• Consequences of receiving money

    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

    If you receive money and choose to take a rollover, the consequences depend on whether:

    • the original asset was acquired before 20 September 1985
    • the original asset was acquired on or after 20 September 1985, and  
      • the money received for the asset is more than the cost of repair or replacement
      • the money received does not exceed the cost of repair or replacement.
       

    Original asset acquired before 20 September 1985

    If you acquired the original asset before 20 September 1985, you are taken to have acquired the repaired or replacement asset before that day if:

    • you repair or restore the original asset, or
    • you replace the original asset:  
      • at a cost of no more than 120% 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.
       

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

    Original asset acquired on or after 20 September 1985

    If you acquired the original asset on or after 20 September 1985, the way rollover applies will depend on whether the money you received is more or less than the cost of repairing or replacing the asset. If it is more, it also depends on whether the capital gain you make when the event happens is:

    • more than that excess, or
    • less than or equal to that excess.

    Money received is more than the cost of repair or replacement

    If you do not use all of the money you received to repair or replace the original asset, this affects your CGT obligation. The amount of capital gain you include 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 CGT discount (see chapter 2 for more information).

    When a later CGT event happens, the expenditure to include in the cost base of the asset is reduced by the difference between the gain before it is reduced and the excess. This enables you to defer part of your CGT liability until a later CGT event happens.

    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.

    (See example below)

    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. (See example below).

    Example - Money received is less than expenditure incurred

    Gerard's business premises were destroyed by fire on 15 March 2004. 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 apportioned to the building was $44,000 at the time of the fire.

    Money received

    $46,000

    Cost base

    $44,000

    Capital gain

    $2,000

    Money received

    $46,000

    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.

    Example - Money received is more than the expenditure incurred

    Assume that in the above example, Gerard incurred only $40,000 for repairs and the cost attributed to the building was $30,000.

    Money received

    $46,000

    Cost base

    $30,000

    Capital gain

    $16,000

    Money received

    $46,000

    Replacement expenditure

    $40,000

    Excess

    $6,000

    The compensation money ($46,000) is $6,000 more than the replacement expenditure ($40,000). The capital gain ($16,000) is $10,000 more than the excess of $6,000. The capital gain is reduced to the excess amount of $6,000.

    Gerard's capital gain (before applying the CGT discount of 50%) is $6,000. Therefore, assuming he has not made any other capital losses or capital gains in the 2003-04 income year (and does not have any prior year net capital losses) Gerard must include $3,000 ($6,000 x 50%) as his net capital gain for the 2003-04 income year.

    Also, the expenditure he incurred on the replacement asset is reduced by the balance of the capital gain ($10,000) to $30,000. This means $10,000 of the capital gain is deferred.

    End of example
    Last modified: 04 Mar 2016QC 27527