• If you receive 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 because a CGT event happens, you can choose roll-over only if:

    • you incur expenditure in acquiring another CGT 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
    Roll-over applies

    Trish paid for the repair of an asset for which she was compensated after part of it was destroyed on 1 September 1999. Trish's expenditure qualifies for the roll-over concession if it was incurred any time during the period 1 September 1998 to 30 June 2001.

    The replacement asset need not be identical to the one it is replacing. However, for roll-over 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. You cannot hold as trading stock any replacement asset you acquire.

    Example
    Roll-over 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 roll-over concession because she does not use the rental property for the same or similar purpose as her old business premises.

    Consequences of receiving money

    If you receive money and choose to obtain a roll-over, these are the consequences.

    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 it, or
    • you replace it:
      • 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 roll-over 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 capital gains tax obligation. The amount of capital gain you include in your tax return depends on whether the capital gain is more than the difference between the amount you received and the cost of the repair or replacement, or less.

    If the capital gain is more than that difference, your capital gain is reduced to the amount of the excess. Include this amount in 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 capital gains tax 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.

    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. Again, the capital gain is deferred.

    Example
    Money received is less than expenditure incurred

    Gerard's business premises were destroyed by fire on 15 March 2001. 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 $2000 because his cost base for 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 ($2000) to $55 000.

    Example
    Money received is more than the expenditure incurred

    On 28 December 2000, Patrick received $120 000 from his insurance company in compensation for the loss of his yacht, which sank on 22 October 2000 after hitting a reef and could not be salvaged. He spent $110 000 to purchase a replacement yacht.

    Patrick made a capital gain (non-indexed) of $15 000 on the original yacht. This was the difference between the cost base of $105 000 and the amount he received from the insurance company.

     

    $

    Money received

    120 000

    Cost base

    105 000

    Capital gain

    15 000

    Money received

    120 000

    Replacement expenditure

    110 000

    Excess

    10 000

    The compensation money ($120 000) is $10 000 more than the replacement expenditure ($110 000). The capital gain ($15 000) is $5000 more than the excess of $10 000. The capital gain is reduced to the excess amount of $10 000 and Patrick must include this amount as a capital gain in his assessable income in his 2000-01 tax return.

    If Patrick is eligible for the CGT discount of 50%, the $10 000 excess is Patrick's nominal capital gain. Therefore, Patrick must include $5000 ($10 000 x 50%) in the calculation of his net capital gain/ loss for the 2000-01 income year.

    As well, the expenditure he incurred on the replacement asset is reduced by the balance of the capital gain ($5000) to $105 000. This means $5000 of the capital gain is deferred.

    Last modified: 31 Aug 2010QC 16195