ATO Interpretative Decision

ATO ID 2003/129 (Withdrawn)

Income Tax

• This ATO ID is withdrawn due to changes in the law that operate in respect of CGT events happening in the 2006-07 and later income years. Despite its withdrawal, this ATO ID continues to be a precedential view in respect of income years up to, and including, the 2005-06 income year.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

If a taxpayer qualifies for both the small business roll-over in Subdivision 152-E the Income Tax Assessment Act 1997 (ITAA 1997) and the replacement asset roll-over in Subdivision 124-B of the ITAA 1997 in relation to a capital gain, can the taxpayer choose which to apply?

Decision

Yes. If a taxpayer qualifies for both the small business roll-over in Subdivision 152-E of the ITAA 1997 and the replacement asset roll-over in Subdivision 124-B of the ITAA 1997 in relation to a capital gain, the taxpayer can choose to apply either roll-over.

Facts

The taxpayer, an Australian resident, is a small business entity and the net value of their CGT assets for the purposes of section 152-20 of the ITAA 1997 is less than $5 million.

The taxpayer acquired land after 19 September 1985 which satisfies the active asset test in section 152-35 of the ITAA 1997.

The land was compulsorily acquired after 21 September 1999 and the taxpayer received money as compensation. A capital gain arose from the compulsory acquisition of the asset.

The taxpayer used the compensation to acquire replacement land which was immediately used by the taxpayer in carrying on their business. The replacement land was acquired within one year of the land being compulsorily acquired.

Reasons for Decision

CGT event A1 (in section 104-10 of the ITAA 1997) happens if a CGT asset you own is compulsorily acquired. A capital gain from a CGT event may be disregarded if a roll-over applies. There are two roll-overs that are potentially available to the taxpayer:

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the small business roll-over in Subdivision 152-E of the ITAA 1997, and

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the replacement asset roll-over in Subdivision 124-B of the ITAA 1997 for assets that are compulsorily acquired, lost or destroyed.

If the taxpayer satisfies the conditions for both of the roll-overs, the taxpayer can choose which of the roll-overs to apply. In making the choice, the taxpayer might consider the different ways in which the roll-overs operate.

If the taxpayer chooses roll-over under Subdivision 152-E of the ITAA 1997, a capital gain equal to the amount originally rolled over will be made if there is a change in the status of the replacement asset (CGT event J2 in section 104-185 of the ITAA 1997). A change of status might happen in this case if, for example, the replacement land is disposed of, or if it otherwise stops being an active asset of the taxpayer. This capital gain would be in addition to any capital gain or capital loss that is actually made from the replacement asset.

Roll-over under Subdivision 124-B of the ITAA 1997 operates in a different manner. There are special rules that limit the amount that you can include in the cost base and reduced cost base of the replacement asset. CGT event J2 does not apply to a capital gain that is rolled over under Subdivision 124-B of the ITAA 1997 so that the amount of the original capital gain will not crystallise if there is a subsequent change in the status of the replacement asset. The tax consequences for the replacement land will depend on its value relative to its cost base and reduced cost base (worked out under Subdivision 124-B of the ITAA 1997) when a later CGT event happens to it (for example, it is sold).

Year of income:  Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 104-10
   paragraph 104-10(6)(a)
   section 104-185
   Subdivision 124-B
   Subdivision 152-E

Keywords
Capital gains tax
CGT compulsory acquisitions
CGT choice
CGT events
CGT replacement assets
CGT replacement asset roll-over
CGT Small business relief
CGT same asset roll-over

Business Line:  Losses and CGT Centre of Expertise

Date of publication:  15 March 2003

ISSN: 1445-2782