Small business entities can change the legal structure of their business without incurring an income tax liability, following the introduction of the small business restructure rollover in July last year.

Small businesses may choose to restructure their business for various reasons, i.e. to minimise tax and compliance issues, raise new capital or to provide greater asset protection.

The rollover applies to the transfer of active assets that are CGT assets, trading stock, revenue assets or depreciating assets. Active assets are assets used or held ready for use, in the course of carrying on a business.

To be eligible for the rollover, the transfer of assets must form part of a genuine restructure as opposed to an artificial or inappropriately tax-driven scheme.

The ATO considers a ‘genuine restructure of an ongoing business’ as one that could be reasonably expected to deliver benefits to small business owners in respect of their efficient conduct of the business. The following features are indicative of a ‘genuine restructure of an ongoing business:’

• It is a bona fide arrangement undertaken in a real and honest sense to facilitate growth, innovation, and diversification; adapt to changed conditions; or reduce administrative burdens, compliance costs and/or cash flow impediments.
• The economic ownership of the business and its restructured assets is maintained.
• The small business owners continue to operate the business through a different legal structure. For example, there is:
  • continued use of the transferred assets as active assets of the business
  • continuity of employment of key personnel, and
  • continuity of production, supplies, sales or services. In addition, to meet the requirements for the rollover, the transaction must not result in a change to the ultimate economic ownership of transferred assets.

The ultimate economic owners of an asset are the individuals who, directly or indirectly own an asset. Where there is more than one individual with ultimate economic ownership, there is an additional requirement that each individual’s share of ultimate economic ownership is maintained.

Discretionary (family) trusts may be able to meet the requirements for ultimate economic ownership, for example, when there is no practical change in which individuals economically benefit from the assets before and after the transfer.

Family trusts may meet an alternative ultimate economic ownership test where the trustee has made a family trust election, and every individual who had ultimate economic ownership of the transferred asset before the transfer, and every individual who has ultimate economic ownership after the transfer, must be members of the family group relating to the family trust.

Business owners must seek proper advice to ensure resettlement does not occur and the associated potential flow on tax consequences.

Although the rollover presents an opportunity for small businesses to change their legal structure without income tax consequences, there may still be potential liabilities to consider prior to restructuring, such as stamp duty and GST. If you are considering restructuring your business, seek professional advice.