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  • Involuntary disposal of a CGT asset

    If your capital gains tax (CGT) asset is lost, destroyed or compulsorily acquired, you may receive money or another CGT asset (or both) as compensation. In this case, you can choose to:

    • defer your liability to pay tax on any capital gain arising on the disposal, or
    • get a CGT exemption for any replacement asset if you acquired the original asset before 20 September 1985.

    This concession is known as a rollover.

    If you choose to take the rollover, you don't need to lodge a written election stating your choice – it will be clear from the way you prepare your tax return.

    If the involuntary disposal results in a capital loss you can use it to reduce any capital gain made in the current income year or a later year.

    Find out about:

    Events for which the rollover is available

    The rollover is available if one of the following events happens:

    • all or part of your CGT asset is lost or destroyed
    • your CGT asset is compulsorily acquired by an Australian government agency
    • your CGT asset is compulsorily acquired by an entity (other than an Australian government agency or foreign government agency) under a power of compulsory acquisition conferred by an Australian or foreign law
    • you dispose of your CGT asset to an entity (other than a foreign government agency) after a notice is served on you inviting you to negotiate a sale agreement. You must have been informed that, if the negotiations are unsuccessful, the asset will be compulsorily acquired under a power of compulsory acquisition conferred by an Australian or foreign law
    • you dispose of land to an entity (other than a foreign government agency) where a mining lease was compulsorily granted over the land, the lease significantly affected your use of the land, the lease was in force immediately before the disposal and the entity to which you disposed of the land was the lessee
    • you dispose of land to an entity (other than a foreign government agency) where a mining lease would have been compulsorily granted over the land, the lease would have significantly affected your use of the land, and the entity to which you disposed of the land would have been the lessee
    • a lease that had been granted to you by an Australian government agency under a Commonwealth, state or territory law expires and is not renewed.

    The compulsory acquisition of minority interests for CGT assets, such as shares in a company, under the Corporations Act 2001 or similar foreign law, is excluded.

    This rollover generally doesn't apply to:

    Main residence

    A compulsory acquisition of part of your main residence may not qualify for the rollover, as the requirement that you acquire a replacement asset that is used for the same (or a similar) purpose may not be able to be met. However, the main residence exemption may apply.

    See also:

    Plant and other depreciating assets

    This rollover is not available for plant disposed of after 11.45am (by legal time in the ACT) on 21 September 1999 and other depreciating assets from 1 July 2001. Instead, if a depreciating asset is lost or destroyed, or acquired compulsorily or by forced negotiation (other than by a foreign government agency), the capital allowances provisions may allow for a balancing adjustment offset.

    This means that rather than including an amount in your assessable income by way of a balancing adjustment, you can offset that amount against the cost of a replacement asset.

    See also:

    Vehicles

    For rollover relief to apply, the replacement asset cannot be a car, motorcycle or similar vehicle.

    Timing of the CGT event

    You need to know the time of the CGT event to work out 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 received the compensation.
    • If you don't receive any compensation, the time of the CGT event is when the loss was discovered or the destruction occurred.
    • If your asset was compulsorily acquired by an entity under an Australian law or foreign law, the time of the CGT event is the earlier of when:
      • you first received compensation from the entity
      • the entity entered the asset (for example, land) or took possession of it.
    • If an entity acquires your asset following negotiation (rather than compulsorily acquiring it), the time of the CGT event is:
      • the date the contract to acquire it was made, or
      • the date of the change of ownership if there was no contract.
    • If a lease that had been granted to you by an Australian government agency expires and is not renewed, the time of the CGT event is when the lease expired.

    An Australian government agency is the Commonwealth, a state, a territory or one of their authorities.

    Receiving money

    If you receive money as compensation, for the rollover to be available you must incur expenditure on repairing the CGT asset, or acquiring another CGT asset, within a certain period.

    The consequences of applying the rollover depend on whether the:

    When the rollover is available

    If you receive money because your CGT asset is lost, destroyed or compulsorily acquired, you can choose the rollover only if:

    • you incur expenditure in acquiring another CGT asset that is used:
      • in your business (or installed ready for use in the business for a reasonable period), if the original asset was a business asset, or
      • otherwise, for a reasonable period for the same or a similar purpose as the original 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 in which the event happens.

    This period may be extended in special circumstances.

    Example: Rollover applies

    Trish paid for the repair of an asset for which she was compensated after part of it was destroyed on 1 September 2016. Trish's expenditure qualifies for the rollover concession if it is incurred any time during the period 1 September 2015 to 30 June 2018.

    End of example

    The replacement asset need not be identical to the one it is replacing. However, for the rollover 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. Also, your replacement asset cannot become an item of trading stock or a depreciating asset.

    Example: Rollover does not apply

    Denise receives money when her manufacturing business premises are destroyed. She buys a rental property with this money.

    Denise cannot access the rollover concession because she does not use the rental property for the same or similar purpose as her old business premises.

    End of example

    Original asset acquired before 20 September 1985

    If you acquired the original asset before 20 September 1985, you're 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 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 the rollover applies depends on whether the money you received is more or less than the cost of repairing or replacing the asset.

    Money received is more than the cost of repair or replacement

    If you don't 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, you reduce your capital gain to the amount of the excess. Include this amount on your tax return in the year the event happens. This capital gain may be eligible for the CGT discount.

    When a later CGT event happens, you reduce the amount of expenditure included in the cost base of the asset by the difference between the capital 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), you don't reduce the capital gain and the amount of the expenditure on the repair or replacement included in the cost base.

    Example: Money received is more than expenditure incurred

    Gerard's business premises were destroyed by fire on 15 March 2017. He received $246,000 in compensation from his insurance company.

    It cost him $240,000 to reconstruct the premises, and the cost base attributed to the building was $230,000.

    Money received

    $246,000

    Cost base

    $230,000

    Capital gain

    $16,000

    Money received

    $246,000

    Replacement expenditure

    $240,000

    Excess

    $6,000

    The compensation money ($246,000) is $6,000 more than the replacement expenditure ($240,000). 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 2015–16 income year (and does not have any unapplied net capital losses from earlier years), Gerard includes $3,000 ($6,000 × 50%) as his net capital gain for the 2015–16 income year.

    Also, he reduces the expenditure he incurred on the replacement asset by the balance of the capital gain ($10,000) to $230,000. This means $10,000 of the capital gain is deferred.

    End of example

    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, you disregard any capital gain. You reduce the expenditure you include in the cost base of the asset when a later CGT event happens by the amount of the gain.

    Example: Money received is less than the expenditure incurred

    Assume that, in the previous example, Gerard incurred $257,000 for repairs and the cost attributed to the building was $244,000.

    Gerard made a capital gain of $2,000 because his cost base apportioned to the building was $244,000 at the time of the fire.

    Money received

    $246,000

    Cost base

    $244,000

    Capital gain

    $2,000

    Money received

    $246,000

    Replacement expenditure

    $257,000

    Shortfall

    $11,000

    As the compensation money does not exceed the repair expenditure, Gerard disregards the capital gain.

    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 $255,000.

    End of example

    Receiving a replacement asset

    If a CGT asset you own is lost, destroyed or compulsorily acquired and you receive a replacement asset, you can choose a rollover only if the:

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

    If you choose to obtain a rollover when you receive a replacement asset, you disregard any capital gain you make from the original asset. The other consequences depend on whether the:

    Original asset acquired before 20 September 1985

    If you acquired the original asset before 20 September 1985, you're taken to have acquired the replacement 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.

    However, you may have to recalculate the first element of the cost base of your replacement asset if the cost base of the original asset included an amount of indexation and you wish to apply the CGT discount to a capital gain from the replacement asset.

    Example: Asset received

    The state government compulsorily acquired land that Jon acquired after 19 September 1985. 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, Jon disregards the capital gain made on the disposal of the original land. 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

    Indexation or CGT discount

    If a CGT event happens to the replacement asset (for example, a later disposal) you may be able to use the indexation method or the discount method to calculate your capital gain. This applies only if the periods of ownership of the original asset and the replacement asset add up to at least 12 months. For indexation to apply, you must have acquired the asset before 11.45am (by legal time in the ACT) on 21 September 1999.

    Receiving both money and an asset

    If you involuntarily dispose of a CGT asset, and you receive both money and a replacement asset and choose to apply a rollover, the requirements and consequences are different for each part of the compensation.

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

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

    Example: Money and an asset received as compensation

    The state government compulsorily acquired land Kris bought in 2002. Its cost base at the time was $150,000, but Kris received compensation worth $160,000.

    Half of the total compensation was money ($80,000) and half was 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 bought additional replacement land for $82,000.

    The total capital gain is $10,000, which is capital 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 is less than the amount he paid to buy the additional land. He can, therefore, disregard the $5,000 of the capital gain that is attributable to the money compensation. He reduces the expenditure on the additional land by $5,000, so the first element of its cost base is only $77,000.

    As the market value of the replacement land is more than that part of the cost base of the original land, Kris can choose to take rollover relief and disregard the capital gain of $5,000 relating to the land.

    As a result, the value of 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

    See also:

    Last modified: 17 Jul 2017QC 17204