New rules that apply from 1 July 2016 mean that small businesses can restructure their business operations without triggering adverse tax implications.

Before the introduction of the new restructuring rules, if a business restructured from say, a partnership to a trust, there was a possibility that the change in structure could trigger capital gains tax (CGT). That is, the tax law would treat the restructure the same way as a sale and the owners could be liable for CGT on their share of any gain based on the current market value of the assets being moved into the new structure.

While the existing CGT provisions already contain a number of roll-overs that can be utilised for business restructures, they generally only provide relief when assets are transferred to a company. Other concessions can potentially apply in a broad range of situations, but will not necessarily provide complete tax relief.  This new form of roll-over relief can provide complete income tax relief when assets are transferred to a sole trader, partnership or trust if certain conditions can be met.

The conditions for accessing these new rules are fairly strict.  Broadly, the key conditions are:

  • The transaction is a genuine restructure of an ongoing business.  So, the concessions can’t be used for winding down or selling a business.
  • Each of the parties to the transaction is a small business entity (revenue under $2m) or is related to a small business entity in the year the transaction occurs.  The turnover test is subject to some grouping rules.
  • The business owners (the people who have ultimate economic ownership of the assets) and their share in those assets doesn’t materially change.
  • The asset being transferred is currently being used in a business carried on by the current owner or certain related parties.
  • Both the original entity and the entity the business is being transferred into need to be Australian residents.
  • The parties involved in the transaction must choose jointly to apply the roll-over.
  • None of the entities involved in the transaction are a superannuation fund or exempt entity.