Small Business Restructure, Div 328 and the PSI-Adjacent Deduction
Marco operates a café as a sole trader with turnover of $1.8m and aggregated turnover of $2.2m. He wants to incorporate, transferring plant ($80,000 market value, $40,000 cost), goodwill ($300,000) and a lease. He also has a $250,000 carried-forward loss from a failed food-truck venture. Marco's spouse Lena works 10 hours weekly in the café and he wants to pay her $60,000, which is above market rate for the hours. Marco also prepaid $36,000 in December 2024 for 12 months of rent and claims the full amount. He is registered for GST. He asks whether he can use the small business restructure rollover and whether the losses survive.
1. Advise on the availability of the small business restructure rollover and the treatment of the losses.
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Restructure rollover (Subdiv 328-G). The rollover applies to a genuine restructure of an ongoing business where the transferor is a small business entity (aggregated turnover under $10m) and the assets are active assets. Marco's aggregated turnover of $2.2m qualifies. Conditions:
- The transfer must be to a company where Marco and Lena are the only shareholders, and the company must be a small business entity.
- The assets must be active assets; plant, goodwill and the lease all qualify.
- There must be no material change to the ultimate economic ownership - Marco and Lena must hold the same proportionate interests.
- The rollover is chosen by the transferor and the transferee in writing.
If satisfied, the transfer is CGT-free and the transferee inherits the transferor's cost base and pre-CGT status. Marco must record the choice in the company's first return.
Losses. The $250,000 loss was incurred by Marco as a sole trader. On incorporation, the loss remains with Marco personally; it does not transfer to the company. Marco can offset it against his personal income (including salary or dividends from the company) subject to the non-commercial loss rules. If the café business is now profitable, the loss may be deductible under s 35-10 if Marco meets the income requirement or one of the exceptions. The company cannot use the loss.
GST. The transfer of a going concern may be GST-free if the parties agree in writing and the company is registered. Marco should document this to avoid GST on the $380,000 of assets.
2. Assess the $60,000 payment to Lena and the $36,000 prepaid rent deduction.
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Lena's wages. A deduction is available only for payments that are genuinely incurred in gaining assessable income and are reasonable. Paying $60,000 for 10 hours weekly (roughly $115/hour) is well above market rate; the ATO will treat the excess as non-deductible and potentially as a personal services income alienation issue if the café income is PSI (it is not, because it is a business with substantial equipment and premises). The reasonable amount should be benchmarked - perhaps $25,000–$30,000 for 10 hours at award rates. The excess is not deductible and may be treated as a dividend or a fringe benefit. Marco should also ensure PAYG withholding and superannuation guarantee (11.5% from 1 July 2024) are applied to Lena's actual wage.
Prepaid rent. Under s 82KZM ITAA 1936, prepayments by a small business entity (turnover under $10m) are deductible in the year paid if the expenditure does not exceed $1,000 or the eligible service period is 12 months or less ending in the next income year. Marco's $36,000 covers 12 months from January 2025 to December 2025, so the service period ends within the next income year and the full deduction is available. If the period extended beyond 12 months, the deduction would be apportioned. Marco should confirm the lease term and retain the invoice and agreement.
GST. The rent is a taxable supply; Marco claims $3,273 in input tax credits, and the net deduction is $32,727.