Reading time: 5 minutes

The disposal of business assets can trigger a capital gain or loss. Broadly, this is calculated as the difference between the cost of purchasing the asset and the consideration you receive on disposal. Businesses must report capital gains and losses in their income tax return, and pay capital gains tax (CGT) on any capital gains.

However, in some cases, they may have access to rollover relief, which allows businesses to defer or disregard this tax payment. This article explains when CGT may be payable on your business transactions, and when CGT rollover relief may apply.

CGT Assets

Broadly, a CGT asset covers any kind of property and includes:

  • land and buildings;
  • shares in a company or units in a unit trust;
  • the right to enforce contractual rights (e.g. restraints of trade); and
  • business goodwill.

Sometimes, an entity can effectively ignore the CGT implications of an asset’s disposal despite the asset falling within the CGT asset definition. This happens when that gain is taxed elsewhere under tax law and the asset is:

  • trading stock;
  • a depreciating asset; or
  • a revenue asset.

These ‘anti-overlap’ rules mean that the CGT regime has a residual operation behind other tax rules.

What is a CGT Event?

A capital gain or loss can only arise where a CGT event occurs. There are 52 different CGT events, but your business will most likely deal with the three common events below.

  • Disposals: This is when your business enters into a contract to dispose of a CGT asset.
  • End of a CGT asset: This occurs when an asset is destroyed, lost, cancelled, surrendered or otherwise ends. It also includes the end of an option to acquire shares.
  • Creation of a CGT asset: This is when a business creates contractual rights or grants an option. For example, Company A may pay Company B $100,000 for a one-month option to purchase Company B’s business. If Company A does not exercise that option, Company B has made a capital gain of $100,000 less expenses. If Company A exercises the option, then Company B will have a capital gain or loss, depending on the cost of acquiring the business.

Rollover Relief

Where available, CGT rollover relief allows your business to defer or disregard a capital gain or loss. It applies in specific situations (discussed further below), either automatically or by election. The relevant entity generally makes the election based on how it prepares its income tax return. However, some rollover reliefs require specific written elections within specified time-frames to apply.

Broadly, there are two categories of CGT rollover relief:

 

1. Replacement-Asset Rollovers

The effect of a replacement-asset rollover is that the cost of acquiring the replacement asset is replaced by the cost of acquiring the original asset. This amount is calculated to determine a capital gain or capital loss when:

  • disposal of the replacement asset occurs; or
  • another CGT event arises.

Specific examples of replacement-asset rollovers include:

  • disposal or creation of assets by an individual or trustee to a wholly-owned company;
  • exchange of shares in the same company or units in the same unit trust (a scrip-for-scrip rollover);
  • exchange of interests in a trust due to a trust restructure; and
  • exchange of units in a unit trust for shares in a company.

 

2. Same-Asset Rollovers

Same-asset rollovers allow your business to dispose CGT assets to a related entity without having to pay CGT twice. This means that the entity that received the CGT asset will be in the shoes of the entity that transferred the asset.

Some examples of where same-asset rollovers occur include when:

  • a partnership transfers ownership of a CGT asset to a wholly-owned company;
  • a company transfers a CGT asset to a related company;
  • an entity transfers a CGT asset to a wholly-owned company;
  • a CGT asset is transferred between certain trusts; and
  • a CGT asset in a trust is transferred to a company under a trust restructure.

Other Taxes

Despite the availability and benefits of CGT rollover relief, it is still important to consider other tax and duty obligations.These include:

  • trading stock rules;
  • depreciation rules;
  • GST; and
  • duty regimes.

You should always look at a relevant transaction from each perspective to determine the overall implications of the proposed course of action. This will help you make a fully informed decision as to whether to proceed with a transaction.

Key Takeaways

Your business may be in the process of disposing, creating or acquiring assets. These events can trigger a CGT liability. Therefore, when disposing of your assets, it is important to know if CGT rollover relief applies and other transactional taxes arise. This can have a significant impact on the overall tax payable and even whether you decide to proceed with a transaction. 

If you need further advice on when CGT rollover relief can apply, call LegalVision’s taxation lawyers on 1300 544 755 or fill out the form on this page.

Webinars

Everything You Need to Know about SaaS Agreements

Thursday 7 April | 11:00 - 11:45am

Online
Understand which contracts will protect your SaaS contract from risk, and how. Register for free today.
Register Now

What to Consider When Buying a Tech or Online Business

Wednesday 13 April | 11:00 - 11:45am

Online
Learn how to get the best deal when buying a tech or online business. Register for our free webinar today.
Register Now

Corporate Governance 101: Responsibilities for New Directors

Wednesday 27 April | 11:00 - 11:45am

Online
If you are a new company director, join our free webinar to understand your legal compliance obligations. Register today.
Register Now

Rogue Directors and Business Divorces: How to Remove a Director

Thursday 28 April | 11:00 - 11:45am

Online
Removing a board director is not simple. Join our free webinar to learn how to handle rogue directors. Register today.
Register Now

Employment Essentials for Tech Businesses

Thursday 5 May | 11:00 - 11:45am

Online
Protect your tech business and your employees by understanding your employment legal obligations. Register for our free webinar today.
Register Now

How to Protect and Enforce Your Trade Mark

Wednesday 11 May | 11:00 - 11:45am

Online
Protect your business’ brand from copycats and competitors. Register for this free webinar to learn how.
Register Now

How Franchisors Can Avoid Misleading and Deceptive Conduct

Wednesday 18 May | 11:00 - 11:45am

Online
Ensure your franchise is not accused of misleading and deceptive conduct. Register for our free webinar today.
Register Now

How to Expand Your Business Into a Franchise

Thursday 26 May | 11:00 - 11:45am

Online
Drive rapid growth in your business by turning it into a franchise. To learn how, join our free webinar. Register today.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year - Australasian Law Awards
  • 2019 Most Innovative Firm - Australasian Lawyer