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.
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.
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.
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.
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.
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