• Small business rollover

    The small business rollover allows you to defer all or part of a capital gain made from a CGT event happening to an active asset.

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    Interaction with other concessions

    You may choose to apply the small business rollover to as much of the capital gain as you decide.

    You may apply this small business rollover concession:

    • after firstly using the small business 50% active asset reduction (if you choose to apply it), and then the 50% CGT discount (if applicable), or
    • after you've applied any capital losses and CGT discount (if applicable)
      • this might ultimately allow a company or trust to make larger tax-free payment 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.
       

    Alternatively, you may 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 you must meet

    To qualify for the small business rollover, you need to satisfy the basic conditions for the small business CGT concessions. You can choose to obtain a rollover even if you haven't yet acquired a replacement asset or incurred expenditure on a capital improvement to an existing asset.

    Example: small business rollover

    Instead of choosing the retirement exemption, Lana decides that she will search for a suitable replacement asset to use in her business. As she meets all basic conditions, she qualifies for the small business rollover.

    This means she can defer her capital gain remaining after all other concessions have applied ($3,500).

    After six months, Lana acquires another small parcel of land immediately adjoining the main business premises to use in her business. The replacement land costs $10,000, and it is her active asset before the end of the replacement asset period, so she meets the further conditions.

    This deferred capital gain of $3,500 may later become assessable if Lana:

    • sells the land
    • stops using it in her business.

    However, she could then choose a further small business rollover if she acquires another replacement active asset. Alternatively, Lana could choose the retirement exemption.

    End of example

    Consequences of choosing the rollover

    If you choose the rollover, the capital gain will not be included in your assessable income.

    Further CGT events happen if you previously chose the rollover and certain conditions are not met by the end of the replacement asset period. This period starts one year before the last CGT event in the income year for which you obtained the rollover and ends at the later of:

    • two years after that last CGT event
    • six months after the latest time a possible financial benefit becomes or could become due under a look-through earnout right relating to the CGT asset and the disposal.

    For example, further CGT events will happen, and a capital gain will arise, if:

    • you don't acquire the replacement assets or make capital improvements to existing assets within the replacement asset period, or the assets are not active assets at the end of that period (CGT event J5)
    • the rollover amount is greater than your expenditure on the replacement asset or capital improved asset (CGT event J6)
    • after the end of the replacement asset period, there's a change in the status of a replacement or capital improved asset you chose for the small business rollover (CGT event J2).

    For a share in a company or interest in a trust to be an active asset, the company or trust must satisfy the 80% test, that is, the market value of the active assets and certain financial instruments 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.

    We can allow a longer replacement asset period.

    Example: Replacement asset test

    Jordan owns 50% of the shares in Company A and Company B. This makes him a CGT concession stakeholder in both companies. The companies are connected with Jordan because he controls both of them.

    Company A owns land that 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 CGT concession stakeholder in Company B.

    End of example

    Distributions

    If a company or trust chooses the rollover for a capital gain and then distributes an amount out of the gain to a shareholder or beneficiary, the distribution is not exempt – that is, the concession does not flow through to the individuals. Such distributions by a company are likely to be assessable to the shareholder as an unfranked dividend.

    Failure to acquire a replacement asset or 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 you 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.

    We 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 can't apply the 50% discount, small business 50% active asset reduction, or the 15-year exemption to reduce this gain.

    Example: CGT event J5

    In September 2014, Luke made a capital gain of $80,000 on an active asset and met the maximum net asset value test. Luke disregarded the whole capital gain under the small business rollover.

    In September 2016 (the end of the two-year period), Luke did not have any replacement or capital improved assets. CGT event J5 happens and Luke makes a capital gain of $80,000 in September 2016.

    End of example

    Rollover amount greater than cost of replacement asset (CGT event J6)

    CGT event J6 happens if:

    • you choose to obtain a rollover
    • by the end of the replacement asset period you acquired a replacement asset or made a capital improvement to an asset, CGT event J5 has not happened and the amount you chose to roll over is 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.

    We 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 can't apply the 50% discount, small business 50% active asset reduction, or the 15-year exemption to reduce this gain.

    Example: CGT event J6

    In October 2014, Nicky made a capital gain of $700,000 on an active asset and met the maximum net asset value test. Nicky chose to disregard the whole capital gain.

    In November 2015, Nicky purchased new business premises for $300,000 and spent $150,000 on improving some other assets. The replacement and capital improved assets met all of the relevant conditions.

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

    In October 2016, 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.

    End of example

    Change in status of 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
    • 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 you 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 can't 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: CGT event J2

    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 is 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.

    End of example

    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.

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    Last modified: 17 Jul 2017QC 52291