• When the gain crystallises

    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

    Failure to acquire a replacement asset and make a capital improvement after a rollover (CGT event J5)

    CGT event J5 happens if you choose to obtain a rollover, and by the end of the replacement asset period:

    • you have not acquired a replacement asset, and have not made a capital improvement to an existing asset
    • the replacement or capital improved asset is not your active asset (for example, you have sold it, it has become your trading stock, or it is no longer used in the business), or
    • where the replacement asset is a share in a company or an interest in a trust
      • the share or trust interest fails the 80% test (unless the failure is only of a temporary nature)
      • you, or an entity connected with you, are not a CGT concession stakeholder in the company or trust, or
      • CGT concession stakeholders in the company or trust do not have a small business participation percentage in the interposed entity of at least 90%.
       

    Consequences of CGT event J5

    When CGT event J5 happens, you make a capital gain equal to the amount of the capital gain previously disregarded under the small business rollover.

    The time of the event is at the end of the replacement asset period.

    The Commissioner may extend the replacement asset period.

    A capital gain from CGT event J5 may be eligible for the retirement exemption if you meet the relevant conditions. You don't need to meet the basic conditions again, but you must meet the retirement exemption conditions. However, you cannot apply the 50% discount, small business 50% active asset reduction, or the 15-year exemption to reduce this gain.

    Example

    In September 2006, Luke makes a capital gain of $80,000 on an active asset and meets the maximum net asset value test. Luke disregards the whole capital gain under the small business rollover.

    In September 2008, Luke does not have any replacement or capital improved assets by the end of the two-year period. CGT event J5 happens and Luke makes a capital gain of $80,000 in September 2008.

    A transitional provision provides that where you chose a rollover in the 2005-06 or earlier year, and did not subsequently acquire a replacement asset, you may access the retirement exemption on a capital gain - that is, if you did not acquire a replacement asset, it would be as though you never chose the rollover and the capital gain was not disregarded.

    CGT event J6

    CGT event J6 happens if:

    • you choose to obtain a rollover, and
    • by the end of the replacement asset period you satisfy all of the rollover conditions except one, namely the amount you choose to roll over is equal to or greater than the sum of the following amounts
      • the amount paid to acquire the replacement asset (that is, the first element of the cost base of the replacement asset)
      • any incidental costs incurred in acquiring that asset, which can include giving property (that is, the second element of the cost base of the replacement asset), and
      • the amount expended on capital improvements to one or more assets that were acquired or already owned (that is, fourth element expenditure).
       

    Consequences of CGT event J6

    When CGT event J6 happens, you make a capital gain equal to the difference between:

    • the amount of the capital gain disregarded under the small business rollover, and
    • the amount incurred on the replacement asset or capital improvements.

    The time of the event is at the end of the replacement asset period.

    The Commissioner may extend the replacement asset period.

    When CGT event J6 occurs, you may be eligible for the retirement exemption, provided you meet the relevant conditions for that exemption. You don't need to meet the basic conditions again. However, you cannot apply the 50% discount, small business 50% active asset reduction, or the 15-year exemption to reduce this gain.

    Example

    In October 2006, Nicky makes a capital gain of $700,000 on an active asset and meets the maximum net asset value test. Nicky chooses to disregard the whole capital gain.

    In November 2007, Nicky purchases new business premises for $300,000 and spends $150,000 on improving some other assets. The replacement and capital improved assets meet all of the relevant conditions.

    However, the amount of expenditure on the replacement and capital improved assets is only $450,000. The capital gain that was rolled over was $700,000.

    In October 2008, two years after the original CGT event, CGT event J6 happens because there has been insufficient expenditure and Nicky makes a capital gain of $250,000. The rollover of $450,000 of the original capital gain continues.

    A transitional provision applies where you chose the rollover in the 2005-06 or earlier income year and acquired a replacement asset, but the expenditure incurred on that asset was less than the amount you chose to disregard under the rollover. The amount of the original capital gain that is able to be disregarded is limited to the total of the first and second elements of the cost base of the replacement asset.

    CGT event J2

    A CGT event (CGT event J2) happens if, after the end of the replacement asset period, there is a change in the status of a replacement or capital improved asset you chose for the small business rollover.

    Examples of CGT event J2 include:

    • the replacement or capital improved asset stops being your active asset - for example, you dispose of the asset or you stop using it or holding it ready for use in your business
    • the replacement or capital improved asset becomes your trading stock, or
    • you start to use the replacement or capital improved asset solely to produce exempt income
    • where the replacement asset is a share in a company or an interest in a trust
      • the share or interest stops being an active asset - that is, the share or trust interest fails the 80% test (and the failure is more than just temporary in nature), or
      • a liquidator or administrator of the company declares the shares worthless (CGT event G3), or
      • you, or an entity connected with you, cease to be a CGT concession stakeholder in the company or trust (or that entity is no longer connected with you), or
      • CGT concession stakeholders in the company or trust cease to have a small business participation percentage in the interposed entity of at least 90%.
       

    Consequences of CGT event J2

    When CGT event J2 happens to your replacement or capital improved asset, you make a capital gain equal to the gain previously disregarded under the small business rollover.

    If there was more than one replacement or capital improved asset and a change happens to only some of the assets, the capital gain is the difference between the amount that was originally rolled over and the relevant expenditure on the remaining replacement or improved assets that satisfied the relevant conditions.

    The time of the event is when the change happens.

    A capital gain from CGT event J2 may qualify for:

    • further rollover, if you acquire another replacement asset, or
    • the retirement exemption.

    This is provided you meet the relevant conditions for the rollover or exemption. You cannot apply the CGT discount, the 15-year exemption, or the small business 50% active asset reduction to reduce this capital gain.

    If you dispose of a replacement or capital improved asset, another CGT event (CGT event A1) happens in addition to CGT event J2. Any capital gain you make from CGT event A1 on the disposal of the replacement or capital improved asset may qualify for any of the small business CGT concessions, if the relevant conditions are satisfied.

    Example

    Peter disposes of an active asset for $10,000, making a capital gain of $2,000. He buys two replacement assets (not being depreciating assets) for $5,000 each, and chooses the small business rollover.

    $1,000 of the capital gain is disregarded for each replacement asset.

    Peter later sells one of the replacement assets for $7,500 - so he makes a capital gain of $2,500.

    He also makes a capital gain of $1,000 because the sale of the replacement asset results in that asset no longer being an active asset. The $1,000 capital gain represents the capital gain made on the disposal of the active asset that was rolled over in respect of this replacement asset.

    Peter's capital gain of $1,000 made from the crystallising of the deferred capital gain (CGT event J2) may be eligible for further rollover relief or the retirement exemption. The capital gain of $2,500 made from the disposal of the replacement asset (CGT event A1) may be eligible for any of the concessions if the relevant conditions are satisfied.

    If CGT event J6 had previously happened in relation to the rollover, the capital gain is the same as calculated above, less the capital gain previously made under CGT event J6.

    If CGT event J2 has previously happened in relation to the rollover, the capital gain is the same as calculated above, less the capital gain previously made under CGT event J2.

    Last modified: 28 Jun 2012QC 25888