Navigating Business Succession: Small Business Rollover Relief
There are significant CGT concessions and deferrals available to small business as they transfer control to the next generation, including Subdiv 328-G Rollover Relief but careful planning is required to ensure the transition meets the strict regulatory requirements
Navigating Restructures - Key Limitations of S 328-G Rollover Relief
For business owners considering succession planning, asset protection, or bringing family members into ownership, changing your legal entity structure (such as moving from a sole trader or company into a discretionary trust) is often a vital strategic step.
Under Subdivision 328-G of the Income Tax Assessment Act 1997 (Cth), small business owners may be able to access Small Business Restructure Rollover Relief, which allows eligible small businesses entities to transfer active assets between legal entities without triggering immediate Capital Gains Tax (CGT) or income tax liabilities.
However, Subdivision 328-G is not an unrestricted pass to re-organise your commercial affairs. To ensure your restructure remains fully compliant, here is a concise overview of its core limitations, followed by our Subdiv 328-G Eligibility Checklist.
The Requirements
$10 Million Turnover Ceiling: Subdivision 328-G applies to Small Business Entities (SBEs) with an aggregated turnover under $10 million (in contrast to the $2 million ceiling under the Division 152 Small Business CGT Concessions).
Unchanged Ultimate Economic Ownership (UEO): The restructure must not materially alter the underlying individual economic ownership of the active business assets. If a discretionary trust is involved, all individual owners must fit strictly within the trust’s designated Family Trust Election (FTE) group.
Genuine Restructure & 3-Year Safe Harbour: The transfer must form part of an ongoing operational restructure, not a temporary tax-driven scheme or pre-sale arrangement. The ATO enforces a 3-year safe harbour rule restricting subsequent changes to ownership or asset use.
Tax Deferral, Not Exemption: Subdivision 328-G does not wipe out tax or uplift asset cost bases. The transferor’s cost base rolls over to the new entity, deferring capital gains tax until a future sale (though pre-CGT assets do retain their pre-CGT status).
Active Assets Only: Rollover relief is restricted to operational active assets (such as goodwill, business premises, trading stock, revenue assets, and depreciating assets). Passive investment assets (like residential rentals or share portfolios) are excluded.
Dual Written Election & Residency: Both transferor and transferee entities must be Australian tax residents and formally elect in writing to apply the rollover.
Where it can go wrong
Discretionary Trusts can prevent access
One of the most common issues arises where a business is transferred into a company owned by a discretionary family trust. Despite being a logical succession and asset protection strategy, the ATO's interpretation of the "ultimate economic ownership" rules can prevent the rollover from applying.
Asset Protection Restructures May Fail
Carrying on from the issue above, a restructure that separates trading risks from valuable assets, such as moving a business into a new company while retaining existing ownership, may not qualify where discretionary trusts are involved in the ownership chain.
Share Transfer Can Be Problematic
Transferring shares in a trading company to a trust may fail because the shares do not satisfy the required active asset tests, even where ownership remains within the same family group
Succession Planning Is Not Always Considered a Genuine Restructure
The ATO has indicated that succession planning alone may not constitute a genuine restructure of an ongoing business. This can create difficulties where owners wish to split businesses, separate ownership interests, or prepare for future generations.
The Control and Connection Rules are Strict
Where multiple family members or entities are involved, technical "connected entity" and control requirements can prevent access to the rollover, even where assets are being used in the business.
Subdivision 328-G Eligibility Checklist
Before proceeding with any restructure, ask:
Is the business genuinely continuing after the restructure?
Will the ultimate economic ownership be exactly the same before and after the transaction?
Are any discretionary trusts involved directly or indirectly?
Are the assets being transferred active assets for tax purposes?
Do all parties satisfy the small business entity, affiliate, or connected entity requirements?
Is the restructure being undertaken for commercial reasons rather than merely succession planning or ownership separation?
Has specialist tax and legal advice been obtained before implementation? The article concludes that obtaining a private ruling may often be prudent given the uncertainty in the application of the rules.
Key Takeaway
Subdivision 328-G can be a powerful concession, but it is far from a universal restructuring solution. Some of the most common succession-planning and asset-protection restructures undertaken by family businesses may not qualify. A careful review before implementation can prevent unexpected tax consequences and ensure the proposed structure achieves its intended objectives.
At Eastern Hill, we work closely with business owners, accountants and advisers to ensure restructuring and succession strategies are legally effective, commercially sound and tax-efficient before any transaction is implemented.
