Tax Laws Amendment (Small Business Restructure Roll-over) Act 2016

The Tax Laws Amendment (Small Business Restructure Roll-over) Act 2016 amended the Income Tax Assessment Act 1997 to introduce Subdivision 328-G, which deals with restructures of small businesses. The stated object is to facilitate flexibility for owners of small business entities to restructure their businesses, and the way their business assets are held, while disregarding tax gains and losses that would otherwise arise.

In practical terms, the law is aimed at situations where a small business is still the same business economically, but the owners want to change the legal entity or entities that hold the business assets. That might include moving assets from an individual to a company, from a partnership to another entity, or between entities within a small business group. If the conditions are met, the transfer can be tax-neutral at the time of the restructure.

This is not a general exemption for internal transfers. The roll-over only applies where the statutory requirements are met. The law is detailed, and businesses should check the exact asset type, the status of each party, and whether the transfer changes ultimate economic ownership before assuming the relief is available.

A roll-over under Subdivision 328-G is available only if each party to the transfer is an entity to which one or more of the following applies in the income year during which the transfer occurred:

The legislation also excludes certain entities. A roll-over is not available if the transferor, or any transferee, is an exempt entity or a complying superannuation entity.

Residency matters as well. The transferor and each transferee must meet the residency requirement for their entity type. For an individual or company, the entity must be an Australian resident. For a trust, it must be a resident trust for CGT purposes. For a partnership other than a corporate limited partnership, at least one partner must be an Australian resident. For a corporate limited partnership, it must be a resident for the purposes of the income tax law under section 94T of the Income Tax Assessment Act 1936.

Before relying on this page, a business should confirm not only that the operating business is small enough to qualify, but that every transfer party fits within the statutory categories and satisfies the relevant residency rule.

Section 328-430 sets out when a roll-over is available. The transfer must occur under a transaction that satisfies all of the following core conditions.

The asset rule needs careful attention. For the main Subdivision 328-G rule, the asset must be a CGT asset other than a depreciating asset. Depending on which eligibility pathway applies, the asset must also be an active asset at the relevant time. The Act separately deals with trading stock and revenue assets through the roll-over cost rules, and separately amends the depreciating asset roll-over provisions so depreciating assets can also be covered in the restructure context.

The application date is also important. The amendments apply only from 1 July 2016. For a depreciating asset, the relevant test is whether the balancing adjustment event arising from the transfer occurs on or after 1 July 2016. For trading stock or a revenue asset, the transfer itself must occur on or after 1 July 2016. For other CGT assets, the CGT event arising from the transfer must occur on or after 1 July 2016.

One of the central requirements is that the transaction be, or be part of, a genuine restructure of an ongoing business. The Act then provides a safe harbour rule in section 328-435. For the purposes of the genuine restructure requirement, a transaction is a genuine restructure if, in the 3 year period after the transaction takes effect, three things are true.

This safe harbour is important, but it should be read carefully. It operates for the purposes of paragraph 328-430(1)(a), which is the genuine restructure requirement. It does not replace the other conditions in section 328-430. A business can satisfy the safe harbour and still need to check ownership continuity, asset eligibility, residency and the choice requirement. Equally, the wording says the safe harbour applies for the purposes of paragraph 328-430(1)(a) without limiting that paragraph, which means the safe harbour is not the only way a restructure may be genuine.

For business owners, the practical point is that post-transfer conduct matters. If significant transferred assets stop being active assets, move into private use, or the underlying ownership changes within the 3 year period, the business may lose the benefit of the safe harbour and may face a challenge on whether the restructure was genuinely within the intended scope of the law.

The roll-over is only available if the transaction does not materially change ultimate economic ownership of the asset. This is a strict concept in the legislation and is one of the main reasons businesses need to map ownership carefully before restructuring.

The Act includes a specific rule for discretionary trusts in section 328-440. For this purpose, a transaction does not have the effect of changing ultimate economic ownership, or any individual’s share of that ownership, if either just before or just after the transaction the asset is included in the property of a non-fixed trust that is a family trust, and the relevant individuals before and after the transfer are members of the relevant family group.

This rule is particularly relevant for family business groups that use discretionary trusts. It does not mean every trust restructure qualifies. The trust must fit the statutory description, and the individuals with ultimate economic ownership before and after the transfer must be within the relevant family group. Businesses using trusts should check the trust status and the family group position before proceeding.

Where the roll-over is available, section 328-450 says the transfer of an asset has no direct consequences under the income tax law, except as provided by the Subdivision. The example in the legislation notes that if the transfer were from a company to a shareholder, it would not be treated as a payment of a dividend under Division 7A merely because of the transfer itself.

Section 328-455 then sets the roll-over cost rules. Broadly, the income tax law applies as if the transfer takes place for the asset's roll-over cost. For a CGT asset other than trading stock, a revenue asset or a depreciating asset, that is the transferor's cost base just before the transfer takes effect. For trading stock, it is the transferor's cost of the item, or if the item was held as trading stock at the start of the income year, its value then. For a revenue asset, it is the amount that would result in the transferor making neither a profit nor a loss on the transfer.

The Act also preserves pre-CGT status in a specific way. If the transferred asset is a pre-CGT asset, the transferee is taken to have acquired it before 20 September 1985 for the purposes of applying the roll-over cost rule to that asset as a CGT asset other than a revenue asset.

If membership interests are issued as all or part of the consideration for the transfer, section 328-465 contains specific cost base rules for those interests. The Act also contains a rule in section 328-470 that disregards certain capital losses on membership interests after the transaction takes effect, except to the extent the entity can demonstrate the loss is attributable to something other than the transaction.

The Act does not operate in isolation. It makes related amendments to other parts of the Income Tax Assessment Act 1997.

Most importantly for many businesses, depreciating assets are dealt with through an amendment to subsection 40-340(1). Item 8 is added to the table so that a roll-over can apply to a transfer of a depreciating asset under a small business restructure where a roll-over under Subdivision 328-G would have been available if the asset were not a depreciating asset. This means businesses should not assume that depreciating assets are excluded simply because section 328-430 refers to a CGT asset other than a depreciating asset. Instead, they should check the separate depreciating asset roll-over pathway.

The Act also inserts a note into section 122-15 stating that a roll-over may also be available under Subdivision 328-G. In addition, section 328-475 deals with assets that have already been subject to the small business roll-over under Subdivision 152-E. Where the transferred asset is a replacement asset for which the transferor had previously chosen the Subdivision 152-E roll-over, the relevant CGT event rules apply to each transferee as if the transferee, and not the transferor, had made that earlier choice.

There is also an amendment to section 152-115 so that, where section 328-450 or 328-455 applies to the transfer of an asset to you, the 15-year and significant individual rules in the small business CGT concessions can apply by reference to the transferor's acquisition time. This can be important where a business is trying to preserve continuity for later access to concessions.

The Act requires the transferor and each transferee to choose to apply the roll-over. The legislation extract does not prescribe a public-facing formality checklist on this page, but businesses should make sure the restructure documents and tax treatment clearly align with the statutory conditions.

As a practical compliance check before relying on the roll-over, businesses should confirm:

Because the rules interact with other parts of the tax law, unusual ownership chains, trust arrangements, replacement assets and mixed asset classes should be checked carefully before implementation.

The Act received Royal Assent on 8 March 2016. The Act as a whole commenced on 1 April 2016, being the first 1 April after Royal Assent. However, the substantive application rule for the amendments is tied to transfers and tax events occurring on or after 1 July 2016.

That distinction matters. A business cannot rely on the roll-over merely because the Act had commenced generally. It must also satisfy the application rule for the relevant asset type and event date.

This page is based on the current text of the Tax Laws Amendment (Small Business Restructure Roll-over) Act 2016 on the Federal Register of Legislation, including Schedule 1 which inserted Subdivision 328-G into the Income Tax Assessment Act 1997 and made related amendments. Businesses should read the operative provisions together, especially sections 328-430, 328-435, 328-440, 328-445, 328-450, 328-455, 328-465, 328-470 and 328-475, as well as the related amendment for depreciating assets in subsection 40-340(1).