If you choose the rollover, you can disregard the capital gain to the extent that it does not exceed the total of:
- 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 (that is, the second element of the cost base of the replacement asset).
You make a capital gain from the CGT event equal to the amount of the capital gain that is not disregarded.
Example
The original capital gain was $100,000. It has been reduced to $25,000 under the CGT discount and 50% active asset reduction. If the total of the first and second elements of the cost base of the replacement asset is $20,000, $20,000 can be disregarded under the rollover leaving a final capital gain of $5,000.
End of exampleRealisation of the capital gain rolled-over
The capital gain that is disregarded under the small business rollover will crystallise if:
- there is a change in the status of the replacement asset, or
- the replacement asset is a share in a company or an interest in a trust and there is a change in circumstances during your ownership of the asset.
Change in status of replacement asset
A CGT event (CGT event J2) happens if there is a change in the status of a replacement asset you chose for the small business rollover.
Some examples of when CGT event J2 happens include:
- the replacement 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 asset becomes your trading stock, or
- you start to use the replacement asset solely to produce exempt income.
When CGT event J2 happens to your replacement asset, you make a capital gain equal to the gain previously disregarded under the small business rollover. This capital gain may qualify for:
- further rollover, if you acquire another replacement asset, or
- the retirement exemption.
You cannot apply the CGT discount, the 15-year exemption or the small business 50% reduction to reduce this capital gain.
If you dispose of a replacement 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 asset may qualify for any of the small business CGT concessions if the relevant conditions are satisfied.
Example
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.
Assume that one of the replacement assets is later sold for $7,500, resulting in Peter making a capital gain of $2,500.
He will also make a capital gain of $1,000 as the sale of the replacement asset results in that asset no longer being an active asset. The $1,000 capital gain represents 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 exampleChange in circumstances where the replacement asset is a share or trust interest
A CGT event (CGT event J3) happens if you choose a share in a company or an interest in a trust as a replacement asset under the small business rollover and:
- you, or an entity connected with you, cease to be a controlling individual of the company or trust
- if the replacement asset conditions were satisfied because an entity connected with you was a controlling individual of the company or trust, that entity stops being connected with you, or
- the share or interest ceases to be an active asset. That is, the market value of the active assets and certain capital proceeds of the company or trust fall below 80% of the total market value of all the assets of the company or trust (except where this is only because of changes in the market value of assets owned by the company or trust when you chose the replacement asset).
When CGT event J3 happens, you make a capital gain equal to the gain previously disregarded under the small business rollover. This capital gain may qualify for:
- further rollover, if you acquire another replacement asset, or
- the retirement exemption.
You cannot apply the CGT discount, the 15-year exemption or the small business 50% reduction to reduce this capital gain.
This advanced guide talks about the four capital gains tax (CGT) concessions available for small business and the basic conditions that must be satisfied for them to apply. It is current for the 2005-06 year.