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  • 8 Loss, destruction or compulsory acquisition of an asset

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    Unless you acquired a CGT asset before 20 September 1985 (pre-CGT) , you may have to pay income tax on any capital gain you make on the loss, destruction or compulsory acquisition of an asset.

    If you receive money or another CGT asset, or both, as compensation for an event which is an involuntary disposal of an asset, or under an insurance policy against the risk of such an event happening, you may be able to choose to:

    • defer your liability to pay tax on any capital gain arising on the disposal or
    • have any replacement asset treated as a pre-CGT asset if the original asset was acquired before 20 September 1985.

    This deferral of taxation or retention of pre-CGT status is known as roll-over. It may be available if one of the following events happens.

    • All or part of a CGT asset is lost or destroyed.
    • A CGT asset:
      • is compulsorily acquired by an Australian government agency – that is, the Commonwealth, a State, a Territory or one of their authorities
      • is disposed of to an Australian government agency after they serve a notice on you inviting you to negotiate a sale agreement, but informing you that, if the negotiations are unsuccessful, the asset will be compulsorily acquired.
    • A lease granted to you by an Australian government agency under a Commonwealth, State or Territory law expires and is not renewed.

    The roll-over will also apply to an asset that is compulsorily acquired after 11 November 1999 by a private purchaser but through a statutory power (see Note 1).

    This roll-over is not available for plant disposed of after 11.45 am on 21 September 1999. Instead, where the asset s lost or destroyed or an Australian government agency acquires it compulsorily or by forced negotiation, a balancing charge offset will be available under the depreciation provisions. The treatment will allow you to not include an amount in your assessable income by way of a balancing adjustment but to offset that amount against the cost of a replacement asset or assets.

    If you choose to take roll-over you do not need to lodge a written election stating your choice. It is indicated by the way in which you prepare your tax return.

    You cannot defer a capital loss but you can use it to reduce any capital gain made in the current income year or a later year.

    Note 1: At the time of printing this is not yet law.

    Time of the CGT event

    You need to know the time of a CGT event to determine in which income year a capital gain or loss affects your income tax.

    If an asset is lost or destroyed and you receive compensation, the time of the CGT event is when you first receive the compensation.

    If you do not receive any compensation, the time of the CGT event is when the loss is discovered or the destruction occurred.

    If an asset for which there is roll-over is compulsorily acquired from you by an Australian government agency, the time of the CGT event is when:

    • you first received compensation from the agency
    • the agency becomes its owner
    • the agency, under its power of compulsory acquisition:
      • enters the asset or
      • takes possession of the asset.

    If an asset is disposed of to an Australian government agency following negotiation, rather than under their power to compulsorily acquire it, the time of the CGT event is:

    If a lease granted by an Australian government agency expires and is not renewed, the time of the CGT event is when the lease expires.

    If you receive money

    If you receive money because a CGT event happens, you can choose roll-over only if:

    • you incur expenditure in acquiring another CGT asset or
    • part of the original asset is lost or destroyed and you incur expenditure of a capital nature in repairing or restoring it.

    You must incur at least some of the expenditure no earlier than one year before the event happens or within one year after the end of the income year n which the event happens. For example, you paid for the repair of an asset for which you were compensated after part of it was destroyed on 1 September 1998. Your expenditure qualifies for the concession if it is incurred any time during the period 1 September 1997 to 30 June 2000. The Australian Taxation Office may extend this period in special circumstances.

    The replacement asset need not be identical to the one it is replacing. However, for roll-over to apply, you must use it in the same business or for the same or a similar purpose as the one for which you used the original asset. For example, there is no roll-over if you buy a rental property with money you receive when your manufacturing business is destroyed.

    You cannot hold as trading stock any replacement asset you acquire.

    Consequences of receiving money

    If you receive money and choose to obtain a roll-over, these are the consequences.

    Original asset acquired before 20 September 1985

    If you acquired the original asset before 20 September 1985 and if:

    • you repair or restore it or
    • you replace it:
      • at a cost of no more than 120 per cent of its market value at the time of the event or
      • at any cost, provided it, or part of it, was lost or destroyed by a natural disaster and the replacement asset is substantially the same

    you are taken to have acquired the repaired or replacement asset before that day.

    This means that you disregard any capital gain or loss you make when a later CGT event happens to the repaired or replacement asset.

    Example: Replacement after a natural disaster

    Henry acquired a semitrailer for his transport business in June 1985. The asset was totally destroyed by a bushfire at a time when it had a market value of $150,000.

    Henry is not subject to any cost limit on the purchase of a new semitrailer because the old one was destroyed by a natural disaster. Provided it is substantially the same as the old one, the vehicle is treated as if it had been acquired before 20 September 1985 and any capital gain on a later disposal is therefore not subject to tax.

    If it had been destroyed other than by a natural disaster, Henry would have been entitled to claim pre-CGT status for the replacement vehicle only if it had cost no more than $180,000 ($150,000 × 120%).

    End of example
    Original asset acquired on or after 20 September 1985

    If you acquired the original asset after 20 September 1985 and if the amount you spend on the repair or replacement of the asset is not equal to the amount of money you received when the event happened, what roll-over s available for you depends on whether:

    • the money you received exceeds the cost of repairing or replacing the asset and
    • the capital gain you make when the event happens is:
      • more than that excess or
      • less than or equal to that excess or
    • the money received does not exceed the cost ofrepairing or replacing the asset.
    Money received exceeds the cost of repair or replacement

    If you do not use all of the money you received to repair or replace the original asset, the amount of capital gain you must include in your assessable income on your tax return depends on whether the capital gain is more or less than the difference between the amount you received and the cost of the repair or replacement.

    If the capital gain is more than that difference, your capital gain is reduced to the amount of the excess. Include this amount on your tax return in the year the event happens. This gain may be eligible for the 50 per cent CGT discount.

    When a later CGT event happens, the expenditure to include in the cost base of the asset is reduced by the amount by which the gain - before it was reduced - is more than the excess. This has the effect of deferring part of the capital gains tax liability until a later CGT event happens.

    Example: Money received is more than the expenditure incurred

    On 28 December 1999, Patrick received $120,000 from his insurance company in compensation for the loss of his yacht, which sank on 22 October 1999 after hitting a reef and could not be salvaged. He spent $110,000 to purchase a replacement yacht.

    Patrick made a capital gain (non-indexed) of $15,000 on the original yacht. This was the difference between its cost base of $105,000 and the amount he received from the insurance company.

    Compensation money received

    $120,000

    less Cost base

    $105,000

    Capital gain

    $15,000

    Compensation money received

    $120,000

    less Replacement expenditure

    $110,000

    Excess

    $10,000

    The compensation money ($120,000) exceeds the replacement expenditure ($110,000) by $10,000. The capital gain ($15,000) is $5,000 more than the excess of $10,000. The capital gain is reduced to the excess amount of $10,000 and Patrick must include this amount as a capital gain in his assessable income in his 1999-2000 tax return.

    If Patrick is eligible for the 50 per cent CGT discount, the $10,000 excess is Patrick's nominal capital gain. Therefore, Patrick must include $5,000 ($10,000 × 50%) in the calculation of his net capital gain/loss for the 1999-2000 income year.

    As well, the expenditure he incurred on the replacement asset is reduced by the balance of the capital gain ($5,000) to $105,000. In this way $5,000 of the capital gain is deferred.

    End of example

    If the capital gain is less than or equal to the excess (the compensation amount less the cost of the repair or replacement), the capital gain and the expenditure on the repair or replacement are not reduced.

    Money received does not exceed the cost of repair or replacement

    If the amount of money you received is less than or equal to the expenditure you incurred to repair or replace the original asset, any capital gain is disregarded. The expenditure you include in the cost base of the asset when a later CGT event happens is reduced by the amount of the gain. Again, the capital gain is deferred.

    Example: Expenditure incurred is more than the money received

    Gerard's business premises were destroyed by fire on 15 March 2000. He received $46,000 in compensation from his insurance company.

    It cost him $57,000 to reconstruct the premises, $11,000 more than the amount of compensation he received.

    Gerard made a capital gain of $2,000 because his cost base for the building was $44,000 at the time of the fire.

    Compensation money received

    $46,000

    less Cost base

    $44,000

    Capital gain

    $2,000

    Compensation money received

    $46,000

    less Replacement expenditure

    $57,000

    Shortfall

    $11,000

    As the compensation money does not exceed the repair expenditure, the capital gain is disregarded. However, the amount of expenditure that Gerard can include in the cost base of the repaired building is reduced by the amount of the capital gain ($2,000) to $55,000.

    End of example

    If you receive an asset

    If you receive a replacement asset when the event happens, you can choose a roll-over only if:

    • the replacement asset is not held as trading stock when you acquire it and
    • the market value of the replacement asset is more than the cost base of the original asset just before the event happened.

    Consequences of receiving an asset

    If you choose to obtain a roll-over when you receive a replacement asset, any capital gain you make from the original asset s disregarded. These are the other consequences.

    Original asset acquired before 20 September 1985

    If you acquired the original asset before 20 September 1985, you are taken to have acquired the new asset before that day.

    Original asset acquired on or after 20 September 1985

    If you acquired the original asset on or after 20 September 1985, the first element of the cost base or reduced cost base of the replacement asset is taken to be the cost base or reduced cost base of the original asset at the time of the event.

    Example: Asset received

    Jon acquired land after 19 September 1985 that the State Government compulsorily acquired on 14 July 1999. The cost base of the land at the time it was compulsorily acquired was $180,000. As compensation, Jon received another piece of land with a market value of $200,000.

    Because the market value of the replacement land was greater than the cost base of the original land just before it was compulsorily acquired, the capital gain Jon made on the disposal of the original land is disregarded. Jon is taken to have paid $180,000 to acquire the replacement land - that is, the cost base of the original land at the time it was compulsorily acquired.

    End of example

    If you receive both money and an asset

    If you receive both money and an asset and choose to take a roll-over, the requirements and consequences are different for each part of the compensation.

    Consequences of receiving both money and an asset

    You need to separately determine what happens in relation to the replacement asset and the money, having regard to the proportion of the original asset attributable to each type of compensation.

    The rules described above are then applied separately to the money and to the asset.

    Example: Replacement land received as compensation

    The State Government compulsorily acquires land Kris bought in 1999. Its cost base at the time is $150,000 but Kris receives compensation worth $160,000.

    Half of the total compensation is money ($80,000) and half is replacement land (market value $80,000). Therefore, the cost base of the original land attributable to each part of the compensation is $75,000 (50% × $150,000). Kris buys additional land for $80,000.

    The total capital gain is $10,000 - proceeds of cash and property totalling $160,000 less the cost base of $150,000. Half of this capital gain can be attributed to the money and half to the asset (the replacement land).

    The money Kris received as compensation does not exceed the amount he paid to buy the replacement land. He can therefore disregard the $5,000 of the capital gain that is attributable to the money compensation. The expenditure on the additional land is reduced by $5,000 so the first element of its cost base is only $75,000.

    As the market value of the replacement land is more than that part of the cost base of the original land attributable to the asset compensation, Kris can choose to take roll-over relief and disregard the capital gain of $5,000 attributable to the land.

    As a result, that part of the cost base of the original asset attributable to the replacement land ($75,000) forms the first element of its cost base, not its market value ($80,000) when it was acquired.

    End of example

    Indexation

    If a CGT event happens to the replacement asset - for example, a later disposal - for indexation and the CGT discount the 12-month rule applies provided the periods of ownership of the original asset and of the replacement asset are together at least 12 months.

    Last modified: 18 Sep 2009QC 18323