The small business restructure roll-over allows small businesses to transfer active assets from one entity to another without incurring an income tax liability.
The roll-over applies if each party to the transfer is one of the following in the income year in which the transfer occurs:
- a small business entity
- an entity that has an affiliate that is a small business entity
- an entity that is connected with a small business entity
- a partner in a partnership that is a small business entity.
You are eligible for the small business restructure roll-over if:
- you are an eligible entity with an aggregated turnover of less than $10 million
- from 1 July 2016, you transfer active assets that are capital gains tax (CGT) assets, trading stock, revenue assets or depreciating assets from one entity (the transferor) to one or more other entities (transferees)
- transfer of assets forms part of a genuine restructure of an ongoing business as opposed to an artificial or inappropriately tax-driven scheme
- the transaction must not result in a change to the ultimate economic ownership (individuals who, directly or indirectly, own an asset) of transferred assets. When there is more than one individual with ultimate economic ownership, there is an additional requirement that each individual’s share of ultimate economic ownership be maintained.
Determining whether a restructure is genuine depends on all the facts surrounding the restructure.
To provide certainty to small business owners, a safe harbour rule is included that provides an alternative way of meeting the requirement that a restructure is genuine.
For more about what we consider to be a genuine restructure of an ongoing business and more about the safe harbour rule, see Law Companion Ruling LCR 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matter.
- Example: ultimate economic ownership does not change
Penny runs a furniture manufacturing business as a sole trader.
Penny sets up the Just Me Unit Trust with herself as sole unit holder and transfers the active assets of the business to the trust.
This would not result in a change in ultimate economic ownership of those assets because Penny continues to hold a 100% interest in the transferred assets.End of example
Example: changed share of ownership
Amy, Joanna and Remy run a delivery business as equal partners and want to transfer their interests in the assets of the partnership to a company. Joanna and Remy are a couple.
Amy, Joanna and Remy establish a company, where 300 identical shares are issued as:
- 100 shares to Amy
- 150 shares to Joanna
- 50 shares to Remy.
This distribution is because Remy has other income and Joanna and Remy, as a couple, want to lower their overall income tax bill. This shows the company restructure is not a genuine restructure but a tax-driven scheme.
The same individuals have ultimate economic ownership of the asset but there is a change in the proportionate share of the ultimate economic ownership. Therefore, Amy, Joanna and Remy are not eligible for the small business restructure roll-over.End of example
Discretionary trusts and ultimate economic ownership
Discretionary trusts may meet the requirements for ultimate economic ownership, for example, where there is no practical change in which individuals economically benefit from the assets before and after the transfer.
Family trusts may meet an alternative ultimate economic ownership test where:
- the trustee has made a family trust election, and
- every individual who had ultimate economic ownership of the transferred asset before the transfer, and every individual who has ultimate economic ownership after the transfer, must be members of the family group relating to the family trust.
This roll-over applies to active assets that are CGT assets, depreciating assets, trading stock or revenue assets transferred between entities as part of a genuine restructure of an ongoing business.
Active assets are assets used, or held ready for use, while running a business.
The roll-over is not available for any other business assets, such as loans to shareholders of a company, as they are not active assets of the business run by the creditor.
If you choose to apply the small business restructure roll-over, there are a number of tax consequences:
- Assets transferred under the roll-over will not result in an income tax liability arising for either party at the time of the transfer.
- The transferor is considered to have received an amount for the transferred asset equal to the transferor's cost of the asset for income tax purposes.
- The transferee is considered to have acquired the asset at the time of the transfer for an amount that equals the transferor's cost just before transfer.
- There may be potential liabilities such as stamp duty or goods and services tax (GST) consequences to consider before restructuring.
- Even though a restructure may meet the roll-over requirements, this does not prevent the general anti-avoidance rule from applying to a scheme involving the application of the roll-over.
- For more information about how general anti-avoidance rules may apply to an arrangement or scheme, see Practice Statement Law Administration PS LA 2005/24 Application of General Anti-Avoidance Rules.
The following tax implications apply to transferred CGT assets:
- Pre-CGT assets will retain their pre-CGT status after the transfer.
- To be eligible to claim the CGT discount for any subsequent sale of the asset, the transferee will need to wait at least 12 months before a CGT event happens to that asset.
- For the purposes of determining eligibility for the small business 15-year exemption, the transferee is considered to acquire the asset when the transferor acquired it.
The roll-over cost of an asset that is trading stock is either the:
- cost of the item for the transferor at the time of the transfer
- value of the item for the transferor at the start of the income year if the transferor held the item as trading stock at that time.
The roll-over prevents the transferor from having to make a balancing adjustment when assets are transferred. This allows the transferee to deduct the decline in value of the depreciating asset using the same method and effective life as the transferor was using.
If the asset is a revenue asset, the roll-over cost is the amount that would result in the transferor not making a profit or loss on the transfer. The transferee will inherit the same cost attributes as the transferor just before transfer.
Shares or interests in a company or trust
This roll-over does not require that market value consideration, or any consideration, be given in exchange for the transferred assets.
Where membership interests are issued as consideration for the transfer, the cost base or reduced cost base of the new membership interests should be worked out the following way:
- Add the roll-over costs and adjustable values of the roll-over assets together.
- Subtract the liabilities the transferee assumes for the assets.
- Divide the number by the new membership interests.
An integrity rule is included to ensure that a capital loss on any direct or indirect membership interest in the transferor or transferee that is made after the roll-over will be disregarded.
From 8 May 2018, a Commissioner's remedial power instrument ensures no direct income tax consequences from the transfer of depreciating assets undertaken as part of a transaction that otherwise qualifies for small business restructure roll-over relief.
- For more information and examples on this determination, see:
- Commissioner's remedial power CRP 2017/2 Taxation Administration (Remedial Power - Small Business Restructure Roll-over) Determination 2017
- Law Companion Ruling LCR 2016/2 Small Business Restructure Roll-over: consequences of a roll-over