In 2016, the government introduced “The Small Business Restructures roll-over Bill 2016” as part of the small business scheme governed by the Tax Office.
Before the passing of this regulation, many small businesses struggled to save capital gains tax when transferring their assets to another business entity in which they owned.
For example, if a small business entity purchased an office building in 2010 for $400,000, and then in 2016, the entity transferred the asset to an associated business structure, and the market value at the time was $1,000,000.00.
Effective way to save capital gain tax
Capital Gains Tax Implications Before the Bill
Before the Bill passed, the entity had to pay capital gains tax of up to $251,632 on the difference between the cost base and the market value of the building.
If the entity could apply the small business restructure concession and meet all required conditions, it could complete the transfer and save a significant amount of tax.
Flexibility Introduced by the Small Business Restructure Rollover Bill 2016
The Small Business Restructure Rollover Bill 2016, which took effect on 1 July 2016, allows small businesses to change to a more suitable legal structure without paying tax on the transfer.
If a small business meets specific conditions, it can transfer an underlying business asset to another business structure without incurring any capital gains tax. This provides substantial cost savings for small businesses.
The Bill assumes that the transferee acquires the underlying asset at the cost base and that the transferor disposes of the asset at the cost base.
However, businesses must meet several conditions to qualify for this concession:
Both the transferor and the transferee must be small business entities and Australian tax residents.
They must apply the rollover provision to the transferred asset.
The rollover rule does not apply to or from tax-exempt entities or complying super funds.
The CGT asset must be an active asset. However, trading stock, revenue assets, and depreciable assets also qualify.
The restructure must be a genuine business restructure.
The restructure must not alter the ultimate economic ownership of the asset.
To qualify as a small business entity, involved parties must have an aggregated turnover of less than $2 million. The concession also applies to:
Entities affiliated with a small business entity
Entities connected with a small business entity
Partners in a partnership that qualifies as a small business entity
Therefore, even if the entity holding the business asset is not itself a trading business, the concession still applies if it is related to or connected with a qualifying small business entity.
How to minimise capital gains tax
Asset Ownership Across Family Members
This issue becomes particularly relevant when family members use business assets under separate entity structures.
For example, one spouse might hold the business asset through one entity, while the other uses it via a different entity to operate a small business.
The rollover provision also hinges on a key requirement: the asset must qualify as an active asset. That means the asset must be used, or held ready for use, in the course of carrying on a business. If the asset does not meet this definition, the restructure concession will not apply.
Trusts, SMSFs, and CGT Status
Many businesses often ask whether they can transfer assets to a trust or a self-managed superannuation fund (SMSF). While transferring assets to a trust can qualify for the concession, transferring them to an SMSF generally does not offer the same advantage and may not be a viable option.
It’s also important to consider the capital gains tax (CGT) status of the asset. If the underlying asset holds pre-CGT status, it retains that status after the transfer. This means the transferee will not pay capital gains tax if they sell the asset in the future.
However, if the asset is a post-CGT asset, the 12-month ownership period for CGT discount eligibility starts when the transferee acquires the asset. For the 15-year exemption, the relevant ownership period begins from when the transferor first acquired the asset.
Seek Expert Advice
To determine your eligibility and identify the most tax-effective structure for your business, consult a qualified tax professional. At EndureGo, John Cheng, a CPA-qualified tax accountant, is ready to help you save capital gains tax and structure your business for long-term success.
Talk to us today to learn how to optimise your CGT position.
📞 Contact John Cheng at 0410 829 900
📧 Email: john.cheng@endurego.com
Your success is our passion.
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Disclaimer: this article aims to provide general information and does not apply to a specific person or event. Please do not regard this article as legal or professional advice under any circumstances.
