How it works
The small business roll-over allows eligible small businesses to defer all or part of a capital gain made from selling an active asset.
If you acquire a replacement asset or incur costs on making capital improvements to an existing asset, these gains will be deferred until you dispose of the asset.
To qualify for the small business roll-over, you:
- need to meet the basic eligibility conditions for the small business CGT concessions
- can then choose the roll-over for the gain made from selling an active asset.
If you choose the roll-over, the capital gain will not be included in your assessable income.
You can choose the roll-over before you acquire a replacement asset or incur costs on capital improvements to an existing asset. Further CGT events occur if you have not acquired a replacement asset or incurred costs on capital improvements of an existing asset at the end of the replacement asset period (2 years from the CGT event). Consequences of choosing the roll-over explains this in further detail.
Share in a company or interest in a trust
For a share in a company or interest in a trust to be an active asset, the company or trust must meet the 80% test. This means the market value of the active assets and certain financial instruments of the company or trust must be 80% or more of the total market value of all the assets of the company or trust.
If a company or trust chooses the roll-over for a capital gain and then distributes an amount out of the gain to a shareholder or beneficiary, the distribution is not exempt. This means 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.
Applying the small business roll-over
You can apply the small business roll-over to as much of the capital gain as you decide.
If you choose to apply the roll-over to only some of the capital gain, you will make a capital gain equal to the remaining amount that you are not rolling over.
There is a specific order to apply the small business CGT concessions.
Consequences of choosing the roll-over
Further CGT events happen if:
- you previously chose the roll-over, and
- certain conditions are not met by the end of the replacement asset period.
The replacement asset period starts one year before the last CGT event in the income year for which you obtained the roll-over; it ends at the later of:
- 2 years after the last CGT event, and
- 6 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.
The following 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 roll-over amount is greater than your cost of 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 roll-over (CGT event J2).
We can extend the replacement asset period. Applying for an extension on a capital gain roll-over explains how to get an extension of time.
Example: consequences of choosing the roll-over
Lana disposes of an active asset (a parcel of land) and decides to search for a suitable replacement asset to use in her business. As she meets all basic eligibility conditions, she qualifies for the small business roll-over.
After applying other small business CGT concessions, Lana defers the remaining capital gain of $3,500 for the disposal of this asset.
After 6 months, Lana acquires another small parcel of land directly 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.
This deferred capital gain of $3,500 may later become assessable if Lana:
- sells the land, or
- stops using it in her business.
- This is when CGT event J2 would occur.
However, she could then choose a further small business roll-over if she acquires another replacement active asset. Or if Lana is eligible, she could choose the retirement exemption instead.
End of exampleFailure to acquire a replacement asset or make a capital improvement after a roll-over (CGT event J5)
CGT event J5 happens if you choose to obtain a roll-over, 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 sold it, it became your trading stock, or it's no longer used in the business)
- 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 temporary)
- 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 roll-over.
The time of the event is at the end of the replacement asset period.
A capital gain from CGT event J5 may be eligible for the small business retirement exemption if you meet the relevant conditions. You don’t need to meet the basic eligibility conditions again, but you must meet the small business retirement exemption conditions.
However, you can't apply the CGT discount, small business 50% active asset reduction, or the small business 15-year exemption to reduce this gain.
Example: CGT event J5
In September 2020, Luke made a capital gain of $80,000 on an active asset. He met the maximum net asset value test.
Luke disregarded the whole capital gain under the small business roll-over.
In September 2022 (the end of the 2-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 2022.
End of exampleRoll-over amount greater than cost of replacement asset (CGT event J6)
CGT event J6 happens if:
- you choose to obtain a roll-over
- by the end of the replacement asset period you acquired a replacement asset or made a capital improvement to an existing asset; CGT event J5 has not happened, however the amount you chose to roll over is greater than the sum of the following
- 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, the fourth element of the cost base of the asset).
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 roll-over, and
- incurred on the replacement asset or capital improvements.
The time of the event is at the end of the replacement asset period.
When CGT event J6 occurs, you may be eligible for the small business retirement exemption, if you meet the relevant conditions for that exemption. You don’t need to meet the basic eligibility conditions again.
However, you can't apply the 50% discount, small business 50% active asset reduction, or the small business 15-year exemption to reduce this gain.
Example: CGT event J6
In October 2020, Nicky:
- made a capital gain of $700,000 on an active asset
- met the maximum net asset value test
- chose to disregard the whole capital gain.
In November 2021, 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 relevant conditions.
The capital gain that was rolled over was $700,000. However, the costs of the replacement and capital improved assets were only $450,000.
In October 2022, 2 years after the original CGT event, CGT event J6 happens because there has been insufficient costs incurred and Nicky makes a capital gain of $250,000. The roll-over of $450,000 of the original capital gain continues.
End of exampleChange in status of replacement asset (CGT event J2)
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 roll-over.
Examples of CGT event J2 include:
- the replacement or capital improved asset stops being your active asset
- 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 not temporary)
- a liquidator or administrator of the company declares the shares worthless (CGT event G3)
- 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)
- 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 roll-over.
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
- relevant costs on the remaining replacement or improved assets that met the relevant conditions.
The time of the event is when the change happens.
A capital gain from CGT event J2 may qualify for either:
- further roll-over, if you acquire another replacement asset
- the small business retirement exemption.
This is if you meet the relevant conditions for the small business roll-over or small business retirement exemption.
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. This is if the relevant conditions are met.
If CGT event J2 or J6 have previously happened in relation to the roll-over, the capital gain is calculated as in the example below, less the capital gain previously made under the respective CGT events.
Example: CGT event J2
Pan disposes of an active asset for $10,000, making a capital gain of $2,000.
He buys 2 replacement assets for $5,000 each. The assets are not depreciating assets.
Pan chooses the small business roll-over. $1,000 of the capital gain is disregarded for each replacement asset.
Pan 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 (CGT event J2). 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.
Pan’s capital gain of $1,000 (from CGT event J2 happening) may be eligible for either:
- further roll-over relief
- 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. This is if the relevant conditions are met.
End of exampleSmall business roll-over prior to death
If, just before dying, a person still owned a replacement or capital improved asset from an earlier small business roll-over, both CGT events J2 and A1 will happen upon the person's death.
CGT event J2 happens because the replacement asset or capital improved asset will stop being the deceased's active asset.
CGT event A1 will happen when the asset is transferred to their legal personal representative (LPR) or beneficiary upon the deceased's death.
The capital gain from CGT event A1 and CGT event J2 are disregarded under the general rules concerning death. The capital gain on the replacement asset from CGT event A1 is effectively deferred until a later sale of the asset by the LPR or beneficiary. However, the capital gain from CGT event J2 is not transferred to the LPR or beneficiary and, as a result, remains permanently disregarded.
Defer all or part of a capital gain made from selling an active asset.