Plenty of Australian startups don’t start as companies. They start as a consultant with an ABN, a freelancer whose side project grew teeth, a technical founder invoicing early customers as a sole trader while the product finds its shape. Then the business becomes real — a first hire, a first investor conversation, an ESOP to set up — and everyone agrees it’s time for a Pty Ltd.
Here’s the trap: transferring your business into your own new company is a disposal for CGT purposes. CGT event A1 happens to your goodwill, your customer contracts, your brand and your IP, and because you and the company aren’t dealing at arm’s length, the market value substitution rule deems you to have received market value — even if the company paid you nothing. If the business has become valuable, incorporating it the naive way manufactures a tax bill with no cash to pay it.
Subdivision 122-A of the Income Tax Assessment Act 1997 (Cth) is the classic fix: an optional rollover that lets an individual (or a trustee) dispose of a single CGT asset, or all the assets of a business, to a company and disregard the capital gain or loss — provided the deal is structured exactly the way the Subdivision demands.
The Conditions That Actually Bite
The rollover looks simple in outline and fails in the details. The requirements that matter, principally in section 122-20 and section 122-25:
- Shares are the only permitted price. Any consideration you receive must consist only of non-redeemable shares in the company — or shares plus the company undertaking to discharge liabilities in respect of the assets. No cash component, no loan account credit, no earn-out. Founders who have their accountant book part of the transfer price to a director’s loan account so they can draw it out later have, in that entry, broken the rollover.
- You must own all the shares just after the transfer. Not most of them — all of them, and in the same capacity in which you held the assets. The spouse who was going to hold 20% for income-splitting, the co-founder joining at incorporation, the incoming investor: any of them on the register at the moment of transfer kills the rollover. The sequence has to be: roll the business into a company you wholly own, then issue shares to others. (And once others hold shares, everything moves off the defaults — see the pre-seed document stack.)
- The value must line up. The market value of the shares you receive must be substantially the same as the market value of the assets transferred, less any liabilities the company takes over. Where the company does assume liabilities, section 122-35 caps them — for post-CGT assets, broadly at the assets’ cost bases — so a heavily geared business can’t be rolled in without crystallising something.
- Residency and status. In the standard case, you and the company must both be Australian residents, and the company can’t be exempt from income tax.
Then there are the assets the rollover won’t cover. Collectables, personal use assets and decorations awarded for valour (unless you paid for them) are excluded outright. Separately, precluded assets — depreciating assets, trading stock, interests in film copyright and registered emissions units, as defined in section 122-25(3) — are carved out of the CGT rollover even on a whole-of-business transfer. They can still travel across with the business; the CGT rollover just doesn’t do the work for them. Depreciating assets get their own balancing adjustment relief under section 40-340, with the company stepping into your tax values, and trading stock is dealt with under the trading stock rules rather than CGT. For a software or services business, where the value is goodwill and IP, this is rarely fatal — but it belongs on the checklist.
What You Get — and What You Merely Defer
Choose the rollover (no form; the choice is evidenced by how you lodge) and the consequences follow from sections 122-40 to 122-75 — section 122-40 for a single asset, sections 122-50 to 122-60 for a whole business, section 122-70 for the company. Your gain or loss is disregarded; the company inherits your cost bases; and your new shares take a cost base built from the cost bases of the assets you rolled in (plus the market values of any precluded assets that came across), less the liabilities the company assumed. Pre-CGT assets keep their pre-CGT status in the company’s hands — and where everything you transferred was pre-CGT with no precluded assets, the shares themselves are pre-CGT, with a mixed business apportioned between pre- and post-CGT parcels under section 122-60. Special timing rules in Division 115 preserve access to the CGT discount on the shares where the original assets had been held for at least 12 months.
Understand what you’ve bought: deferral, not forgiveness — and the deferred gain is now latent twice. The historical gain sits in your shares and in the assets inside the company, and a company gets no CGT discount when it eventually sells them. Which is why the rollover isn’t always the right answer. If your business would satisfy the small business CGT concessions, deliberately not rolling over — crystallising a gain the concessions reduce to little or nothing, and giving the company a market-value cost base — can beat deferral comfortably. Run both numbers before you choose.
122-A or 328-G?
The Subdivision 328-G small business restructure rollover covers similar ground with different trade-offs: it extends to trading stock, revenue assets and depreciating assets and tolerates family-group ownership shifts, but demands a “genuine restructure” and is confined to businesses under the $10 million aggregated turnover cap. Subdivision 122-A has no turnover limit and no genuine restructure test — the price is the rigid 100%-ownership and shares-only mechanics above. For a solo founder incorporating cleanly ahead of a raise, 122-A is usually the simpler, safer tool.
What the Rollover Doesn’t Fix
Subdivision 122-A answers exactly one question — federal income tax on the disposal. Everything else still has to be done properly: transfer duty is a state-by-state question (Queensland, for instance, exempts eligible small business restructures — turnover under $5 million, application to the QRO required — while other states have their own rules); GST usually needs the going concern exemption — the incoming company registered for GST, a written going-concern agreement, and the seller supplying everything necessary to keep the enterprise running until the day of supply; contracts need assignment or novation; IP needs a written assignment; employees, licences and registrations all need to move. And the company you’ve just created only helps you raise if the register is clean from day one.
Incorporating the business you already built should be a tax non-event. Subdivision 122-A makes it one — but only if the structure, the sequence and the paperwork are exactly right, and only after you’ve checked that deferring the gain is actually better than banking the concessions on it now.
This article is general information only, not legal or tax advice — whether Subdivision 122-A, Subdivision 328-G or no rollover at all is right for you depends on your assets, your numbers and where the business is headed. Viridian Lawyers advises Australian founders, startups and investors on structuring, restructures and capital raising. If you’re moving a sole trader business into a company ahead of a raise, get in touch before you sign the transfer.
