Section 328-G of the Income Tax Assessment Act 1997 (Cth) (ITAA97), or the Small Business Restructure Roll-over, received royal assent on 8 March 2016 and became operative on transfers occurring on or after 1 July 2016.
Small businesses with an aggregate turnover of less than $2 million (Small Business Entities) are now able to change their legal structure without incurring capital gains liability (CGT).
CGT in a Nutshell
If you are not familiar with the terminology, a capital gain or loss is the difference between what it cost you to acquire an asset and what you receive when you dispose of it. Assets are widely defined as including any kind of property or a legal or equitable right that is not property. See section 108-5(1) of the ITAA97.
There are however a number of exemptions including:
- Main residence; and
- Depreciating assets and trading stock in certain circumstances.
The restructure of a business ordinarily involves the transfer of assets between entities and accordingly attracts CGT liability. See section 104 of the ITAA97.
Significance of the Roll-over
The CGT roll-over aims to promote the growth and prosperity of Small Business Entities on the understanding that the start up structure of a business is not always the most appropriate. This is particularly the case where small business entities, due to a lack of industry knowledge or sound legal advice, fail to take advantage of business structures which maximise tax effectiveness and minimise risk.
Broadly the roll-over allows Small Business Entities to:
- Restructure their business and allow gains or losses that would otherwise be realise as a result of transferring assets from one entity to another;
- Roll-over for gains or losses arising from the transfer of active assets (trading stock, revenue assets or depreciating assets).
The key point is that the roll-over only applies to transfers that do not change the ultimate economic ownership of assets.
To discuss how to effectively restructure your Small Business Entity to maximise tax effectiveness, minimise risk and take advantage of the roll-over, contact our office on 02 62159100.