BUSINESS INCORPORATION RELIEF Always be prepared
Many tax regimes around the world encourage transfer of business or assets from an individual to a corporate entity. After all, it is easier for a tax authority to keep track of the affairs of a company – which must be registered through its published accounts -than an individual. Transparency has always been the price paid for incorporation.
AUSTRALIA
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The Australian regime is typical:
Transferring assets
When you incorporate your business, it is likely you will transfer business assets from your original business structure to your new company.
Transferring an asset to your company is a CGT event. When a CGT event occurs, a capital gain or capital loss can arise. However, provided certain conditions are satisfied, you can choose to rollover the capital gain or loss under the CGT rollover provisions.
Rollovers
The rollover is optional and you do not have to provide us with a special notification of your choice. Your decision will be clear by the way you treat the capital gain or loss in your tax return.
The small business restructure rollover allows eligible small businesses to defer any potential tax liability when transferring CGT assets, trading stock, revenue assets (work in progress) and depreciating assets.
There are also separate rollover relief provisions available for businesses who don't meet the requirements for the small business restructure rollover.
These are for transfers of a single CGT asset and transfers of all business assets, provided that certain conditions are met.
This means that if you want the original business entity to retain ownership of some of the business assets (for example, you may not want to transfer to the company a motor vehicle you used in your business but also used for personal travel), you would apply rollover to each asset you transfer individually.
You cannot rollover the capital loss or gain arising from transferring a collectable or personal use asset If the restructure rollover does not apply you can only apply rollover relief in relation to trading stock if you transfer all of the assets of your business.
UK
The UK operates a similar permissive tax regime:
You may be able to delay paying Capital Gains Tax if you transfer your business to a company in return for shares.
Incorporation Relief means you will not pay any tax until you sell (or ‘dispose of’) the shares.
Eligibility
To qualify for Incorporation Relief, you must:
· be a sole trader or in a business partnership
· transfer the business and all its assets (except cash) in return for shares in the company
How to claim
You do not have to claim Incorporation Relief - you’ll get it automatically if you’re eligible.
How to Transfer a Business
Free customisable templates are available online:
https://www.template.net/edit-online/345975/business-transfer-agreement
KEEPING RELIEVED
It is not unknown for tax authorities to try and argue that the incorporation conditions were not met.
A prudent business transferor will include a reversal condition in the Business Transfer Agreement.
Something like:
It is a condition of this Agreement that [the relevant statutory relief] is available. If and to the extent [the relevant statutory relief] is not so available, the relevant transfer of assets otherwise effected hereby shall be void and the Assignee shall hold title to the relevant assets as bare trustee for the Assignor and to the order of the Assignor.
Then, if the incorporation relief is not available, no taxable event has occurred.