Small Business Restructure Roll-Over

Overview

The Small Business Restructure Roll-Over allows small businesses to transfer active assets between eligible restructuring entities without incurring income tax liabilities. This is a valuable tool for facilitating genuine business restructures while maintaining tax efficiency.

Eligibility

The roll-over applies if each party involved in the transfer meets one of the following conditions in the income year in which the transfer occurs:

• Is a small business entity.
• Has an affiliate that is a small business entity.
• Is an entity connected with a small business entity.
• Is a partner in a partnership that qualifies as a small business entity.

To qualify for the small business restructure roll-over, you must meet the following criteria:

• Be an eligible entity with an aggregated turnover of less than $10 million.
• Transfer active assets (such as CGT assets, trading stock, revenue assets, or depreciating assets) on or after 1 July 2016.
• Ensure the asset transfer is part of a genuine restructure of an ongoing business, not an artificial or tax-driven scheme.
• Maintain the ultimate economic ownership of the transferred assets. For multiple owners, each individual’s proportionate share of ultimate economic ownership must remain unchanged.

Determining whether a restructure is genuine requires a review of all facts surrounding the transaction.

Examples of Eligibility

Example: No Change in Ultimate Economic Ownership Penny, a sole trader running a furniture manufacturing business, establishes the Just Me Unit Trust with herself as the sole unit holder and transfers her business assets to the trust. Since Penny retains 100% ultimate economic ownership, the restructure is eligible for the roll-over.

Example: Change in Ownership Shares Amy, Joanna, and Remy operate a delivery business as equal partners. They transfer their partnership assets to a newly established company, issuing shares as follows:

• 100 shares to Amy
• 150 shares to Joanna
• 50 shares to Remy

This restructure changes the proportionate ownership to reduce tax liability for Joanna and Remy, disqualifying it as a genuine restructure. The roll-over is not applicable.

Discretionary Trusts and Family Trusts

Discretionary trusts may satisfy the ultimate economic ownership requirement if the individuals benefiting from the assets remain unchanged before and after the transfer.

Family trusts may meet an alternative test if:

• The trustee has made a family trust election.
• Every individual holding ultimate economic ownership of the assets before and after the transfer belongs to the trust’s family group.

Eligible Assets

The roll-over applies to active assets, defined as assets used or held ready for use in running a business. Eligible asset types include:

• Capital Gains Tax (CGT) assets
• Depreciating assets
• Trading stock
• Revenue assets

Ineligible Assets

Assets not used in the active operations of the business, such as loans to shareholders, are not eligible for the roll-over.

Consequences of Choosing the Roll-Over

If the roll-over is applied, the following tax consequences occur:

• No income tax liability arises for either party at the time of the transfer.
• The transferor is deemed to have received an amount equal to their cost base for the asset.
• The transferee acquires the asset at its cost base or value as held by the transferor.
• Potential liabilities, such as stamp duty or GST, may still apply.
• The general anti-avoidance rule (Part IVA) may apply if the restructure is tax-driven.

Asset-Specific Considerations

CGT Assets

• Pre-CGT assets retain their status.
• To qualify for the CGT discount upon a subsequent sale, the transferee must hold the asset for at least 12 months.
• For the small business 15-year exemption, the transferee’s ownership period begins when the transferor originally acquired the asset.

Trading Stock The roll-over cost is the lower of:

• The transferor’s cost base at the time of the transfer.
• The opening value of the stock if held at the start of the income year.

Depreciating Assets

• The roll-over prevents the transferor from making a balancing adjustment.
• The transferee continues to deduct the decline in value using the transferor’s method and effective life.

Revenue Assets

• The roll-over cost ensures the transferor does not record a profit or loss.
• The transferee inherits the transferor’s cost attributes.

Shares or Interests in Companies or Trusts

• The roll-over does not require consideration (e.g., market value) for the transfer.
• If membership interests are issued as consideration, the cost base or reduced cost base is calculated as follows:
  1. Add the roll-over costs and adjustable values of the assets.
  2. Subtract liabilities assumed by the transferee.
  3. Divide the result by the number of membership interests issued.

An integrity rule ensures that any capital loss on direct or indirect membership interests in the transferor or transferee after the roll-over is disregarded.

The Small Business Restructure Roll-Over provides significant tax advantages for genuine restructures. However, it is essential to ensure compliance with eligibility requirements and assess all potential consequences, including non-income tax liabilities. Seek professional advice to determine the best approach for your business restructuring.