Subdivision 328-G Rollover Mechanics: Transferring Active Assets vs Equity Interposition

Subdivision 328-G of the ITAA 1997 grants tax neutrality for transfers of active business assets between entities that satisfy the ultimate economic ownership test. To access the rollover, the transferor and transferee must be small business entities (SBEs) with an aggregated turnover under $10 million, or entities affiliated with or connected to an SBE under section 328-110 for the income year in which the transfer takes place. The scope of eligible assets under section 328-430 is precise: the rollover applies exclusively to an asset that is an active asset of an SBE under section 152-40 (excluding depreciating assets whose decline in value is calculated under Division 40, except where specifically incorporated through section 328-440). It encompasses CGT assets, trading stock, revenue assets, and depreciating assets used in the active conduct of a business. Crucially, passive investment assets—such as residential real estate held solely to derive passive rental income—remain entirely outside the boundary of Subdivision 328-G. Advisers must verify that every asset scheduled for conveyance qualifies as an active asset at the transfer time, rather than relying on enterprise-wide characterisations.

Section 328-430(1)(c) requires that the reorganisation does not result in a material change in the ultimate economic ownership (UEO) of the transferred assets. Furthermore, the share of that ownership held by individuals who had that ownership must remain substantially unchanged. In fixed structures—such as unit trusts, partnerships, and proprietary companies—measuring UEO requires mathematical tracing through legal and equitable shareholdings. For discretionary trusts, where beneficiaries have an expectancy rather than fixed proprietary entitlements, the statutory framework introduces a legal presumption under section 328-440. Where an asset is transferred to or from a discretionary trust, the UEO test is satisfied if the transferor or transferee has a family trust election (FTE) in force, and every individual who had or acquired UEO is a member of the designated family group under Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936). Failing to match the FTE designated individuals precisely invalidates the rollover, triggering unmitigated CGT event A1 liabilities based on market value substitution under section 116-30.

A frequent objective in corporate advisory is the segregation of valuable IP or business real property from operational trading risks. Taxpayers often seek to transfer plant, equipment, and customer-facing operations into an operating subsidiary, while retaining real property or valuable intellectual property in an asset-holding company. The legal friction arises from whether separating connected business assets compromises the requirement that the transaction constitutes a genuine restructure of an 'ongoing business'. Paragraphs 28 to 34 of LCR 2016/3 explicitly confirm that asset segregation designed to mitigate commercial trading risks, insulate enterprise value from operational claims, or enhance creditor asset protection does qualify as a bona fide reorganisation. However, the assets separated must continue to be used in the active conduct of a business by connected or affiliated entities. If valuable assets are segregated into a holding structure and subsequently leased to third parties or used for passive generation of returns, the continuity condition is breached.

Reorganising enterprise assets or equity demands precision in statutory execution. Local Knowledge delivers principal-led tax structuring that brings institutional-grade compliance to private enterprises. To review an asset transfer or corporate reorganisation, contact our team to speak directly with our principal.