Are you a small business owner looking to restructure your business to access a lower tax rate or increased asset protection? The Queensland Government has recently introduced a new transfer duty exemption for certain small business transfers to a company structure.
What is the transfer duty?
Until recently, small businesses (i.e. sole traders, partnerships or discretionary trusts) which restructured to operate as a company, have been required to pay duty on the transfer of the small business assets. The cost of the transfer duty can be considerable, which often means a restructure is not commercially viable for a small business. For example, a small business with a dutiable value of $2,000,000 would be required to pay transfer duty of approximately $95,000.
The introduction of this exemption therefore opens the doors for more small businesses to restructure their operations.
What type of small businesses are eligible?
The exemption applies to sole traders, partnerships and discretionary trusts that:
- carry on business in Queensland, i.e. providing goods or services to Queensland customers;
- have an annual turnover of $5,000,000 or less;
- have business assets with a dutiable value of $10,000,000 or less; and
- restructure their operations to a newly registered private company (the company cannot have previously traded), of which the individual sole trader, partner or default beneficiaries are shareholders.
The exemption applies to transactions entered on or from 7 September 2020.
Why would I want to change my small business structure to a company?
There are several reasons why a company is an attractive structure for a small business, including:
- the business is taxed at the corporate tax rate of 26%, dropping to 25% next financial year;
- a company is a separate legal entity, so shareholders have limited liability, which protects their other assets from the risks of the business;
- ability to raise capital and expand the business; and
- as duty is not payable on the transfer of shares in companies that do not own land with a value of more than $2M, holding the business in a company would allow for future succession planning or restructuring without duty. It might also make the business more appealing to a purchaser who would not pay duty if they purchased the shares in the company, rather than purchasing the business assets themselves.
To find out more about the different types of small business structures, click here.
Partial or full exemption
If the ownership proportions in the business remain the same after the restructure, then a full exemption applies. For example, if business assets are transferred from a partnership where partner A and partner B have equal shares, to a newly registered company where partner A and partner B have equal shareholdings, then the full exemption will apply meaning no transfer duty is payable.
If the ownership proportions change or new owners are introduced, then only a partial exemption will apply. For example, if partner A has a 70% shareholding in the new company and partner B has a 30% shareholding, partner A will only receive the exemption in relation to the original 50% interest.
For further information on claiming this exemption, please contact a member of our Commercial team at Fox and Thomas.