Small business restructure roll-over: tax relief for genuine business restructures

With the latest statistics showing a significant rise in liquidations and with the ATO’s focused efforts on debt collection, small businesses face significant financial pressures. However, the answer isn’t to evade responsibilities or take shortcuts. Business restructuring can be a saviour but it has to be done properly and in compliance with the relevant laws.

The small business restructure roll-over (SBRR) provides a legitimate, structured path for businesses to reorganise their operations, allowing them to better meet these challenges without prejudicing creditors or engaging in unethical practices. For many small business owners, the idea of restructuring can often seem daunting, laden with complexities and potential tax liabilities. However, the SBRR, which is contained in Subdiv 328-G of the Income Tax Assessment Act 1997 (ITAA 1997), provides a valuable opportunity to transfer active assets between eligible restructuring entities without incurring an income tax liability.

This article explores how the SBRR facilitates genuine business restructures, enabling owners to protect and grow their businesses while maintaining full compliance with tax laws and creditor obligations. It delves into the eligibility criteria, the types of assets that qualify, and the practical implications of choosing the roll-over, empowering small business owners to make informed decisions about their restructuring strategies.

Defining a small business entity

A small business entity is defined as an entity with an aggregated turnover of less than $10 million. This includes businesses that operate as a sole trader, partnership, company or trust, provided they meet the turnover threshold. Entities connected with or affiliated with a small business entity also fall under this definition. The classification is crucial for accessing various tax concessions, including the SBRR.

Eligibility criteria for the SBRR 

To qualify for the SBRR, the following conditions must be met:

• Business structure: Each party to the transfer must be a small business entity, an entity connected with a small business entity, or a partner in a partnership that is a small business entity.
• Turnover threshold: The business must have an aggregated turnover of less than $10 million.
• Types of assets: The assets being transferred must be active assets, which include CGT assets, trading stock, revenue assets, or depreciating assets.
• Genuine restructure: The transfer must be part of a genuine restructure of an ongoing business, not an artificial or inappropriately tax-driven scheme.
• Economic ownership: There must be no change in the ultimate economic ownership of the transferred assets.

Genuine restructure of an ongoing business

A genuine restructure is expected to deliver benefits to the efficient conduct of the business. This may involve:

• facilitating growth, innovation or diversification;
• adapting to changed conditions;
• reducing administrative burdens or compliance costs; and
• maintaining economic ownership and continuity of business operations.

Example 1: Asset protection 

Facts: Andrew operates a small pool cleaning and maintenance business. Andrew’s business has grown significantly and is generating larger profits. His insurance premiums have also increased. Due to legal risks, he moves the business into a discretionary family trust. He and his wife are the beneficiaries and Andrew is the primary individual specified in the family trust election in force in respect of the trust. For asset protection purposes, a corporate trustee is appointed and the trust contracts with clients. Andrew does not personally provide guarantees or indemnities. Andrew has also caused the trustee to employ other staff to service the larger client base. The trustee pays Andrew and the other employees a salary commensurate to the services they provide to the business. Andrew and the trustee of the discretionary family trust choose to apply the SBRR.

Outcome: This restructure is genuine as it provides asset protection and facilitates business growth, with no change in the economic ownership of the business.

Example 2: Maintaining essential employees 

Facts: Swetha runs a family business with her siblings through a discretionary family trust. They transfer the business assets to a company and later issue shares to key employees to incentivise them.

Outcome: This restructuring is genuine as it aims to enhance business performance by retaining key employees, without significantly changing the economic ownership of the business.

Non-qualifying restructure

A non-qualifying restructure does not meet the criteria of a genuine restructure and is primarily tax-driven or results in significant changes in economic ownership.

Example 3: Tax-driven scheme

Facts: Kevin owns Amazing Projects Pty Ltd, which runs a successful business. To sell the business to buyers unwilling to purchase company shares, Kevin transfers the business assets to himself. After 12 months, Kevin sells these assets to the buyers, claiming the general 50% CGT discount, which Amazing Projects Pty Ltd would not have been able to claim.

Outcome: This restructure is not genuine as it is undertaken to facilitate the economic realisation of business assets and gain tax advantages, not to enhance business efficiency or growth. The SBRR is not applicable in this scenario.

Eligible assets

The SBRR applies to active assets, which include:
•    CGT assets: assets subject to capital gains tax;
•    depreciating assets: assets whose value declines over time due to wear and tear;
•    trading stock: goods held for sale or manufacturing; and
•    revenue assets: assets generating ordinary income.

Non-active assets, such as loans to shareholders, are not eligible for the roll-over.

Consequences of choosing the roll-over

Opting for the SBRR has several tax implications:

• No immediate tax liability: The transfer does not trigger an income tax liability at the time of the transfer.
• Cost base for transferor and transferee: The transferor is deemed to have received an amount equal to the asset’s cost, and the transferee acquires the asset at this cost.
• GST and stamp duty: Potential liabilities like GST or stamp duty must be considered, as they might still apply.
• General anti-avoidance rule: The roll-over does not protect against the application of anti-avoidance rules, ensuring the transaction is not purely tax-motivated.

For CGT assets, the transferee must wait at least 12 months to claim the CGT discount on any subsequent sale, and pre-CGT assets retain their status. For trading stock, the roll-over cost is based on the transferor’s cost or value at the beginning of the income year. Depreciating assets allow the transferee to continue deducting the decline in value using the transferor’s method and effective life. Revenue assets are transferred without resulting in a profit or loss for the transferor.

Practical implications

The SBRR is a strategic tool for small businesses looking to restructure without the immediate burden of tax liabilities. It allows for greater flexibility in organising business assets, potentially leading to more efficient and effective business operations. For instance, restructuring from a sole proprietorship to a trust or a company can be seamlessly facilitated through the roll-over, provided the ultimate economic ownership remains unchanged.

Summary

The small business restructure roll-over offers significant tax relief and flexibility for small businesses undergoing genuine restructures. By understanding the eligibility criteria and implications, business owners can leverage this provision to enhance their business structure while maintaining compliance with tax regulations.

Source: ATO - Law Companion Ruling: Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters 
www.ato.gov.au/tax-and-super-professionals/for-tax-professionals/tax-professionals-newsroom/eligibility-for-the-small-business-restructure-rollover