Does your current business structure no longer suit you? If so, you may want to consider a restructure. Although this is a significant undertaking, thanks to the Small Business Restructure Roll-over legislation (introduced in 2016), small business owners are now able to change their structure without having to pay as much income tax on the transfer of assets.
However, there are some important restrictions on who is eligible for the concessions. Here’s what you need to know to understand the Small Business Restructure Roll-over.
What is the Small Business Restructure Roll-over?
The Small Business Restructure Roll-over (SBRR) is one of a number of tax concessions the Australian government has made in recent years to encourage small business growth. Specifically, the SBRR provides more flexibility for eligible businesses to change their legal structure and transfer assets between entities without incurring income tax. Unlike some of the other tax concessions available to small businesses, the SBRR applies to a broad range of assets, including:
- Capital Gains Tax (CGT).
- Trading stock.
- Revenue assets.
- Depreciating assets.
- Membership interests (for example shares in a company or trust).
Does my business qualify for the Small Business Restructure Roll-over?
In order to qualify for the SBRR, your business must meet a number of criteria:
- Both parties involved in the transfer must be a small business entity. The Australian Tax Office (ATO) defines a small business entity as sole traders, partnerships, companies or trusts with an aggregated annual turnover of less than $10 million. Entities involved in the transaction must also operate for all or part of the income year.
- All parties must be Australian tax residents.
- Both parties must agree to apply the roll-over in relation to the assets transferred.
- There must be no change to the ultimate economic ownership of the assets. Ultimate economic ownership is defined as individuals who directly or indirectly own an asset. Ownership must stay the same for a period of three years after the transaction. If, for example, a business was owned by two different parties and the number of shares one party held decreased after the transfer of assets, this would count as a change in economic ownership and the transaction would be excluded from any tax concessions.
- The transaction must be part of a genuine restructure. The ATO defines this as a restructure that will deliver benefits to small business owners. This excludes material use of assets for private purposes but includes a commercial arrangement that could reasonably be expected to deliver growth, reduce cash flow or improve compliance burdens. It’s important to note that a genuine restructure would exclude any plans where the primary goal is to achieve a more favourable tax outcome from the disposal of assets.
Do discretionary trusts qualify for the SBRR?
Discretionary trusts (where the number of shares are fixed by trustees) can qualify for the SBRR if there is no change in which individuals benefit from the assets both before and after the transfer.
Understanding your small business structure
There are many existing business structures, and which one suits you best will depend on a number of factors. If you are applying for the SBRR it’s essential you understand exactly what structure you want to move towards and why.
That’s where DFK Crosbie can help. Our Business Services team will work with you to ensure you are operating under the best structure for your current situation, offering peace of mind that your business is operating as smoothly as possible. We can also ensure you are operating tax efficiently.