The Ultimate Guide to Small Business Restructure Rollover

"Worried about the liabilities and tax implications of upgrading your business structure? Then you don't have to worry because, In 2016, a new Small Business Restructure Rollover - introduced by the Australian government to tackle this problem."
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As a small business owner, have you ever thought that you might be stuck in a terrible business structure? Don’t worry; Small Business Restructure Rollover relief is available. 

Perhaps you are worried about the liabilities and tax implications of upgrading your business structure?

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Then you don’t have to worry because, In 2016, a new Small Business Restructure Rollover -was introduced by the Australian government to tackle this problem. This authorised small business proprietors to shift their structure legally without enticing a tax liability. This particular exemption is identical to accessing the relief for small business – rollover, but with an emphasis on a restructure from an entity that may be no longer applicable.

However, this new structure is not a comprehensive alternate for a Small Business Rollover. If you are considering this type of restructuring for your small business, you need to carefully assess the consequences, advantages, and technicalities of this form of restructuring. 

Understanding Small Business Restructure Rollover 

I get it; it is a confusing subject. Let me give you a practical example which will hopefully make things clearer for you.

  • In the year 2016-17, Two partners, Mr. X and Mrs. Y, got into an agreement to take in Mr. Z as a partner with a 20% share. 

  • Both Mr. X and Mrs. Y sell their 10% stake in their respective partnerships. This type of event is a balancing adjustment. 

  • Due to this adjustment, they must deduct the termination value of the – depreciating assets – from the pool balance. 

  • Let’s take into account that they have ten assets used for business purposes only. The opening pool balance is $200,000, and this adjustment occurred in July 2017. The termination value of depreciating assets is their collective market value of $240,000. 

  • Now obviously, this puts the balancing adjustment into a negative balance. Now, this amount would get accounted for in their assessable partnership income. But if Mr. X and Mrs. Y would have taken advantage of the rollover relief under subdivision 122-B, they can cut short the balancing event. 

  • Earlier Partnership – Mr. X and Mrs. Y can opt for a 50% deduction for the income year – 2017. 

  • New Partnership – Mr. X, Mrs. Y, and Mr. Z can take the other 50% for the income year – 2016. 

  • For this new partnership, assets would get allocated to the small business pool. Also, they can continue to opt for deductions for this small business pool. 

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Rollover Relief Under Subdivision 122-B 

This method of placing a holding company and announcing dividends from the trading company to the holding company usually furnishes asset protection benefits for the organisation, as the holding company can accumulate assets, including cash and intellectual property. In contrast, the trading company comprises the risks associated with regulating small businesses.

SBBR, i.e., Small Business Restructure Rollover, under subdivision 328-G was introduced to furnish assistance to change the structure of your business. However, there are various other kinds of rollovers, such as Trust Restructure Rollover, which are mentioned under subdivision 124-N Rollover.

Advantages of a Small Business Restructure Rollover

  1. You don’t need any prerequisites to qualify for the Small Business CGT Concessions. You won’t have to worry about the possibility of an ATO audit to prove that everything was adhered to correctly.

  1. The old rollovers were relatively limited in which prevailing structures can rollover to which current arrangements, whereas the current rollover carries a much broader scope.

  1. Small Business Restructure Rollover Transfer of Shares and non-capital assets, including trading stock, plant, and machinery, can get transferred as per the current rollover without tax obligations. 

  1. The rollovers which were formerly available would deal with the transfer of stock as if these stocks got sold, and therefore, those rollovers imposed a tax on the former business entity. 

  1. Under the former rollover, the transfer of non-capital assets got classified as a sale at market price. This would have probably caused extra taxable income, too, if the market price is greater than the depreciated value. 

How do you know if your business is eligible for Small Business Restructure Rollover?

Now that you understand the concept of this rollover, you might be wondering about your eligibility. The following questions and answers will provide you some mental clarity.

Question 1 – Do the transferor and the transferee need to come under the ambit of small businesses?

The transferor and the transferee must both qualify as a small business entity in Australia with an aggregated turnover of less than $2 Million. If they satisfy this condition, only then can they apply for the rollover.

Question 2 – What if there is a change in the ownership of the business?

Small Business Restructure Rollover demands that there shouldn’t be any change in the direct or indirect economic ownership of the business. Also, the proportionate rights of the transferee and the transferor needs to be of the same status.

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Question 3 – LCG demands a ‘genuine restructure’ of the business. What are the attributes which make a restructure to be viewed as a ‘genuine’ one? 

A genuine restructure usually has the following features –

  • There must be a bonafide business agreement that was ventured into with the intention of enriching business productivity. 

  • The transferring of assets to a companhave to be in use even after the restructuring. 

  • Restructure needs to be natural and driven duly by the tax. 

  • The process of destruction should be genuine and not a trick to dispose of assets without the tax obligation. 

The process of restructuring is considered a genuine restructure if:-

  • Even after three years from the date of a rollover, there is no modification in the ultimate economic ownership of any substantial asset of the business entity which was transferred. However, trading stocks are an exception to this rule.

  • After three years, those substantial assets are still active without any private usage.

Question 4 – Can I get a rollover on the transfer of all my assets?

No, the restructuring rollover is only applicable to the transfer of active assets. The replacement asset can be any kind of CGT asset which fulfills the criteria as an active asset. 

Replacement Asset Rollover Examples include – 

  • CGT Assets
  • Trading Stock
  • Revenue Assets 
  • Depreciating Assets 
  • Land or Building 
  • Membership Interests such as Shares, Units, Company, Trust, etc. 

The crucial thing is to check is that the transfers shouldn’t give rise to any income tax obligation.

Question 5 – What does the roll-over do?

The purpose of the Small Business Restructuring Rollover is to create simplicity. Especially for proprietors of small business entities in restructuring their business. Also, it’s how active assets can be carried while overlooking the taxable gains and penalties that would otherwise occur contrarily.

Essentially, this roll-over regulates when a small business entity aspires to transfer assets to a company as a modification in the legal structure without altering the absolute legal right of the active assets. If you are still not sure about the eligibility and implications of this rollover, you need to check out this article by the ATO

Question 6 – I am eligible for Small Business Restructuring, but what are the advantages of this rollover?

The significance of the Small Business Restructuring Rollover are concerned with its taxation implications. Under this rollover, there is no impact on direct income tax. This is the most outstanding characteristic in the usefulness of the CGT outcome of the roll-over, which regulates as follows:

  • CGT asset shifted for a cost that is equal to the transferor’s expense base of the active asset thoroughly before the transfer, thus curbing any capital profit or penalty.

  • Every pre-CGT asset maintains its status as a pre-CGT asset even after the transfer.

  • To get the 50% CGT capital gain rebate, the transferee deals in the same way as having obtained the CGT asset at the period of the transfer. This means that there is no amount of capital gain or loss occurring from the transfer of these assets.

Frequently Asked Questions

How does the Small Business Restructure Rollover affect future tax liabilities and obligations for a business?

The impact of a Small Business Restructure Rollover on future tax liabilities and obligations can be substantial. Typically, such a rollover might alter how a business is assessed for tax purposes, potentially leading to changes in tax rates or the applicability of certain deductions and credits. Business owners need to consult with a tax professional to understand fully how the rollover will affect their specific tax situation in the years following the restructure.

Are there any common pitfalls or mistakes businesses make when applying for Small Business Restructure Rollover?

The process of applying for a Small Business Restructure Rollover involves several intricate legal and tax considerations that can lead to mistakes if not properly managed. Common pitfalls may include misinterpreting eligibility criteria, timing the rollover incorrectly, or failing to comply with all the requisite legal requirements. These errors can lead to unwanted tax consequences or delays in the restructure process.

How does the Small Business Restructure Rollover impact employees and operational processes during the transition?

The impact of a Small Business Restructure Rollover on employees and operational processes during the transition is significant and requires careful planning. Changes in business structure can lead to adjustments in job roles, shifts in departmental goals, and the introduction of new operational procedures. Effective communication and management strategies are essential to ensure that the transition is smooth and that employee morale remains high.

Conclusion 

If you’re pondering over a restructure of your small business, to maintain your assets, retain essential employees, raise additional equity, or just to facilitate your commercial affairs, it is worth evaluating if and how the Small Business Restructure Rollover can enable you with the right persistent yet profitable approach for your business.

This roll-over has the power to authorise you to bring about the legal, structural alterations to your business that you have invariably needed to make, while still avoiding those CGT implications which dissuaded you from doing so in the past.

The most important advice we hope you take with you is that a Capital Gains Tax rollover is a crucial option you have available to your business in the process of restructuring. You should continuously review whether the old business entity could qualify for the small business Capital Gains Tax (CGT) concessions. If not, then the CGT rollover regulations in a restructure are the second-best strategy. If you wish to know more about this strategy – you can check out this – Wolters Kluwer Website

Please note: As mentioned, before making any decision regarding your business, always consult your accountant, lawyer, or adviser to realise whether restructuring is the right strategy for your business. While it can seem daunting and complicated, the knowledge of a seasoned expert will enable you to navigate through these outcomes efficiently and with assurance. The initial professional costs involved will save you from unnecessary expenses down the line.

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