Eligible small businesses (SMEs) entitled to change their legal structure without incurring a capital gains tax (CGT) liability, once the Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 is finally passed by federal parliament, should seek specialist input before entering into any new arrangements.


As of 1 July 2016, eligible SMEs  have access to an optional rollover provision when they transfer an active business asset to another small business entity as part of a ‘genuine’ legal restructure within which their business currently operates. The legislation for the roll-over itself has already been enacted, so as of today SMEs with a turnover of less than $2m are eligible. This is proposed to increase to entities with turnover of $10m under the legislation that is currently with the senate committee.


This rollover will apply to active assets of SMEs with aggregated turnover of less than $10m (previously $2m that are CGT assets, trading stock, revenue assets and depreciating assets used or held ready for use, in the course of carrying on a business).


Assuming the 'ultimate economic ownership' of the asset doesn’t change – within entities eligible for a Small Business Restructure Roll-over - a taxpayer operating as a sole trader, partnership, trust or company will be able to decide on a more appropriate legal entity, without incurring significant tax liabilities.


The net effect of the Small Business Restructure Roll-over means the new legal entity acquires the assets with the same tax characteristics as the original holder of the assets.


This enables small business entities to transfer Capital Gains Tax ('CGT') assets, depreciating assets, trading stock and other revenue assets between entities and defer the gains or losses on the transfer until the subsequent sale of those assets to a third party.


While it lacks a legal definition, SMEs wishing to be included with government’s 'safe harbour' for a 'genuine restructure' must display the following conditions in the three year period subsequent to transactions taking effect:


  • no change to the ultimate economic ownership (direct and indirect) of any of the significant assets of the business other than trading stock; and

  • the significant assets continue to be active assets, and

  • there is no significant or material use of those significant assets for private purposes

It’s important to note that the Small Business Restructure Roll-over does not require the assets to be held for three years in order for it to be eligible. However, restructures that fail to meet the safe harbour may be subject to greater ATO scrutiny.


Whilst the expansion of the eligibility of the Small Business Restructure Roll-over is encouraged, care should be taken by taxpayers seeking to restructure their business. For example, it is noted that generally the transferee will be taken to acquire assets on the date of the transaction, which will have the effect of refreshing the holding period for the purposes of the CGT Discount. Pre-CGT assets will be considered to retain their pre-CGT status in the hands of the transferee.


Further, tax losses held in the original entity are not eligible for transfer, and a taxpayer would need to consider the value of those losses prior to entering into any restructuring arrangement.


Lastly, the Small Business Restructure Roll-over only provides CGT and income tax relief to small businesses. Taxpayers should consider the potential application of other taxes such as transfer duty or goods and services tax prior to entering into any restructuring arrangement.