Subdivision 328-G Restructure Roll-over: Asset Transfer vs Share Exchange

For expanding small-to-medium enterprises (SMEs) and founder-led groups, transitioning between operational structures—such as moving from a discretionary trust to a dual-tier holding company and operating entity—presents severe income tax and capital gains tax (CGT) hurdles. Under ordinary principles in the Income Tax Assessment Act 1997 (ITAA 1997), disposing of business assets, goodwill, or equity triggers CGT event A1 under section 104-10 or balancing adjustments under Division 40 for depreciating assets. To alleviate these friction costs for growing entities, the federal tax framework offers statutory concessions: Subdivision 328-G (the Small Business Restructure Roll-over, or SBRR) and Subdivision 124-M (scrip-for-scrip rollover relief). However, conflating an active asset carve-out with an interposing holding company share swap can trigger severe, unmitigated tax exposures, including immediate clawback assessments and anti-avoidance interventions under Part IVA.

Advising on these transactions requires strict adherence to statutory mechanics rather than broad commercial assumptions. Subdivision 328-G permits eligible entities to transfer active assets without realizing an immediate income tax liability, provided the transfer forms part of a 'genuine restructure' and maintains proportionate 'ultimate economic ownership' (UEO) under section 328-440. Conversely, Subdivision 124-M governs equity-for-equity exchanges where owners swap existing shares or trust units for replacement equity in an acquiring entity. Navigating these pathways demands precision: a single misstep regarding family trust elections, asset classification, or subsequent equity realisations within three years can invalidate the rollover entirely. This technical analysis unpacks the operational, statutory, and regulatory boundaries governing Subdivision 328-G versus Subdivision 124-M, ensuring advisers and commercial principals execute transactions that withstand Australian Taxation Office (ATO) audit scrutiny.

The central statutory gatekeeper of Subdivision 328-G is the requirement for continuity of 'ultimate economic ownership' (UEO). Under paragraph 328-430(1)(c), the transaction must not result in any change in the ultimate economic ownership of the transferred assets. Section 328-440 defines this requirement with arithmetic precision: the individuals who held the ultimate economic ownership of the asset immediately before the transfer must continue to hold that ownership immediately after the transfer takes effect.

Where assets move between fixed entities (such as sole traders, partnerships, fixed unit trusts, and standard corporate entities with ordinary shares), the test requires absolute mathematical proportionality. If an individual owns 60% and another individual owns 40% of the shares in Company A, a transfer of active assets to Company B requires that the same two individuals own precisely 60% and 40% of Company B's ordinary shares [legislation.gov.au: ITAA 1997 s 328-440]. Any non-proportional dilution—such as introducing an employee share scheme interest, granting variable-dividend alphabet shares, or bringing in external investment equity as part of the restructure—violates section 328-440 and causes the rollover to fail ab initio. When this occurs, CGT event A1 applies at market value under the section 116-30 market substitution rules, resulting in an unmitigated dry tax liability across the enterprise.

Paragraph 328-430(1)(a) mandates that the transaction must form part of a 'genuine restructure of an ongoing business'. The ATO formalized its interpretation of this qualitative threshold in Taxation Determination TD 2020/2, which delineates the statutory safe harbour rule and clarifies the parameters under which the Commissioner will examine whether an arrangement is artificial or commercially deficient.

Under section 328-435, the genuine restructure safe harbour is satisfied if, throughout the three-year period following the transfer:

1. There is no change in the ultimate economic ownership of any of the significant assets transferred (other than trading stock disposed of in the ordinary course of business);
2. Those significant assets continue to be active assets of an enterprise carried on by the transferor, transferee, or an affiliated entity; and
3. The assets are not used to confer private advantages or extracted from the commercial sphere [ato.gov.au: TD 2020/2].

Failing to meet this safe harbour does not automatically invalidate the rollover, but it removes statutory immunity, forcing the entity to prove that the restructure served an authentic commercial purpose under general principles. In TD 2020/2, the ATO explicitly states that restructuring in preliminary anticipation of an asset sale, initial public offering, or third-party equity injection does not constitute a genuine restructure of an ongoing business. Restructures designed to segment assets to facilitate an unencumbered sale within 36 months invite immediate disqualification, causing the ATO to revoke Subdivision 328-G relief retroactively.

The execution of an asset-for-equity or share-for-share restructure involves latent statutory traps that can trigger immediate capital gains or income tax assessments if unaddressed by advisory teams.

First, consider the erosion of the Pre-CGT status of underlying assets. Under section 328-460 of the ITAA 1997, where an asset that was acquired prior to 20 September 1985 is transferred under Subdivision 328-G, it unequivocally loses its pre-CGT status. The transferee is deemed to have acquired the asset on the date of transfer for its roll-over cost base. By contrast, a Subdivision 124-M scrip-for-scrip reorganisation preserves the pre-CGT character of the underlying equity via the cost base allocation rules in section 124-800. Advising a client to transfer pre-CGT land, commercial premises, or legacy goodwill under Subdivision 328-G represents a catastrophic and irreversible crystallisation of future CGT liability.

Second, practitioners must be vigilant regarding the distribution of equity issued as consideration. Under section 328-450, if an operating entity transfers an active asset to a new company, and that new company issues shares to the original entity's underlying owners rather than the transferor entity itself, practitioners must ensure this does not create a deemed dividend under Division 7A of Part III of the ITAA 1936 or an assessable distribution under section 44. The asset transfer and the corresponding issuance of equity must be structured through valid corporate capital contribution mechanisms or formal assignment agreements to avoid triggering CGT event K11 or unfunded Division 7A benchmark interest requirements [ATO: Division 7A].

Finally, the ATO continues to scrutinise restructures followed by synthetic equity sales, private equity recapitalisations, or pre-arranged debt-funded redemptions under Part IVA of the ITAA 1936. Where an adviser establishes a holding company framework using rollover relief solely to access the Small Business CGT Concessions (Subdivision 152-C or 152-D) on an impending exit, the Commissioner may determine that the dominant purpose of the scheme was to obtain a tax benefit, rendering the rollover void and applying substantial administrative penalties.

Navigating entity restructuring across Australian corporate environments demands absolute precision between legal documentation and federal tax statutes. In principal-led practice, the most severe breakdowns occur when business owners attempt to simultaneously solve asset protection concerns and bring in non-family equity within a single reorganisation. Attempting to execute an asset carve-out under Subdivision 328-G while concurrently issuing equity incentives or third-party shares fundamentally ruptures the ultimate economic ownership test.

Professional governance standards, including APES 110 (Code of Ethics for Professional Accountants), dictate that corporate advisers must reject commercial assumptions and rigorously trace beneficial interests through every link in the ownership chain. Where active assets are separated from operating risks, the structure must be supported by valid commercial documentation—formal business sale agreements, independent valuations, cross-entity service agreements, and correctly lodged Family Trust Elections. A restructure is not complete when the Australian Securities and Investments Commission (ASIC) registers the new entities; it is complete only when the tax cost base schedules, register of members, and revenue authority reporting are fully synchronized to withstand regulatory audit.