Plenty of successful startups don’t begin as companies. The founder consults under an ABN while building the product, or two co-founders split revenue through a partnership, and by the time investors show interest there is a real business — customers, revenue, goodwill, a brand, a codebase — sitting in the wrong structure. Investors won’t subscribe for shares in a sole trader. The fix is obvious: incorporate and move the business in.
What is less obvious is that the move itself is a tax event. You cannot “convert” a sole trader or partnership into a company — you incorporate a new entity and transfer the business assets to it, and each transfer is a CGT event. Because you and your company are not dealing at arm’s length, the market value substitution rule applies: the assets are deemed disposed of at market value even if the company pays you nothing. Goodwill and self-created IP typically have a cost base near zero, so the whole value is gain — tax payable on money you never received, at exactly the moment the business needs every dollar.
Two rollovers in the Income Tax Assessment Act 1997 (Cth) exist to defer that outcome. For most founders, the modern one — the small business restructure rollover in Subdivision 328-G — does the job.
What Subdivision 328-G Does
Where it applies, the rollover switches off the income tax consequences of transferring active business assets between entities as part of a genuine restructure. The transferor disregards the gain or loss; the company takes the assets at the transferor’s existing tax cost. It is deliberately broad in the kinds of assets it covers — not just CGT assets like goodwill and IP, but also trading stock, revenue assets and depreciating assets, each rolled over under its own mechanism. That breadth is what makes it the default choice for moving a whole operating business.
The conditions, under section 328-430, are where the work is:
- Small business scale. Each party must be a small business entity for the income year — aggregated turnover under $10 million — or an entity that has an affiliate that is a small business entity, is connected with one, or is a partner in a partnership that is one. Aggregated turnover counts connected and affiliated entities, but almost every pre-Series A startup fits comfortably.
- Active assets. The rollover only covers assets used, or held ready for use, in carrying on the business. Goodwill, the brand, the codebase, customer contracts, plant and equipment all qualify. A passive investment held on the side does not.
- Genuine restructure of an ongoing business. More on this below — it is the test that decides marginal cases.
- No material change in ultimate economic ownership. The transaction must not materially change which individuals ultimately own the assets, or each individual’s proportionate share, immediately before and after. A sole trader taking 100% of the new company’s shares passes. Two equal partners taking 50/50 pass. Using the restructure to quietly move a co-founder from 40% to 30%, or to bring a new holder onto the register as part of the same transaction, fails — for everything transferred. (There is an alternative test for discretionary trusts with a family trust election, but it rarely matters for startup founders.)
- Residency and status. Both parties must be Australian residents (or meet equivalent tests), and neither can be an exempt entity or a complying superannuation entity. Both must choose for the rollover to apply.
“Genuine Restructure” and the Three-Year Safe Harbour
Parliament did not define “genuine restructure of an ongoing business”, so the ATO’s LCR 2016/3 carries the weight. The good news for founders: the ruling’s indicators of genuineness read like a startup’s reasons for incorporating — a bona fide commercial arrangement to facilitate growth or reduce administrative burden, with the same business continuing to run in the new structure — and its worked examples expressly treat incorporating to attract new investors, and restructuring for asset protection, as genuine. The bad news: the ruling excludes restructuring “in the course of winding down or realising their ownership interests”, or as a divestment or preliminary step towards realising the assets. Incorporating to grow is fine; incorporating as step one of a pre-agreed business sale is not.
Section 328-435 adds a safe harbour: the restructure is deemed genuine if, for three years after the transfer, there is no change in the ultimate economic ownership of the significant transferred assets, those assets remain active, and there is no material private use. Note what this means for a startup on a funding path: a priced round inside the three years — new investors taking equity — takes you outside the safe harbour. That is not fatal; the safe harbour is one way to satisfy the test, not the only way, and a restructure undertaken to become investable is squarely within LCR 2016/3’s contemplation. But it does mean the closer the restructure sits to a specific deal, the more the genuineness analysis needs to stand on its own evidence — board papers, advice, a documented commercial rationale — rather than the safe harbour.
When Subdivision 122-A Is the Better Tool
The older rollover in Subdivision 122-A (and its partnership sibling, Subdivision 122-B) covers the classic incorporation: an individual, trustee or partners transfer assets to a company and receive nothing but shares (the company may also take over liabilities), and immediately afterwards the transferor(s) own all the shares in the company. There is no turnover cap, no genuine restructure test and no safe harbour clock — but the consideration rules are strict, the transferor must end up wholly owning the company in the same proportions, and the mechanism is built around CGT assets, with depreciating assets handled under a separate balancing adjustment rollover. If your turnover is past $10 million, or the genuine-restructure analysis is uncomfortable, 122-A is often the cleaner path for a straight incorporation.
What Neither Rollover Fixes
Three limits catch founders out. First, deferral is not forgiveness. The gain is preserved in the company’s low asset cost base — and your shares in the new company have their own cost base rules — so tax is postponed to a later exit, not eliminated. The clock for the general 50% CGT discount also restarts on rolled-over assets. Second, the rollovers are income tax provisions only. GST needs its own analysis (a transfer of everything necessary for the business’s continued operation can be a GST-free going concern if the conditions, including a written agreement, are met), and transfer duty is state law — some states no longer duty non-land business assets while others still can, so the duty position depends on where the assets sit. Third, tax rollovers move tax attributes, not legal relationships. Customer and supplier contracts still need assignment or novation, employees must be moved with continuity of service handled properly, and registrations, licences and domain names must be transferred — the legal restructure is a project, not a form.
The Bottom Line
If you built your business as a sole trader or partnership and investors are circling, the restructure into a company is close to inevitable — the only question is whether you pay CGT on your own goodwill on the way in. Subdivision 328-G usually means you don’t, provided the same people own the same proportions afterwards and the restructure is genuinely about running and growing the business. Do it early, do it before the term sheet, and document why: the further the restructure sits from any particular deal, the easier every one of these tests becomes.
This article is general information only, not legal or tax advice — rollover eligibility turns on your turnover, assets, ownership structure and the commercial context of the restructure, and you should take advice on your specific position. Viridian Lawyers advises Australian founders on incorporation, restructures and investment readiness, and works alongside your accountant on the rollover analysis. If your business has outgrown its structure, get in touch.
