Small businesses are dynamic entities that inevitably evolve as they respond to market demands, pursue new opportunities, or adapt to the changing landscape of their respective industries.
This evolution often necessitates significant structural adjustments, including shifts in ownership, the integration of businesses through mergers and acquisitions, or the strategic expansion into new markets or areas of operation.
In Australia, navigating these changes is made more manageable through the provision of the Small Business Restructure Rollover.
In this blog, we’ll delve deep into how small business owners can significantly benefit from the Small Business Restructure Rollover.
We’ll explore the practical steps necessary to qualify for and effectively utilise this tax relief, ensuring that entrepreneurs are well-equipped with the knowledge to make informed decisions about restructuring their business.
What is small business restructure rollover?
The Small Business Restructure Rollover, offered by the Australian Taxation Office (ATO), is a form of tax relief for qualified small businesses. It enables these businesses to transfer assets within a group structure without triggering a capital gains tax (CGT) liability, which is a huge benefit when a business needs to reorganise its structure for strategic reasons, without incurring significant tax consequences.
By taking advantage of this opportunity, small business owners can more effectively position their business for success, longevity, and resilience in Australia’s competitive business environment.
Who is eligible for small business restructure rollover?
To qualify for the Small Business Restructure Rollover, businesses must meet certain criteria. The key eligibility requirements include:
Small Business Entity Status: The business must be a “small business entity” as per the ATO definition. Generally, this includes businesses with an aggregated turnover of less than $10 million.
Active Asset Test: The assets being transferred must be active assets. These are assets used, or held ready for use, in the course of carrying on a business, and they include:
- capital gains tax assets,
- revenue assets,
- trading stock, and
- depreciating assets
Genuine restructure: Assets that aren’t used in the course of carrying on their business such as shareholder loans do not meet this definition. In contrast to other business rollover tax concessions, the ATO has a specific requirement that the small business restructure rollover must be considered a genuine transaction. If the restructuring is occurring to only access the tax concessions (i.e. a tax-driven scheme), the transaction won’t be considered genuine, and the restructure rollover benefits won’t apply.
Continuity of Ownership: The transaction must not result in a change to the ultimate economic ownership (individuals who, directly or indirectly, own an asset) of transferred assets. There should be a genuine continuity of ownership post-restructure. This means that the same individuals or entities should continue to have a significant economic interest in the business.
What is considered a genuine restructure?
ATO may consider the following attributes as a demonstration of a genuine restructure:
- the rollover is taking place in good faith, and to enhance business efficiency,
- the business operations continue in the new entity structure,
- the transferred assets continue to be of use to the new entity structure,
- the small business obtained the necessary professional advice before and during the restructuring process,
- there is substantial evidence to prove that the restructuring is not tax-driven, and
- the restructuring isn’t used to promote the disposal of any business assets outside the business entity.
For example, a person operating as a sole trader may wish to change to a company structure with a trust shareholding. The person would then be able to transfer the business assets to the new company.
What is the Safe Harbour Rule?
The Small Business Restructure Rollover regulations include a ‘safe harbour.’ According to the rule, a small business will have satisfied the genuine restructure requirement, if, for three (3) years after the rollover:
- there is no change in the ultimate economic ownership of any of the significant assets of the business (other than trading stock) that were transferred;
- those significant assets continue to be active assets;
- there is no significant or material use of those significant assets for private purposes.
If a small business owner restructured their affairs for the sole purpose of facilitating a tax-effective sale of the business shortly after, that would not be a genuine restructure. This is because the small business owner had no intention of carrying ongoing business in the new entity.
Benefits of Small Business Restructure Rollover
- Capital Gains Tax Relief: One of the primary advantages of utilising the Small Business Restructure Rollover is the exemption from capital gains tax on the transfer of eligible assets. This can result in substantial cost savings for the business.
- Flexibility in Business Structure: Small businesses can restructure their operations without the burden of immediate tax liabilities. This flexibility allows for better adaptation to changing market conditions and strategic goals.
- Simplified Transactions: The rollover simplifies the process of transferring assets within a business group, making it more efficient and cost-effective.
How do you process small business restructure rollover?
To access the Small Business Restructure Rollover, businesses must follow a specific process:
Seek Professional Advice
Before initiating any restructuring, it is advisable to seek professional advice from tax experts or financial advisors to ensure eligibility and compliance with regulations.
Complete the Necessary Forms
The business needs to complete the required ATO forms, including the Small Business Restructure Rollover Election form.
Notify the ATO
Notify the ATO of the restructure and the intention to apply for the rollover within the required timeframe.
Need help with small business restructure rollover? Connect with our team at Blackwattle Tax.
At Blackwattle Tax, we’re your trusted outsourced accounting team. We understand the challenges of going through a small business restructure.
Whether you’re looking to understand eligibility, maximise benefits, or ensure compliance with minimal tax implications, our team of seasoned chartered accountants and registered tax agents have the expertise to make your business restructuring as smooth and beneficial as possible.
We prioritise keeping our clients from diverse sectors informed about the process of small business restructure rollover to optimise cost savings and tax benefits.
Schedule a FREE 30-minute consultation today to discover how we help clients make strategic decisions to reach their financial goals while adhering to Australian tax regulations.
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Disclaimer: We endeavour to make sure the information provided in this guidance is up to date and accurate. Please note, that the information is only intended to be a guide, with a general overview of information. This guidance is not a comprehensive document and should not be interpreted as legal advice or tax advice. The information is general in nature. You should seek the assistance of a professional opinion for any legal and tax issues related to your personal circumstances.
