Paying taxes is a certainty in life we cannot avoid. The good news is small business owners can minimise the taxes they pay by taking advantage of the government's tax breaks and concessions. If you have yet to hear so, the Australian Taxation Office (ATO) has a Small Business Restructure Rollover to help eligible businesses reduce their tax liability.
The small business restructure rollover offers significant tax benefits to small businesses looking to restructure their affairs. However, the ATO has strict guidelines and eligibility criteria.
If you're wondering what this looks like and whether your business fits the brief, read on to see what it involves.
What exactly is the Small Business Restructure Rollover?
It helps to have context on how the Small Business Restructure Rollover came about. It was a result of the Federal Budget speech in FY2015/2016, where the Australian Government emphasised the importance of small businesses in our economy.
The Government introduced these tax concessions to encourage the growth of existing small businesses.
The small business restructure rollover enables small businesses to transfer active assets from one entity to one or more other entities from 1 July 2016, without attracting any income tax liability.
An eligible small business can disregard any capital gain made from transferring their active assets into the new entity structure. This rollover applies to the transfer of:
- Operational assets that typically attract capital gains tax (CGT)
- Trading stock
- Revenue assets
- Depreciating assets
Businesses can access this tax concession if their turnover is less than $10 million.
What is an eligible active asset?
Active assets are assets that the business uses to run the business entity.
- Capital gains tax assets
- Depreciating assets
- Revenue assets
- Trading stock
Note: Shareholder loans are not considered active assets because they are not used while carrying out the business.
This is obvious, but it must be mentioned because the ATO is pretty strict (anyone who has been audited will know how scary it is):
The ATO has very specific requirements for the small business restructure rollover to be genuine.
Small businesses should not restructure to access the tax concessions (i.e. a tax-driven scheme). If they do, the transaction won't be considered legitimate, and the rollover benefits won't apply.
What qualifies as a genuine small business restructure?
The ATO's Law Companion Ruling states that a genuine restructuring of an ongoing business is expected to deliver benefits and efficiencies to the owners.
It could mean restructuring the way business assets are held to conform with best practices that might have been followed, had the business owners received professional advice when initially setting up the business.
A genuine restructuring of an ongoing business has the following indicators:
- The rollover enhances business efficiency, facilitates growth and innovation and reduces administrative and compliance costs.
- There is clear evidence that the restructuring is not tax-driven and isn't intended to dispose of any business assets outside the business entity.
- The economic ownership of the business and its restructured assets continues as before.
- The small business operation resumes through a different legal structure.
- There is the continued use of the transferred assets as active assets of the business, continuity of employment of key workers and continuity of production, supplies, sales or services.
- The resulting structure is likely to have been adopted had the small business owners sought professional advice when setting up the business.
Related: Small business hardship grants
Is my business eligible to claim the rollover relief?
To be eligible for the small business restructure rollover, the ATO states:
- Both entities must each agree to apply for the rollover, and
- Both entities must be small businesses
What does the ATO consider a small business?
The ATO states that a small business entity is a sole trader, partnership, company or trust with a turnover of less than $10 million and has operated as a business for all or part of the income year. A holding company is also eligible to apply for the rollover relief.
What are the tax implications of the Small Business Restructure Rollover?
When applying for the small business restructure rollover, there are several tax implications to think about. Typically:
- The new business structure will not result in an income tax liability for either party at the time of the asset transfer
- The transferred asset is equal to the transferor's asset cost for income tax purposes
- The transferee acquires the asset at a value equal to the transferor's cost just before the transfer
- Pre-capital gains tax assets retain their status after the transfer
- Access to the 15-year CGT exemption is not affected
- For any future sale of any assets, business owners need to wait at least 12 months before a CGT event applies.
Overall, the small business restructure rollover allows small businesses to change their business structure without getting hit
with significant tax liabilities. Small business is both challenging and rewarding, so this tax break is one way to reduce the headaches.
While the tax advantages can be substantial and enticing, the ATO has implemented strict guidelines and regulations for the process. It means there must be a real intention to restructure the business rather than creating a more tax-effective sale. If the ATO decides this was your intention in restructuring, your small business won't qualify for the tax relief.
Before applying, you need to be clear on why you’re restructuring and how it will affect the types of assets in the new business entity.
The ATO is cracking down on ingenuine claims and may check if you have sought professional advice during the restructuring decision-making process.
The information in this blog is intended to serve as a guide to help your business. It should not be taken as professional legal, tax or financial advice.
We want to champion your every success, so we strongly recommend you seek professional advice to assess your unique circumstance and determine your eligibility to apply for the government's small business restructure rollover.
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