Small Business Restructure Rollover
What is the Small Business Restructure Rollover (SBRR)?
The SBRR is contained under Subdivision 328-G of the ITAA97. Broadly, it was
introduced to make it possible for certain eligible small business owners to change
the legal structure of their business without tax consequences, where there is a
genuine restructure and the underlying economic ownership of the assets
remain the same. SBRR can be applied on transfers on or after 1 July 2016.
Eligible small businesses can defer the recognition of any income or capital gains
that may arise from the transfer where the transfer involves active assets that meet
the requirements for claiming the SBRR.
7 Requirements for claiming SBRR
Section 328-430 of the ITAA97 sets out the following requirements:
1. Genuine business restructure
2. Small business entity
3. Ultimate economic ownership
All requirements
4. Active asset
must be met to be
5. Residency
eligible for SBRR!
6. Choice
7. Concessionally taxed entity
1. Genuine business restructure
The transaction is, or is part of, a genuine restructure of an ongoing business. Note that the term
‘genuine restructure’ is not defined in Subdivision 328-G of the ITAA97 nor any other provisions in the
legislation.
The Explanatory Memorandum to the Tax Laws Amendment (Small Business Restructure Roll-over) Bill
2016 sets out the following relevant factors that would indicate that there is a genuine restructure,
distinguished from those that are artificial or inappropriately tax-driven schemes:
a) the transaction is a bona fide commercial arrangement undertaken to enhance business efficiency;
b) the business continues to operate following the transfer, through a different entity structure but
under the same ultimate economic ownership;
c) the restructure results in a structure likely to have been adopted had the business owners obtained
appropriate professional advice when setting up the business; and
d) the restructure is not artificial or unduly tax-driven.
ATO’s views on what is a “genuine restructure”
The ATO published its views in LCR 2016/3, including features that will indicate whether a restructure falls
within the scope of a ‘genuine restructure of an ongoing business’. They would consider it such where:
a) the transaction is a bona fide commercial arrangement undertaken in a real and honest sense to
facilitate growth, adapt to changed conditions or reduce administrative burdens or compliance
costs;
b) the transaction is authentically restructuring the way in which the business is conducted as
opposed to a 'divestment' or preliminary step to facilitate the economic realisation of assets;
c) the economic ownership of the business and its restructured assets is maintained;
d) the small business owners continue to operate the business through a different legal structure.
For example, there is a continued use of the transferred assets as active assets of the business,
continuity of employment of key personnel and continuity of sales and services; and
e) the transaction results in a structure likely to have been adopted had the small business owners
obtained appropriate professional advice when setting up the business.
LCR 2016/3 also sets out the ATO’s view where a transaction will NOT qualify as a genuine restructure:
a) the transaction is a preliminary step to facilitate the economic realisation of assets, or takes place in
the course of a winding down to transfer wealth between generations;
b) the transaction effects an extraction of wealth from the assets of the business (including
accumulated profits) for personal investment or consumption or otherwise designed for use outside
of the business;
c) artificial losses are created or there is a bringing forward of their recognition;
d) the transaction effects a permanent non-recognition of gain or the creation of artificial timing
advantages; and
e) there are other tax outcomes that do not reflect economic reality.
Although LCR 2016/3 provides useful guidance regarding the ATO’s views, from a legal
perspective it is worth noting that the ATO’s publications do not override the applicable
legislation and do not represent the law.
“Safe Harbour” Provision (s 328-435) provides that a restructure will be taken to be a
genuine restructure of an ongoing business if, in the three-year period after the
transaction takes effect:
a) there is no change in the ultimate economic ownership of any of the significant
assets of the business;
b) those significant assets continue to be ‘active assets’; and
c) there is no significant or material use of those significant assets for private purposes.
2. Small business entity
Each party to the Proposed Transfer must be (or have a sufficient connection with) a small business
entity (SBE) for the income year in which the transfer occurred.
To qualify as an SBE, both the transferor and the transferee must meet the requirements under section
328-110, which are that:
a) the entity must carry on a business in the relevant year; and
b) the aggregated turnover of the entity:
i. was less than $10 million in the previous year; or
ii. is likely to be less than $10 million in the relevant year (provided it did not exceed $10
million in the previous two years); and
iii. is actually less than $10 million in the current year (assessed at the end of the year).
In broad terms, the ‘aggregated turnover’ includes the gross turnovers of entities that are affiliates of
or are connected with the entity (e.g. via a shareholding of at least 40%).
What counts as “carrying on a business”?
Section 995-1 of the ITAA97 defines a business as any profession, trade, employment,
vocation or calling, but does not include occupation as an employee.’
The principles derived by case law in relation to the main indicators of carrying on a
business are summarised in the Commissioner’s tax rulings and outlined as follows:
• are recurrent or regular activities;
• the activity is carried on in a similar manner to that of other businesses in the same or
similar trade;
• activity is systematic, organised and carried on in a business-like manner and records
are kept;
• the activities are of a reasonable size and scale;
• a business plan exists;
• the activity is or will be profitable;
• commercial sales of product;
• the entity has relevant knowledge or skill; and
• whether the activity is better described as a hobby, or recreation.
Note that it is well-established in case law that no one factor is determinative and each
factor must be weighed against each other in light of all of the background facts.
Which entities are eligible for the SBRR?
SBRR might be available if each party to the transfer is:
• a small business entity; or
• an entity that is an affiliate of a small business entity; or co-written with
• an entity that is connected with a small business entity; or Andrew Henshaw
• a partner in a partnership that is a small business entity.
Links to key resources
Section 328-G Explanatory Law Companion
ITAA 1997 Memorandum Ruling (LCR) 2016/3
3. Ultimate economic ownership
The transaction must not have the effect of materially changing which individual(s) has the
ultimate economic ownership of the asset, directly or indirectly. If there is more than one individual,
each individual’s share of the ultimate economic ownership must be maintained.
Ultimate economic ownership and discretionary trusts
In a discretionary trust, there is usually no individual who has the ultimate economic ownership of
the assets. Most modern trust deeds state that no beneficiary of a discretionary trust has a defined
interest in any particular asset of the trust. This means that if an asset were rolled from an individual to
a discretionary trust, there could be a change in ultimate economic ownership and SBRR cannot be
applied.
However, there are special deeming rules under section 328-440 that may be relied on where assets
are transferred to a discretionary trust. The section provides that:
328-440 For the purposes of paragraph 328-430(1)(c), a transaction does not have the effect
of changing the ultimate economic ownership of an asset, or any individual’s share of that
ultimate economic ownership, if:
a) either or both of the following applies:
i. just before the transaction took effect, the asset was included in the property of
a non-fixed trust that was a family trust;
ii. just after the transaction takes effect, the asset is included in the property of a
non-fixed trust that is a family trust; and
b) every individual who, just before the transfer took effect, had the ultimate economic
ownership of the asset was a member of the family group (within the meaning of
Schedule 2F to the Income Tax Assessment Act 1936) relating to the trust or trusts referred
to in paragraph (a); and
c) every individual who, just after the transfer takes effect, has the ultimate economic
ownership of the asset is a member of that family group.
A ‘non-fixed trust that is a family trust’ is a discretionary trust that has made an Family Trust Election
(FTE) under subsection 272-80(1) of Schedule 2F of the ITAA36.
What is the effect of making a Family Trust Election (FTE)?
Making an FTE will have the effect of limiting the beneficiaries to which the relevant trust
can make distributions, without the family trust distribution tax applying).
• For individuals: distributions can only be made to persons that are related to the test
individual;
• For companies: distributions can only be made to companies that have made an
interposed entity election. This means that any companies receiving trust distributions
in your group will need to make an interposed entity election; and
• For trusts: distributions can only be made to companies that have made an interposed
entity election or an FTE nominating the same test individual.
4. Active assets
The CGT asset being transferred must be an active asset at the time that the transfer takes effect.
The term ‘active asset’ has the meaning given by section 152-40 of the ITAA97. For most assets,
subsection 152-40(1) applies:
152-40(1) A CGT asset is an active asset at a time if, at that time:
a) you own the asset (whether the asset is tangible or intangible) and it is used, or held
ready for use, in the course of carrying on a business that is carried on (whether alone or
in partnership) by:
i. you; or
ii. your affiliate; or
iii. another entity that is connected with you; or
b) if the asset is an intangible asset — you own it and it is inherently connected with a
business that is carried on (whether alone or in partnership) by you, your affiliate, or
another entity that is connected with you.
Shares in companies and interests in trusts – 80% test
If the asset is a share in a company or an interest in a trust, subsection 152-40(3) applies, which outlines
the ’80% test’. Subsections 152-40(3A) and (3B) also provide relief from applying the test on a day-to-
day basis and temporary failure of the test, respectively.
152-40(3) A CGT asset is also an active asset at a given time if, at that time, you own it and:
a) it is either a share in a company that is an Australian resident at that time or an interest
in a trust that is a resident trust for CGT purposes for the income year in which that time
occurs; and
b) the total of:
i. the market values of the active assets of the company or trust; and
ii. the market value of any financial instruments of the company or trust that are
inherently connected with a business that the company or trust carries on; and
iii. any cash of the company or trust that is inherently connected with such a
business;
is 80% or more of the market value of all of the assets of the company or trust.
Financial instruments, including bank accounts and loans, count towards the 80% test if they are
inherently connected to the business, but cannot be active assets. See [Exceptions] below.
Accounts receivables and trade debtors are not considered financial instruments, and are considered
to be inherently connected to the business. Therefore, they are included as active assets.
Exceptions to what can be considered active assets
Subsection 152-40(4) contains a list of assets that cannot be considered active assets, even if they are
used in the course of carrying on a business. Noteworthy exceptions include:
• Financial instruments – including bank accounts, loans, debentures, and bonds
• Assets that are mainly used to derive rent – unless the rent was only temporary
5. Residency 6. Choice 7. Not a
Each party must meet Each of the parties concessionally
certain residency must choose to apply taxed entity
requirements. the SBRR.
Superannuation funds and tax
If they are Australian tax exempt entities (as defined in
residents, they would pass s 995-1 and s 11-5) are not
this requirement. eligible.
Disclaimer: This information is of a general nature only, and does not take into account your particular objectives and circumstances. It is
not intended to be an exhaustive source of information. It should not be seen to constitute legal or tax advice. It is not personal financial
or investment advice. No person should act on the basis of this information without first, where appropriate, obtaining and following the
advice of a suitably qualified professional adviser. Last updated: 10 August 2022