The rules covering the small business rollover are contained in Subdivision 152-E of the Income Tax Assessment Act 1997.
Interaction with other concessions
The small business rollover allows you to defer the capital gain made from a CGT event if you acquire one or more replacement assets and satisfy certain conditions. If the replacement asset's use changes (for example, you no longer use it in the business or you sell it), or there is a change in circumstances, the deferred capital gain will crystallise, that is, you will make a capital gain equal to the capital gain previously deferred.
You may choose to apply the small business rollover:
- after the small business 50% active asset reduction - that is, to the remaining 50% (or if the CGT discount has also applied, the remaining 25%) of the capital gain after you have applied capital losses, or
- instead of the small business 50% active asset reduction - that is, to the capital gain remaining after you have applied any capital losses and CGT discount. Making this choice might ultimately allow a company or trust to make larger tax-free ETPs under the small business retirement exemption if they choose the retirement exemption after the deferred capital gain has crystallised, for example, when the replacement asset is later sold.
You may instead choose the small business retirement exemption if its conditions are satisfied or you may choose both concessions for different parts of the remaining capital gain.
Conditions to be satisfied
You can choose to obtain a rollover if:
- you satisfy the basic conditions for the gain
- you choose one or more CGT assets as replacement assets within the period starting one year before and ending two years after the last CGT event happens in the income year for which you choose the rollover
- the replacement asset
- is acquired within that same period (the Commissioner may extend the time limit)
- is an active asset when you acquire it, or an active asset by the end of two years after the last CGT event happens in the income year for which you choose the rollover. A depreciating asset such as plant can be a replacement asset
- if the replacement asset is a share in a company or an interest in a trust, you, or an entity connected with you, must be a controlling individual of that company or trust just after you acquire the share or interest. As the share or interest also needs to be an active asset this means the company or trust must satisfy the 80% test. That is, the market value of the active assets and certain capital proceeds of the company or trust must be 80% or more of the total of the market value of all the assets of the company or trust.
Jordan owns 50% of the shares in Company A and Company B. He is therefore a controlling individual of both companies. The companies are connected with Jordan because he controls both of them.
Company A owns land which it leases to Jordan for use in a business. It sells the land at a profit and buys shares in Company B as replacement assets. All of Company B's assets are active assets.
The replacement asset test is satisfied because the shares are active assets and Jordan is connected with Company A and is a controlling individual of Company B.End of example