A registered trade mark is often the most valuable asset of any business. It represents a significant part of the goodwill and reputation of the business in the market.
A trade mark is often registered when a business is still young and growing. At that time, there are many issues a business owner must consider. One of the issues that is usually overlooked is creating a business structure that effectively protects IP assets, including the trade mark. This often results in trade marks being registered in the name of the trading entity.
Ideally, ownership of a trade mark should be quarantined from the trading entity. This is because in the event of a legal claim against the trading entity, the trade mark would be treated like any other asset. A liquidator or administrator could be forced to sell the trade mark to meet the company’s obligations.
One common way to quarantine a trade mark is for it to be held in the name of a holding company, and for that company to licence the trade mark to the trading entity. While, the ownership and control of both entities is usually the same, most of the risk is borne by the trading entity.
However, the transfer of trade marks from one entity to another can sometimes have unpleasant tax consequences. In particular, the transfer of a trade mark can generate capital gains tax liability. If the trade mark has significant goodwill and reputation, this liability can be significant.
Fortunately, for many businesses, effective tax planning may allow for a restructure of IP assets within a business without generating capital gains tax liability.
There are potentially three groups of tax concessions that could apply to the restructure of IP assets: small business capital gains tax concessions, rollovers and the new small business restructure roll-over.
Each concession has very specific requirements and negotiating the complex legislation to determine what concession is best suited to a specific rollover can be a challenge to business owners and their accountants.
Small business capital gains tax (CGT) concessions
The small business CGT concessions are only applicable if the annual turnover (under $2 million) or net asset value (under $6 million) thresholds of the business are satisfied. These concessions are also only available to non-depreciating assets such as trade-marks and do not apply to IP assets that are depreciating assets for income tax purposes such as patents, registered designs and copyright.
There are 4 small business CGT concessions and careful analysis of the factual circumstances of the taxpayer and its asset profile will be required to determine which concession will provide the best tax outcome.
The second group of tax concessions are generally known as CGT “roll-overs”.
A roll-over is effectively a tax exemption that allows capital gains or losses to be disregarded.
No turnover or net asset value thresholds apply but each rollover has specific conditions. The roll-overs include roll-over of an asset from an individual or trust to company or of a partnership interest to a company.
The most important practical requirement is that the taxpayer seeking the roll-over must be the entity or person that receives the shares in the company as part of the transaction. As such, a rollover will not allow restructuring of the ownership of the ultimate underlying equity in the business.
Another roll-over is a company to company roll-over which generally entails creating a new holding company to acquire all of the shares in an existing company. Choosing between the available company to company roll-overs will depend on issues such as whether the company owns pre-capital gains tax assets or whether the ultimate shareholders in the holding company are to be identical to the existing shareholders in the target company.
The new small business restructure roll-over (“SBR”)
This rollover is for small businesses whose aggregate annual turnover is less than $2 million and is applicable from 1 July 2016. It was designed to improve access to the restructure roll-overs discussed above and to provide greater flexibility to business owners.
The capital gains tax roll-overs discussed above allow individuals and trusts to transfer CGT assets to companies but not the other way. The SBR allows assets to be transferred out of a company to a trust or individual, and also assets to be transferred from one trust to another trust. The restructure also enables a company to transfer assets to another company outside the income tax consolidations regime.
Which concession is the right one for my business?
Clearly, the concessions do not promote a one size fits all, but if a methodical approach is adopted, it will generally be possible to achieve the required commercial objectives without triggering undesirable tax outcomes. To achieve this, the actual tax consequences need to be considered on a case-by-case basis.
Please don’t hesitate to contact us if you have any questions on the above.