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  • Chapter 7 - Loss, destruction or compulsory acquisition of an asset

    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

    This chapter explains your capital gains tax (CGT) obligation if your CGT asset is lost, destroyed or compulsorily acquired.

    Generally, there is no CGT obligation for assets acquired before 20 September 1985 (pre-CGT).

    New terms

    We may use some terms that are new to you. These words are explained in Definitions. Generally they are also explained in more detail in the section where they first appear.

    There may be a situation where you receive money or another CGT asset (or both) as compensation when you dispose of an asset involuntarily (or under an insurance policy against the risk of such an event happening). In this case, you may be able to 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 rollover. It may be 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 (that is, the Commonwealth, a state, a territory or one of their authorities)
    • you dispose of your CGT asset to an Australian government agency after they serve a notice on you inviting you to negotiate a sale agreement. They must have informed you that, if the negotiations are unsuccessful, the asset will be compulsorily acquired, or
    • 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.

    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 an Australian government agency acquires it compulsorily or by forced negotiation, the capital allowances provisions may allow for a balancing charge 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 (or assets).

    If you choose to take rollover, you do not need to lodge a written election stating your choice - it will be clear from the way you prepare your tax return.

    You cannot choose to defer a capital loss but you can use it to reduce any capital gain made in the current income year or a later year.

    For rollover relief to apply, the replacement asset you receive cannot be a car, motor cycle or similar vehicle.

    Further, from 1 July 2001, for rollover relief to apply, the replacement asset you receive cannot become an item of your trading stock nor can it be a depreciating asset.

    Time of the CGT event

    You need to know the time of a CGT event to work out in which income year a capital gain or capital 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 receive the compensation.

    If you do not receive any compensation, the time of the CGT event is when the loss is discovered or the destruction occurred.

    If an Australian government agency compulsorily acquires your asset, the time of the CGT event is when:

    • you first received compensation from the agency, or
    • the agency enters the asset (for example, land) or takes possession of it.

    If an Australian government agency acquires your asset following negotiation (rather than compulsorily acquiring it), the time of the CGT event is:

    • the date the contract to acquire it is made, or
    • the date of the change of ownership if there is 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 expires.

    If you receive money

    If you receive money because a CGT event happens, you can choose rollover only if:

    • you incur expenditure in acquiring another CGT asset that is used
      • in your 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 2003. Trish's expenditure qualifies for the rollover concession if it was incurred any time during the period 1 September 2002 to 30 June 2005.

    The replacement asset need not be identical to the one it is replacing. However, for 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 nor can it be a depreciating asset.

    End of example

    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
    Consequences of receiving money

    If you receive money and choose to take a rollover, the consequences depend on whether:

    • you acquired the original asset before 20 September 1985
    • you acquired the original asset on or after 20 September 1985, and
      • the money received for the asset is more than the cost of repair or replacement
      • the money received does not exceed the cost of repair or replacement.
       
    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 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 capital 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 rollover 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 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 gain may be eligible for the CGT discount (see chapter 2 for more information).

    When a later CGT event happens, you reduce the expenditure to include in the cost base of the asset by the difference between the 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 do not reduce the capital gain and the expenditure on the repair or replacement.

    (See the example below.)

    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. (See the example below.)

    Example: Money received is less than expenditure incurred

    Gerard's business premises were destroyed by fire on 15 March 2005. 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 $2,000 because his cost base apportioned to 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, 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 $55,000.

    End of example

    Example: Money received is more than the expenditure incurred

    Assume that in the above example, Gerard incurred only $40,000 for repairs and the cost attributed to the building was $30,000.

    Money received

    $46,000

    Cost base

    $30,000

    Capital gain

    $16,000

    Money received

    $46,000

    Replacement expenditure

    $40,000

    Excess

    $6,000

    The compensation money ($46,000) is $6,000 more than the replacement expenditure ($40,000). 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 2004-05 income year (and does not have any unapplied net capital losses from earlier years) Gerard must include $3,000 ($6,000 × 50%) as his net capital gain for the 2004-05 income year.

    Also, he reduces the expenditure he incurred on the replacement asset by the balance of the capital gain ($10,000) to $30,000. This means $10,000 of the capital gain is deferred.

    End of example

    If you receive an asset

    If you receive a replacement asset when the event happens, you can choose a rollover only if:

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

    If you choose to take a rollover when you receive a replacement asset, you disregard any capital gain you make from the original asset. The other consequences are outlined below.

    Original asset acquired before 20 September 1985

    If you acquired the original asset before 20 September 1985, you are taken to have acquired the new 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 and reduced cost base of the replacement asset is taken to be the cost base and 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 are seeking to apply the CGT discount to a capital gain from the replacement asset.

    Example: Asset received

    Jon acquired land after 19 September 1985 that the state government compulsorily acquired on 14 July 2004. 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
    If you receive both money and an asset

    If you receive both money and an asset and choose to take a rollover, the requirements and consequences are different for each part of the compensation.

    Example: Money and an asset received as compensation

    The state government compulsorily acquires 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 is money ($80,000) and half is 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 he acquired it.

    End of example
    Consequences of receiving both money and an asset

    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 to the asset.

    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.

    Last modified: 09 Apr 2020QC 27596