Concepts
Small business restructure rollover
The small business restructure rollover lets eligible small businesses transfer assets to a new structure without triggering an immediate income tax or capital gains tax liability, provided conditions are met.
The small business restructure rollover is a concession that lets a small business change its legal structure, for example from a sole trader or partnership to a company, or into a trust, without generating an immediate tax cost on moving the business assets. Normally, transferring an asset from one entity to another can trigger a capital gain, a taxable balancing adjustment on depreciating assets or a trading stock adjustment. The rollover defers or avoids those consequences.
The rollover is available only to small business entities, meaning those meeting the aggregated turnover test set by legislation. It applies to certain asset types, including active assets used in the business, depreciating assets, trading stock and revenue assets such as receivables. The transfer must be part of a genuine restructure of the ongoing business, rather than a step in a tax avoidance arrangement.
A key condition is that the ultimate economic ownership of the transferred assets must stay the same. In other words, the same people must be the ultimate owners before and after the restructure, even though the legal holder changes. The assets also need to be transferred for something other than a payment that would count as a real change of value, and generally the entity that acquires them needs to be an Australian resident for tax purposes. Further conditions apply, which is why advice is important.
The rollover works by treating the transfer in a particular way. The receiving entity usually takes over the original cost base or tax value of the assets, so any deferred tax is effectively carried forward, and the gain or loss is considered when the asset is later disposed of. The participants can choose to apply the rollover in many cases, and the details of how the choice is made and recorded matter.
GST is a separate question. A restructure usually involves supplies of business assets between entities, and you must consider whether the transfer is a taxable supply or whether a going concern exemption could apply. If the business assets are transferred as an operating business and the conditions for GST-free supply of a going concern are satisfied, GST may not apply. State stamp duty may also arise on the transfer, and that is a state or territory matter, administered by state revenue offices.
A common misunderstanding is believing the rollover removes all tax on a restructure. It does not, and the deferral can still crystallise later. Another is overlooking the new entity's registrations, such as an ABN and GST registration, and the need to update record-keeping and contracts. Because errors can be expensive, this is an area where professional guidance matters. This is general information only, so confirm your situation with the ATO or a registered tax professional.
Worked example
A plumber operating as a sole trader decides to move his business into a new company he fully owns. The business assets include equipment with a tax value of $18,000 and a market value of $30,000. Without the rollover, transferring the equipment at market value could create a taxable amount of $12,000. If he qualifies, the rollover lets the company take over the $18,000 value, so no immediate $12,000 tax event arises.
Practical tips
- Get advice before restructuring. Conditions on eligibility and ownership are detailed and missing one can undo the concession.
- Consider GST and state stamp duty separately, since the income tax rollover does not deal with them.
- Update your ABN, GST registration, bank accounts and contracts when the new entity starts trading.