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Many business owners may be considering a restructure, merger, or demerger in the current economic environment to adapt, sustain, or promote growth in these tumultuous times. A change in a corporate structure typically entails either the change of ownership interests in the entire business or the transfer of specific assets of the business. The disposal of an ownership interest in a business or its assets may have tax implications for the business on capital or revenue account.
The law on the distinction between the treatment of capital account and revenue account is complex. As a general principle, it will likely be found on a capital account if an interest in a business or business asset is acquired for long-term purposes and, for instance, to generate annual dividends. On the other hand where an interest in a business or a business asset is acquired as a short-term expense, this would indicate that the amount should be on revenue account. The recent decision of the Federal Court in Greig v Commissioner of Taxation [2020] FCAFC 25, however, reminds us that even an isolated transaction can alter this determination.
As part of a restructure, it is important an important first step to consider the distinction between capital and revenue since substantial tax incentives extend to capital assets, including roll-over relief, which is the subject of this paper. Therefore, appropriate advice must be obtained before applying the roll-over relief provisions to ensure that the asset or assets in question are indeed capital assets (or the roll-over is one that can be extended to assets held on revenue account).
Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) contain the general capital gains tax (CGT) provisions. The provisions on roll-over relief offer taxpayers the ability to either disregard or defer capital gains or capital losses resulting from the disposal of CGT assets where the conditions for the applicable roll-over are met. These provisions are an area of great complexity and ones that are subject to continual change whether legislative, judicial, or administrative.
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