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  • Involuntary disposal of a CGT asset

    If your capital gains tax (CGT) asset is involuntarily disposed of (lost, destroyed or compulsorily acquired) and you receive compensation for it, you can roll over your CGT liability.

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    Choosing to roll over your CGT liability

    If you choose to roll over your CGT liability, you defer your liability to pay tax on any capital gain from the involuntary disposal of the asset.

    You do not need make a choice in writing – 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 same or later income year.

    There are no CGT obligations for assets acquired before 20 September 1985. If you acquired the original asset before this date, any replacement asset is generally exempt from CGT.

    Events eligible for the rollover

    The rollover is available if any of the following events occur:

    • all or part of your CGT asset is lost or destroyed
    • your CGT asset is compulsorily acquired by an Australian government agency (Australian, state or territory) or by a non-government entity under a power given 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
    • you dispose of land to an entity (other than a foreign government agency) where
      • a mining lease was, or would have been, compulsorily granted over the land
      • the lease significantly affected, or would have affected, your use of the land
      • the entity to which you disposed of the land was, or 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 rollover is not available for the compulsory acquisition of minority interests in CGT assets. For example, the acquisition of shares in a company, under the Corporations Act 2001 or similar foreign law, is excluded.

    Main residence

    A compulsory acquisition of part of your main residence may not qualify for the rollover. This is because you may not meet the requirement that you acquire a replacement asset that is used for the same or a similar purpose.

    However, the main residence exemption may apply.

    Depreciating assets

    A rollover is not available for depreciating assets, which are exempt from CGT when used solely for taxable purposes. Depreciating assets include business equipment and fittings in a rental property.

    The capital allowances provisions may allow for a balancing adjustment offset if the depreciating asset is:

    • lost or destroyed
    • compulsorily acquired
    • compulsorily acquired by forced negotiation (other than by a foreign government agency).

    With the capital allowances provision, you can offset the balancing adjustment amount against the cost of the replacement asset.

    Vehicles

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

    Compensation

    Eligibility when money is received

    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
      • for a reasonable period for the same or a similar purpose as the original asset
       
    • 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 CGT event occurs
    • within one year of the end of the income year in which the CGT event occurs.

    This period may be extended in special circumstances.

    The replacement asset does not need to be identical to the one it is replacing for the rollover to apply. However, you must use the asset in the same business or for the same or similar purpose as the original asset.

    Example: rollover applies

    Trish owns a bakery. On 1 September 2019 part of her bakery was destroyed in an electrical fire.

    Trish paid for repairing the bakery early in the following year and later received an insurance payout in compensation for her loss. Her expenditure would qualify for the rollover if it was incurred any time from 1 September 2018 to 30 June 2021.

    End of example

     

    Example: rollover does not apply

    Denise is compensated when her manufacturing business premises are destroyed. With this money, she buys a rental property.

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

    End of example

    Eligibility when a replacement asset is received

    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 occurred.

    Eligibility when both money and a replacement asset are received

    You can choose to apply a rollover. However, the requirements and consequences are different for each part of the compensation.

    Working out the timing of the CGT event

    You need to know when the CGT event occurred 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, such as when you received an insurance pay out.
    • If you do not 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 or foreign law, the time of the CGT event is the earlier of when
      • you first received compensation from the entity
      • the entity occupied 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 either
      • the date of the contract to acquire it
      • 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 (Australian, state or territory) expires and is not renewed, the time of the CGT event is when the lease expired.

    Applying the rollover

    You may receive money or another CGT asset (or both) as compensation for the involuntary disposal of your CGT asset. The type of compensation you receive affects how you roll over your CGT liability.

    Receiving money

    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 either:

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

    If a CGT event later occurs to the repaired or replacement asset, you disregard any capital gain or capital loss you make.

    Original asset acquired on or after 20 September 1985

    The way the rollover applies depends on whether the money you received exceeds the cost of repairing or replacing the asset.

    Money received exceeds the repair or replacement cost

    If the money you received exceeds the cost you have incurred to repair or replace the original asset, you may have a CGT liability.

    The capital gain you include on your tax return depends on whether your capital gain from the compensation is more or less than the amount by which the compensation exceeds the cost of repair or replacement.

    When the capital gain is more than the excess

    If the capital gain is more than the excess, you reduce the capital gain you report 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.

    When the capital gain is less than or equal to the excess

    If the capital gain is less than or equal to the excess (the compensation amount less the cost of the repair or replacement), you do not reduce the capital gain, and the amount of the expenditure on the repair or replacement is included in the cost base.

    Example: money received is more than the replacement expenditure

    Gerard's business premises were destroyed by fire on 15 January 2020. 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 2019–20 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 2019–20 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. In effect, this reduces the cost base of the new asset.

    End of example
    Money received does not exceed the repair or replacement cost

    You disregard any capital gain and reduce the replacement expenditure you include in the cost base of the asset under a later CGT event by the amount of the capital gain.

    Example: money received is less than the replacement expenditure

    Assume that, in the previous example, Gerard spent $257,000 for repairs, and the cost base for the building was $244,000.

    Gerard made a capital gain of $2,000 because the cost base of 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 replacement expenditure, Gerard disregards the capital gain.

    However, the amount of expenditure that Gerard can include in the cost base of the replacement building is reduced by the amount of the capital gain ($2,000) to $255,000.

    End of example

    Receiving a replacement asset

    If you receive a replacement asset as compensation and you choose to apply a rollover, you disregard any capital gain you make from the original asset.

    Original asset acquired before 20 September 1985

    You can treat the replacement asset as if you acquired it before that date.

    Original asset acquired 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 had bought 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.

    He is taken to have paid $180,000 to acquire the replacement land (the cost base of the original land at the time it was compulsorily acquired). This is the cost base of the replacement land in the event of a future CGT event.

    End of example

    Choosing the indexation or discount method

    If a CGT event occurs to the replacement asset, you may be able to use the indexation method or the discount method to calculate your capital gain.

    You can use either of these methods if the periods of ownership of the original asset and the replacement asset add up to at least 12 months.

    To apply the indexation method, you must also have acquired the asset before 11:45am (ACT time) on 21 September 1999.

    Receiving both money and an asset

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

    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
    Last modified: 04 Aug 2021QC 66017