You may be entitled to rollover relief, if a balancing adjustment event occurs to a depreciating asset because of a change in ownership. This allows you to ignore the balancing adjustment event, and the consequent income tax liability, until the transferee later disposes of the asset.
A balancing adjustment event may occur when you no longer hold or use an asset. For example when there is a change in asset ownership.
The change in ownership can be a result of a:
- change in a partnership structure
- transfer of assets as a result of a marriage or relationship breakdown
- transfer of assets to a wholly owned company.
See also:
Balancing adjustment events
Rollover relief may be available when the following balancing adjustment events occur.
Partnership restructures
Rollover relief may be available if there is a change in your partnership structure that constitutes a balancing adjustment event – for example, if:
- the partnership is reconstituted
- there is a variation in the interests of partners in the partnership
- a sole trader takes on a partner
- one partner leaves and the remaining partner carries on as a sole trader.
Rollover relief is available where both:
- at least one of the entities that had an interest in the asset before the change has an interest in the asset after the change
- the asset either was a partnership asset before the change or becomes one because of the change.
Marriage or relationship breakdowns
The simplified depreciation rules also provide optional rollover relief where there is a change in ownership that results in a capital gain where all assets in a small business pool are transferred to another taxpayer as a result of a marriage or relationship breakdown.
This rollover applies to balancing adjustment events occurring in 2007–08 and later income years.
See also:
Company incorporations
The simplified depreciation rules also provide optional rollover relief where there is a change in ownership that results in a capital gain where either:
- a sole trader, trustee or a partnership disposes of all the assets in the small business pool to a wholly-owned company
- the partners in a partnership choose a rollover under Subdivision 122-B for disposing of their capital gains tax (CGT) assets consisting of their interests in the property to a wholly-owned company.
This rollover applies to balancing adjustment events occurring in 2007–08 and later income years.
If you choose the rollover relief
The effect of the rollover relief is that:
- you don't subtract the termination values of the depreciating assets from the closing balance of the small business pool because of the change in ownership – the transferee simply takes over your depreciating asset pool
- for assets that were written off by the transferor under instant asset write-off or temporary full expensing, you don't include the taxable purpose proportion of the asset's termination value in assessable income.
The transferred assets must go into the small business pool, regardless of whether the transferee chooses to use the simplified depreciation rules or not. However, they don't have to use the simplified depreciation rules for any new assets or add any new assets to the pool. They must choose the simplified depreciation rules for the transferred assets in an earlier year and, therefore, they must continue in the small business pool.
In the year that the change occurs, you split the pool deduction equally between you and the transferee. For income years after the change occurs, the transferee claims the deductions.
Conditions
To be eligible for rollover relief, you must work out deductions for the depreciating assets using the simplified depreciation rules. As a result, the assets must be in the small business pool at the time of the balancing adjustment event.
The transferee must hold all the depreciating assets immediately after the change.
Both you and the transferee must:
- choose to apply rollover relief
- put this choice in writing and keep this document for five years after the end of the income year in which the change occurs.
The written choice must contain enough information about the pooled assets for the transferee to work out how to work out the deductions under the simplified depreciation rules.
You must make this choice within six months of the end of the transferee's income year in which the balancing adjustment event occurred, unless we allow a longer period.
A choice you make about primary production assets applies to the transferee as if it had been made by them.
If you stop deducting amounts for depreciating assets under the simplified depreciation rules, or are no longer eligible to use the rules, depreciating assets you have allocated to a small business pool continue to be depreciated under these rules.
This means that former small businesses may still choose rollover relief for depreciating assets allocated to a small business pool when a balancing adjustment event occurs.
A transferee does not need to choose to use the simplified depreciation rules to be eligible for the rollover. They will be treated as having been a small business and then having stopped being a small business for that year. As a result, they continue to allocate the assets to the small business pool for that year, and those assets continue to be depreciated under the simplified depreciation rules.
If you don't choose the rollover relief
If you transfer all the pooled assets to another entity and are otherwise eligible to choose the rollover, but decide not to, the transferred assets must still go into the small business pool. The transferee must work out deductions for those transferred assets according to the simplified depreciation rules.
Assets first used and improvement costs incurred in change year
If you started to use an asset or had one installed ready to use during the year that the change occurred, the deduction is split equally between you and the transferee. The same applies for improvement costs you incurred.
If the transferee started to use an asset or had one installed ready to use during the change year, the transferee claims the deduction and you cannot claim anything for the asset. The same applies for improvement costs the transferee incurred.
If you started to use a certain asset or had one installed ready to use, and a balancing adjustment event occurred before the time the change occurred, the transferee:
- can't claim anything
- does not include the taxable purpose proportion of the asset's termination value in their assessable income.
The same applies for improvement costs that you incurred.
Changes in taxable use
The transferee uses the taxable purpose proportion estimates that you made for assets you held just before the change occurred. The transferee does not adjust the opening pool balance for the year in which the change occurs to reflect changes in estimates of income producing use as a result of the change. Changes in the taxable purpose proportion you made are taken to have been made by the transferee.
Example
Example: Reconstituted partnership
In the 2018-19 income year, a partnership comprising equal partners Teresa and Sally agree to accept Matthew as a partner with a 30% share.
Teresa and Sally each sell Matthew the equivalent of a 15% stake in the partnership. This is a balancing adjustment event.
The effect of this is that the old partnership must subtract the termination value of the depreciating assets from the small business pool balance.
The partnership has five assets, and all are used 100% for business purposes. The opening pool balance is $160,000. The partnership adjustment occurs on 30 June 2019 and the termination value of the assets for this balancing adjustment event is their combined market value of $180,000. The balancing adjustments that arise as a result of this change in the constitution of the partnership put the pool into a negative balance.
Normally, Teresa and Sally would have to account for this negative amount in the partnership’s assessable income.
However, if Teresa and Sally choose to apply rollover relief, and Matthew as a partner in the new partnership also agrees, they ignore the balancing adjustment event. The old partnership of Teresa and Sally can claim 50% of the deduction for the 2019 income year worked out under the simplified depreciation rules.
The new partnership of Teresa, Sally and Matthew can claim the remaining 50% deduction for the 2018-19 income year. The assets are allocated to the small business pool for the new partnership, and the new partnership continues to claim deductions in respect of this pool.
If Teresa leaves the partnership in the 2019-20 income year, this will mean another partial partnership change. Provided all of the partners chose to apply the rollover relief, the old partnership will not have to subtract the termination value of the assets from the respective pool balances. In effect, if the assets are worth $180,000 and this is greater than the pool balance at the time Teresa leaves, the partnership of Teresa, Sally and Matthew will not have to account for the negative balance that would normally occur.
The partnership is not assessed on any taxable gain as part of this partnership adjustment – instead, a taxable gain or loss will only be accounted for when the partnership ultimately disposes of the assets.
End of example