Australia’s Small Business Restructure Rollover Explained

Operating a small business is a challenge. The Australian Government offers a range of incentives to simplify the process, and we’re going to provide a small business restructure rollover example in this article.

Small business restructure rollover

We’ll show how the small business restructure rollover scheme makes it easier for small businesses to adapt to changing market conditions and meet the needs of their customers.

The Small Business Restructure Rollover Scheme

The Australian Government offers a number of incentives to small businesses that are designed to encourage growth and reduce red tape. The Small Business Restructure Rollover (SBRR) scheme is a tax concession that simplifies the process of transferring assets when restructuring a small business.

Traditionally, businesses that underwent restructuring would be expected to pay income tax on the gains or losses associated with certain types of asset transfers. Instead, the SBRR allows eligible businesses to record zero losses or gains from these transactions, reducing unnecessary tax expenses.

The SBRR is designed to help small businesses perform legal restructures that support the business’ goals. It applies to several categories of assets:

  • CGT assets
  • Revenue assets
  • Trading stock
  • Depreciating assets
  • Membership interests

The Benefits of the SBRR Scheme

Small businesses face a huge number of challenges. Changing market conditions, shifts in consumer demand, supply problems and the economic environment can all affect your operation.

Staying afloat means being flexible enough to change your business as and when necessary. In some cases, that means altering the legal structure of your small business to manage cash flow issues, reduce personal liability or navigate compliance concerns. The SBRR makes it easier for owners to restructure the legal entity of their business without incurring additional income tax debts.

Ultimately, this reduces red tape, helps businesses manage their tax liabilities and it promotes flexibility in small business operations.

Eligibility Criteria for the SBRR

The SBRR is open to most small businesses in Australia. To be eligible, both entities need to be considered Australian residents for tax purposes. You’ll also need to meet a few other criteria:

  • Both entities must qualify as a small business with an annual turnover of less than $2 million. Sole traders, partnerships, trusts and companies are all eligible to be considered small businesses.
  • Your business (and any affiliated entities) must have a net assets worth less than $6 million.
  • Both parties must agree that the asset transfer is subject to the rollover scheme.
  • The ultimate economic ownership of the assets must remain unchanged. The ultimate economic ownership (UEO) lies with the individuals who directly (or indirectly) own an asset.
  • The UEO of the assets cannot change within 3 years of the asset transaction.
  • The restructuring process must be genuine and offer benefits to the owners of the business. This includes restructuring to manage cash flow, reduce compliance requirements or limit personal liability. Restructuring to take advantage of better tax requirements does not qualify as a genuine restructuring.

An Example of How the SBRR Works

The SBRR is a relatively complex scheme. Ultimately, it’s designed to benefit small businesses by simplifying the restructuring process and allowing business to evolve. To help understand what’s going on, we’ve prepared a short small business restructure rollover example:

After several years of offering floral arrangements as a side hustle, Jennifer is struggling to keep up with demand for her work. She decides it’s time to turn her hobby into a business. Jennifer doesn’t know a lot about business, so she wants to keep things simple by operating as a sole trader. After obtaining an ABN and buying a shop front, Jennifer opens her business and commences trading.

Jennifer’s flower shop enjoys plenty of success over the next few years and she’s able to grow her team and employ additional staff. Then, with the opening of a major wedding venue in a neighbouring city, Jennifer decides that it’s time to expand and take advantage of the new opportunity! Jennifer has learned more about business and consults her accountant who advises incorporating her business as a private company. This will limit her personal liability and provide a framework for further growth in the business.

Jennifer registers an ACN and begins the process of transferring her business operations. Because the ACN is a new business entity, she needs to transfer her existing assets from her sole tradership, including:

  • Her existing shop real estate (a CGT asset)
  • Her tools and display cabinets (depreciating assets)
  • The flowers in her inventory (trading stock)
  • The company van she uses to make deliveries (depreciating asset)

Jennifer’s business is eligible for the SBRR and the UEO of her assets remains unchanged. That means she can transfer ownership of the assets from her small business to the new company without incurring new income tax debts!

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