What Is the Small Business Restructure Rollover?

In Australia, the Small Business Restructure Rollover is a tax-deferral concession that lets eligible entities reorganise assets and equity without the immediate impact of capital gains tax.

This guide offers a deep dive into the rollover: how it works, who qualifies, the step-by-step process, accounting and trust structures, plus a detailed worked example. By the end, you’ll understand how to leverage this concession to optimise your structure, protect assets and maintain agility.

What Is the Small Business Restructure Rollover?

The Small Business Restructure Rollover is legislated under Division 328A of the Income Tax Assessment Act 1997. It allows a small business (or group of entities) to transfer active assets or ownership interests into a new structure without triggering a CGT event at the time of transfer. Instead, any deferred gain is rolled into the cost base of the replacement asset or interest.

Key features include:

• Deferral, not forgiveness: CGT is deferred until you dispose of the replacement asset.
• Cost base continuity: Your original purchase price, indexation and any rollovers carry through, preserving potential future concessions.
• Structural realignment: Useful for bringing in new investors, isolating high-risk assets, simplifying succession or preparing for sale.

Why Consider the Rollover?

Small businesses may restructure for many reasons: to improve governance, enable passive investment, segregate liabilities or streamline group entities before a strategic sale. The rollover concession:

• Defers immediate tax liabilities, preserving cash flow.
• Simplifies succession planning, by placing shares and assets into trust or company vehicles.
• Enhances asset protection, by separating trading risks from valuable properties or intellectual property.
• Facilitates investment, allowing family or external partners to acquire equity without dragging the existing CGT liabilities into new hands.

Eligibility Criteria

To qualify, your restructure must satisfy these core tests:

Aggregated Turnover Test

• Threshold: Combined turnover (including connected or affiliated entities) under $10 million in the relevant income year.
• Application: Calculate using standard ATO aggregation rules—include entities you control or that are controlled by related parties.

Active Asset Test

• Definition: An asset is “active” if it is used, or held ready for use, in your business.
• Minimum period: Must have been active for at least 50% of the ownership period, or since acquisition if under 15 years.
• Examples: Trading stock, business premises, plant and equipment, goodwill and client lists.

Genuine Restructure Test

• Commercial purpose: Must arise from a bona fide business decision—such as tax-effective succession, risk mitigation, capital injection or governance enhancement.
• Prohibited motives: Structures solely designed to access concessions (e.g., transferring shareholder loans) will be disallowed.

Continuity of Ownership Test

• Economic continuity: The same individuals must maintain a significant economic interest before and after the rollover.
• Affiliates included: Beneficial interests held through related parties or interposed entities are also considered.

Election Requirements

• Timing: Lodge a signed election with the ATO alongside your annual tax return for the year of restructure.
• Disclosure: Provide details of assets, replacement interests and the market values used.

Demonstrating a Genuine Restructure

The ATO will assess your transaction for genuine commercial intent. Evidence includes:

• Business continuity: Operations must continue under the new structure without interruption.
• Asset utilisation: Transferred assets remain in productive use.
• Professional advice: Engagement of accountants, lawyers or financial advisers before and during the process.
• Documented motives: Board minutes, strategy papers or shareholder resolutions outlining business reasons.
• Non‑tax evidence: Absence of arrangements to immediately dispose of assets or divert value outside the business.

Case in point: A sole proprietor forming a company and trust to separate trading activities from passive property holdings, with no change in beneficial ownership, clearly meets the genuine restructure criteria.

Safe Harbour Rule

The Safe Harbour Rule offers certainty: if you meet these conditions for three years after the rollover, the restructure is automatically treated as genuine.

• Ownership stability: No change in the ultimate economic ownership of the significant assets transferred (excluding trading stock).
• Continuing activity: Those assets remain active assets in the group’s business operations.
• Private use restriction: No material private use of the assets by owners or their associates.

Failing the Safe Harbour (for example, if you sell the business soon after) risks the ATO denying the concession.

Accounting Techniques: Journal Entries

Accurate accounting is vital to substantiate the rollover. Each asset transfer typically requires:

Example journal entry: Transferring a delivery van valued at $50,000 from Trader Pty Ltd to Holding Co Pty Ltd.

Dr Plant & Equipment (Holding Co) $50,000

Cr Plant & Equipment (Trader Pty) $50,000

Dr Inter‑entity Loan (Trader Pty) $50,000

Cr Inter‑entity Loan (Holding Co) $50,000

These entries ensure that both sets of financial statements accurately reflect the new structure and preserve cost bases for future CGT calculations.

Choosing Trust Structures

In many restructures, trusts are the preferred replacement entity for their flexibility, tax advantages and asset protection capabilities. Below are three trust structures commonly used:

Family Trust (Discretionary Family Trust)

• Purpose: Established to benefit a defined family group, allowing the trustee to allocate income and capital among beneficiaries at their discretion.
• Benefits:
  • Flexible profit streaming to optimise tax outcomes across family members.
  • Estate-planning tool—assets remain under family control across generations.
  • Potential barrier to creditor claims (subject to legal tests on sham transactions).
• Key considerations:
  • Trust deed must expressly permit acquisition of rollover assets.
  • Distributions must comply with ATO rules to avoid trust leakage tax.
  • Control must remain with intended family decision-makers to satisfy continuity tests.

General Discretionary Trust

• Purpose: Any trust where the trustee has broad discretion to distribute income and capital among a defined or open class of beneficiaries.
• Benefits:
  • High degree of flexibility for tax planning—direct distributions to beneficiaries in lower tax brackets.
  • Suitable for holding both operating assets and passive investments.
• Key considerations:
  • Trustee minutes should clearly record distribution resolutions to satisfy audit requirements.
  • Must ensure trust deed powers cover rollover transactions under Division 328A.
  • ATO control and beneficiary tests (e.g., effective control test) must be maintained.

Unit Trust or Hybrid Trust

Purpose:

• Combines fixed entitlements (units) with discretionary distributions for profits above unit rate, blending benefits of companies and discretionary trusts.

Benefits:

• Clear ownership delineation via units, facilitating external investment.
• Discretionary overlay allows flexibility in distributing surplus profits.

Key considerations:

• Unit valuation at transfer date must be supported by independent valuation.
• Trust deed compliance is essential; unit-trust rules and managed investment scheme regulations may apply.

Why Trusts Suit the Rollover

• Ownership Continuity: Beneficiary classes and control structures remain unchanged, meeting the Continuity of Ownership Test.
• Active Asset Compliance: Transferred assets continue as active business assets held by the trustee.
• Genuine Restructure Evidence: Deploying a trust for asset protection, estate planning or investor attraction substantiates bona fide commercial intent.
• Governance & Documentation: Amended trust deeds, trustee resolutions and minutes streamline compliance and ATO reporting.

Implementation Steps for Trust-Based Rollovers

• Deed Review & Amendment: Confirm the trust deed permits acquisition and holding of rollover assets; execute deed amendments if required.
• Valuations & Schedules: Obtain independent valuations and prepare detailed asset schedules referencing market values.
• Trustee Resolutions: Hold and document trustee meetings approving the rollover, asset acquisitions and distribution strategies.
• Journal Entries: Record asset movements and inter-entity funding in your accounting system (see Accounting Techniques section).
• ATO Election: Lodge the Division 328A election with appropriate trust and entity tax returns, attaching trustee resolutions and schedules.
• Ongoing Compliance: Maintain usage logs, minutes and beneficiary registers for at least three years to satisfy Safe Harbour requirements.

Always engage specialist legal and tax advisers when establishing or restructuring trust arrangements to ensure full compliance and alignment with your commercial objectives.

Example: Sole Trader to Company & Family Trust

Scenario: Alice operates a flourishing café as a sole trader. She seeks to achieve:

• Liability protection by moving trading risks into a limited‑liability company.
• Flexible profit distribution for her spouse and adult children.
• Capital‑raising potential to admit a silent investor without passing on existing CGT liabilities.

Initial Assessment & Planning

• Valuation: Commission an independent valuation of plant, equipment, goodwill and leasehold improvements (total value $200,000).
• Turnover check: Confirm aggregated turnover remains under $10 million.
• Entity review: Evaluate entity options—company, discretionary trust or hybrid structures—to meet Alice’s objectives.
• Advice: Engage accountants, legal and tax advisers to document commercial rationale and prepare board/shareholder minutes.

Entity Formation

• Café Co Pty Ltd: A new proprietary company to conduct trading operations.
• Alice Family Trust: A discretionary trust for flexible distribution of dividends and capital to Alice, spouse and children.
• Trust Deed Update: Amend the trust deed to permit rollover assets and outline beneficiary classes.

Asset Transfer & Journal Entries

Alice rolls over $200,000 of assets into the new structure:

Journal entries:

Dr Plant & Equipment (Café Co) 120,000

Cr Plant & Equipment (Sole Trader) 120,000

Dr Goodwill (Café Co) 80,000

Cr Goodwill (Sole Trader) 80,000

Dr Inter‑entity Loan (Sole Trader) 200,000

Cr Inter‑entity Loan (Café Co) 200,000

This preserves cost bases and formalises funding via inter‑entity loan.

Election Lodgement

• Prepare and sign the Division 328A election form.
• Attach detailed schedules showing asset descriptions, market values and beneficiary arrangements.
• Lodge the election with Alice’s personal and Café Co tax returns by due date.
• Secure adviser sign‑off confirming compliance with genuine restructure requirements.

Safe Harbour Compliance

Maintain for three years:

• Ownership continuity: No change in beneficial interest by Alice and her family.
• Active use: Assets remain deployed in café operations (no private use).
• Documentation: Maintain usage logs and board minutes at regular intervals.

Outcome & Benefits

Through this rollover, Alice achieves:

• CGT Deferral: $200,000 of deferred capital gain until disposal.
• Cost Base Continuity: Full carry‑over of historical costs.
• Cash Flow Preservation: No immediate CGT payment.
• Structural Flexibility: Ability to admit a partner via new shares.
• Asset Protection: Liability shield around trading risks.
• Succession & Investment Ready: Streamlined distribution and investment.
• Governance Efficiency: Simplified reporting and compliance.
• Safe Harbour Certainty: Automatic genuine restructure status.

Alice can now focus on growing her business, confident that her restructure supports strategic goals without immediate tax consequences.

Common Pitfalls & Compliance Tips

• Election timing errors: Late or incorrectly lodged elections invalidate the rollover. Ensure elections are signed, dated and submitted correctly.
• Asset classification mistakes: Misclassifying assets as “active” risks disqualification. Keep clear asset usage records.
• Valuation discrepancies: Use independent valuations for high‑value assets to avoid ATO adjustments.
• Continuity breaches: Track any changes in ownership or beneficiary structures meticulously.
• Trust deed issues: Review and amend deeds to authorise rollover asset acquisitions.
• Private use violations: Restrict asset use to business activities only.
• Inter‑entity funding gaps: Formalise loans and equity movements with clear agreements.
• Record‑keeping lapses: Document board minutes, valuations and restructure rationale thoroughly.
• Indirect tax oversights: Address GST, stamp duty and other taxes before transfers.
• Adviser over-reliance: Maintain a multidisciplinary advisory team.
• Private binding ruling omission: Seek ATO guidance for complex or novel restructures.

Maintain robust documentation, clear audit trails and regular compliance reviews.

Benefits of the Small Business Restructure Rollover

• CGT Relief: Defer capital gains tax on transfers until disposal.
• Cost Base Continuity: Retain original cost bases for future concessions.
• Cash Flow Preservation: Avoid immediate tax cash outflows.
• Structural Flexibility: Adapt ownership and operations swiftly.
• Asset Protection: Ring‑fence high‑risk ventures.
• Succession & Investment Facilitation: Plan family succession and attract investors.
• Governance & Compliance Efficiency: Simplify reporting and ATO compliance.
• Safe Harbour Certainty: Automatic genuine restructure treatment for three years.

How M2 Corporate Can Assist

At M2 Corporate, we combine decades of expertise to:

• Provide structural diagnostics and entity selection guidance.
• Prepare and review journal entries and documentation.
• Manage Division 328A rollover election lodgements.
• Support ongoing Safe Harbour monitoring and compliance.

Discover our business exit strategies and business management services.

Next Steps

Ready to transform your structure without immediate tax burdens? Contact an M2 Corporate business advisor in Perth today for a complimentary consultation. Let us streamline your restructure, safeguard your assets and empower your business for long-term growth.