Tax-Free Restructures

Thinking of restructuring your business but concerned about the tax consequences of doing so? Small Business Entities (SBE’s with a turnover of up to $10 million including the turnover of connected entities and affiliates) can – subject to certain conditions – change their operating structure tax-free.

Having decided to go into business, one of the most important initial decisions is to choose which structure through which you will operate – sole trader, company, trust, partnership, or a combination of these. In making this decision, a number of factors need to be considered including minimising your tax liability, asset protection, access to equity capital, compliance costs, succession planning, and more.

The most appropriate structure for a small business may change over time, or a new small business may choose an initial structure that it later finds to be inappropriate. For instance, for reasons of simplicity and minimisation of start-up costs, a number of small businesses commence as sole traders. However, as their business grows, they often wish to change to a more tax-effective structure (such as a trust). Aside from tax minimisation, restructuring into a more appropriate operating structure may help a business to:

• Provide protection from personal liability
• Continue to develop and grow (e.g. taking on new business partners by changing from a sole trader to a company)
• Minimise compliance costs
• Enhance business efficiency, or
• Adapt to current conditions.

If at any stage like many business owners you are contemplating restructuring, an optional rollover is available (deferring any CGT liability and any income tax liability until the asset is eventually sold) where an SBE transfers an active asset of the business to another SBE as part of a genuine business restructure, without changing the ultimate economic ownership of the asset (i.e. the people who own the business). The intent and effect of this rollover is to make the change of structure CGT and income tax neutral for the transfer of CGT assets, trading stock, revenue assets and depreciating assets.

In consultation with your Advisor, periodically review your existing business structure to ensure it still meets your needs. If a restructure is desired, check your eligibility for tax relief under the SBE Rollover laws.

If eligible, observe the key requirements (e.g. same ultimate economic ownership requirement).