Small businesses often change their business structure from a simple structure, like a sole trader to a more complex structure; for example, a company or trust.

The ATO has identified the following common errors made by taxpayers who have changed their business structure:

  • Reporting income for the wrong entity;
  • Claiming tax deductions for expenses incurred by another entity; and
  • Personal use of business funds and assets.

When restructuring a business to a company, the following principles must be remembered:

  • The company is a separate legal entity from the shareholders or directors;
  • Money earned by the company belongs to the company;
  • The company owns the assets – shareholders or directors cannot treat these assets as their own; and
  • Use of the company’s assets for personal use, may be treated as a taxable benefit to the director or shareholder – the benefit could be subject to income tax or fringe benefits tax.

If a business is restructured into a trust, the trustee’s responsibilities are as follows:

  • Managing the trust’s tax affairs;
  • Paying tax liabilities such as PAYG withholding tax or tax on distributions of income to minors or non-resident beneficiaries; and
  • Holding the trust property (including assets, investments and income) for the benefit of beneficiaries.

Concessions are now available in the capital gains tax (CGT) law to allow changes in business structures without attracting CGT which usually applies when a change in ownership occurs. The concessions may apply if the transfer of an active asset of a business to another small business entity is part of a genuine business restructure without changing the ultimate economic ownership of the asset. The following criteria must be satisfied:

  • The transfer of the asset is, or is part of, a genuine restructure of an ongoing business;
  • Each party to the transfer is one of the entities listed below:
    • Small business entity
    • Affiliate of small business entity
    • Entity connected with an entity that is a small business entity
    • Partner in a partnership that is a small business entity
  • No material change occurs in the ultimate economic ownership of the transferred asset;
  • The asset being transferred is a CGT asset that is an active asset;
  • Both the transferor and each transferee are tax residents of Australia, and
  • Both the transferor and each transferee choose to apply the CGT roll-over.

Furthermore, the small business restructure CGT roll-over relief is not available if the transferor and any transferee is an exempt entity or a complying superannuation entity.