its simplest, a sole trader, for example, would be eligible for a full exemption provided the company was dormant and the sole trader owned all of the shares in the company immediately after the transaction. As this followed the most basic form of restructuring using a CGT rollover, it makes sense as a measure designed to reduce red tape and the cost of doing business.

When it came to discretionary trusts however, the position was markedly different. To be eligible, it was not the trustee of the trust that needed to hold shares in the company but the default beneficiaries of the trust. For those not familiar with Queensland Duty, a particular curiosity is that the legislation essentially treats default beneficiaries of discretionary trusts as de facto owners of the dutiable property held upon the trust. A change to a default beneficiary can also trigger duty on a corresponding proportionate value of trust property. This essentially meant that in many circumstances where a CGT rollover was available, duty was still payable and vice versa.

amendments to the eligibility requirements

As with many tales that begin with woe, we love a happy outcome, and that outcome was delivered in July this year with the release of updated arrangements in Public Ruling DA000.16.2. So, what has changed?

A new fourth ‘eligible transaction’ has been added to the list for discretionary trusts so that in addition to allowing the exemption where all default beneficiaries take shares in the new company, the restructure exemption can now also apply where the trustee of the trust takes all of the shares in the new company, provided there is no change to the rights and interests of the trust beneficiaries.

Other key elements of this new eligible transaction are:
• although the term ‘beneficiary’ as previously defined included only default beneficiaries, this new eligible transaction includes all beneficiaries (i.e. all those eligible to receive distributions of income or capital);
• this ‘no change’ beneficiary test applies at a point in time immediately after the transaction, by reference to the beneficiaries in place immediately before it. There are no ongoing requirements to maintain ‘no change’; and
• as with all eligible transactions, the new company must be unlisted and either newly registered or dormant since registration.

who will this benefit in practice?

This new eligible transaction is likely to benefit successful individuals very much in the growth phase of their business who are structured in a discretionary (family) trust and are struggling to reinvest business income into business investment capital, without major Division 7A headaches.

Previously in Queensland, CGT rollovers that could quickly fix this problem from a federal tax perspective were not being implemented because of the duty cost. For businesses meeting the duty test definition of ‘small business’ (which have nothing to do with the small business CGT concession tests), this impediment could now be largely removed.

why do we say “could”?

The enduring issue with this administrative arrangement has always been confusion as to its legislative authority. Neither the exemption, nor the authority to implement ‘administrative arrangements’ that change the operation of the Duties Act, are contained in that Act or in the Taxation Administration Act (Qld). This begs the question: what can we do if we apply for the exemption and the Commissioner says no? Based on experiences in other jurisdictions, we have our concerns that the answer may be “not much”. The task is to object to an assessment that is otherwise correct under the provisions of the Duties Act.

This is further compounded by the lack of mechanism in Queensland for the Commissioner to issue private rulings under the Duties Act generally, other than in very limited circumstances. Nonetheless, we have been very active in our communications at senior levels within the Office of State Revenue concerning specific applications of the exemption and have found their assistance, although not binding, to be both candid and useful.

take away message

The take away then is that although the updated arrangements are very good news for many SME trust clients seeking to restructure to a company in Queensland, reliance on the exemption has significant risks which you need to understand before deciding to take this plunge.

There also remains situations where a change of ABN and not duty is the insurmountable hurdle to a restructure. In these circumstances, other strategies are still required to be deployed.

If any of the above raises questions for you, contact Macpherson Kelley’s tax team.

stay up to date with our news & insights

commissioner gets commercial on queensland small business duty relief

24 September 2021
john ioannou dominic moon

Much to the delight of Queensland small businesses, Treasurer Cameron Dick announced on 7 September 2020 that his government would introduce a new small business restructure exemption from transfer duty and motor vehicle registration duty in Queensland.

This announcement was quickly followed by the release of an ‘administrative arrangement’ the form of a Public Ruling DA000.16.1 setting out the eligibility requirements of the exemption.

small business eligibility requirements

Originally, the small business restructure exemption applied to a transfer of ‘small business property’ to a company from any of the following small business entities:

  • an individual;
  • a discretionary trust; or
  • a partnership.

The exemption for individuals and partnerships essentially applied so that duty would not be assessed on interests that were retained by the original owners in the new company.

At its simplest, a sole trader, for example, would be eligible for a full exemption provided the company was dormant and the sole trader owned all of the shares in the company immediately after the transaction. As this followed the most basic form of restructuring using a CGT rollover, it makes sense as a measure designed to reduce red tape and the cost of doing business.

When it came to discretionary trusts however, the position was markedly different. To be eligible, it was not the trustee of the trust that needed to hold shares in the company but the default beneficiaries of the trust. For those not familiar with Queensland Duty, a particular curiosity is that the legislation essentially treats default beneficiaries of discretionary trusts as de facto owners of the dutiable property held upon the trust. A change to a default beneficiary can also trigger duty on a corresponding proportionate value of trust property. This essentially meant that in many circumstances where a CGT rollover was available, duty was still payable and vice versa.

amendments to the eligibility requirements

As with many tales that begin with woe, we love a happy outcome, and that outcome was delivered in July this year with the release of updated arrangements in Public Ruling DA000.16.2. So, what has changed?

A new fourth ‘eligible transaction’ has been added to the list for discretionary trusts so that in addition to allowing the exemption where all default beneficiaries take shares in the new company, the restructure exemption can now also apply where the trustee of the trust takes all of the shares in the new company, provided there is no change to the rights and interests of the trust beneficiaries.

Other key elements of this new eligible transaction are:
• although the term ‘beneficiary’ as previously defined included only default beneficiaries, this new eligible transaction includes all beneficiaries (i.e. all those eligible to receive distributions of income or capital);
• this ‘no change’ beneficiary test applies at a point in time immediately after the transaction, by reference to the beneficiaries in place immediately before it. There are no ongoing requirements to maintain ‘no change’; and
• as with all eligible transactions, the new company must be unlisted and either newly registered or dormant since registration.

who will this benefit in practice?

This new eligible transaction is likely to benefit successful individuals very much in the growth phase of their business who are structured in a discretionary (family) trust and are struggling to reinvest business income into business investment capital, without major Division 7A headaches.

Previously in Queensland, CGT rollovers that could quickly fix this problem from a federal tax perspective were not being implemented because of the duty cost. For businesses meeting the duty test definition of ‘small business’ (which have nothing to do with the small business CGT concession tests), this impediment could now be largely removed.

why do we say “could”?

The enduring issue with this administrative arrangement has always been confusion as to its legislative authority. Neither the exemption, nor the authority to implement ‘administrative arrangements’ that change the operation of the Duties Act, are contained in that Act or in the Taxation Administration Act (Qld). This begs the question: what can we do if we apply for the exemption and the Commissioner says no? Based on experiences in other jurisdictions, we have our concerns that the answer may be “not much”. The task is to object to an assessment that is otherwise correct under the provisions of the Duties Act.

This is further compounded by the lack of mechanism in Queensland for the Commissioner to issue private rulings under the Duties Act generally, other than in very limited circumstances. Nonetheless, we have been very active in our communications at senior levels within the Office of State Revenue concerning specific applications of the exemption and have found their assistance, although not binding, to be both candid and useful.

take away message

The take away then is that although the updated arrangements are very good news for many SME trust clients seeking to restructure to a company in Queensland, reliance on the exemption has significant risks which you need to understand before deciding to take this plunge.

There also remains situations where a change of ABN and not duty is the insurmountable hurdle to a restructure. In these circumstances, other strategies are still required to be deployed.

If any of the above raises questions for you, contact Macpherson Kelley’s tax team.