Setting up companies and trusts proves a tax trap for winemakers
Winemakers can run into significant tax problems after transferring their businesses to a company or trust structure. While income tax relief may be available on the transfer of the business assets, many winemakers and their accountants fail to realise that such restructures can eliminate or substantially reduce a winemaker’s entitlement to the Wine Equalisation Tax rebate. For winemakers who are heavily reliant on the WET rebate for profitability and cash flow, overlooking such consequences can be disastrous.
Over the last few years, we have seen a number of winemakers run into significant tax problems after transferring their businesses to a company or trust structure. Such restructures have become increasingly popular due to the introduction in 2016 of the “Small Business Restructure Roll-Over”. The SBRR provides relief for some of the income tax and capital gains tax (CGT) consequences on the transfer of business assets, e.g. from a sole trader to a company structure.
Often, however, there is little or no documentation for the transfer of the business assets or, where documentation exists, it has not been drafted by a lawyer or is simply a “standard form” contract. We have also seen advisors who have recommended these restructures without giving adequate consideration to key contract terms, and it is therefore not unusual to find that contracts require the transfer of inventory at cost-price (or less) or the application of the GST-free “going concern” exemption.
Importantly, while income tax and CGT relief may be available, many winemakers and their accountants often overlook the fact that the relief does not extend to WET, and restructures undertaken on the terms described above can often eliminate or substantially reduce a winemaker’s entitlement to the WET rebate. For winemakers who are heavily reliant on the WET rebate for profitability and cash flow, overlooking such consequences can be disastrous.
For example, while it may seem like a good idea to claim the GST-free going concern exemption on the transfer of a winery business, that exemption disqualifies the transferor winemaker from claiming the WET rebate on the stock sold to the company or trust. The company or trust cannot then claim the WET rebate, as it is not the “producer” of the wine. Unfortunately, it is quite common for standard form contracts for the sale of a business to apply the going concern exemption.
Some winemakers will realise the significant WET problem when it comes time to lodge their BAS. However, others may not realise there is a problem until they receive a very nasty surprise when they are audited some months down the track by the ATO. Those winemakers may face an uphill battle in trying to resolve the WET issues many months after the contract has settled.
We therefore recommend that winemakers who are thinking of restructuring their businesses—whether due, for example, to business growth, succession planning or outside investment—obtain advice prior to entering into the restructure from a qualified tax advisor with significant WET experience. Finlaysons regularly act for clients in WET-related matters, including ATO audits, and are well-placed to ensure that the restructuring of your wine business is carried out in a tax and WET effective manner.
This publication is intended as general information only. It does not purport to be comprehensive advice or legal advice. Readers must seek professional advice before acting in relation to these matters.