If you receive money because a CGT event happens, you can choose a rollover only if:
- you incur expenditure in acquiring another CGT asset that is used
- in your business or is installed ready for use in the business for a reasonable period if the original asset was a business asset, or
- otherwise, for a reasonable period for the same or a similar purpose as the original asset, or
- part of the original asset is lost or destroyed and you incur expenditure of a capital nature in repairing or restoring it.
You must incur at least some of the expenditure:
- no earlier than one year before the event happens, or
- within one year after the end of the income year in which the event happens.
This period may be extended in special circumstances.
Example 89: Rollover applies
Trish paid for the repair of an asset for which she was compensated after part of it was destroyed on 1 September 2018. Trish’s expenditure qualifies for the rollover concession if it was incurred any time during the period 1 September 2017 to 30 June 2020.
The replacement asset need not be identical to the one it is replacing. However, for a rollover to apply, you must use it in the same business (or for the same or a similar purpose) as the one for which you used the original asset. Also, your replacement asset cannot become an item of trading stock, nor can it be a depreciating asset.
End of example
Example 90: Rollover does not apply
Denise receives money when her manufacturing business premises are destroyed. She buys a rental property with this money.
Denise cannot access the rollover concession because she does not use the rental property for the same or similar purpose as her old business premises.
End of exampleConsequences of receiving money
If you receive money and choose to take a rollover, the consequences depend on whether you acquired the original asset:
- before 20 September 1985
- on or after 20 September 1985, and
- the money received for the asset is more than the cost of repair or replacement
- the money received does not exceed the cost of repair or replacement.
1. Original asset acquired before 20 September 1985
If you acquired the original asset before 20 September 1985, you are taken to have acquired the repaired or replacement asset before that day if:
- you repair or restore the original asset, or
- you replace the original asset
- at a cost of no more than 120% of its market value at the time of the event, or
- at any cost, provided it (or part of it) was lost or destroyed by a natural disaster and the replacement asset is substantially the same.
This means you disregard any capital gain or capital loss you make when a later CGT event happens to the repaired or replacement asset.
2. Original asset acquired on or after 20 September 1985
If you acquired the original asset on or after 20 September 1985, the way rollover applies will depend on whether the money you received is more or less than the cost of repairing or replacing the asset. If it is more, it also depends on whether the capital gain you make when the event happens is:
- more than that excess, or
- less than or equal to that excess.
a. Money received is more than the cost of repair or replacement
If you do not use all of the money you received to repair or replace the original asset, this affects your CGT obligations. The amount of capital gain you include on your tax return depends on whether the capital gain is more or less than the difference between the amount you received and the cost of the repair or replacement.
If the capital gain is more than that difference, you reduce your capital gain to the amount of the excess. Include this amount on your tax return in the year the event happens. This gain may be eligible for the CGT discount. For more information see How to work out your capital gain or capital loss.
When a later CGT event happens, you reduce the amount of expenditure included in the cost base of the asset by the difference between the capital gain before it is reduced and the excess. This enables you to defer part of your CGT liability until a later CGT event happens.
If the capital gain is less than or equal to the excess (the compensation amount less the cost of the repair or replacement), you do not reduce the capital gain and the amount of the expenditure on the repair or replacement included in the cost base, see example 92.
b. Money received does not exceed the cost of repair or replacement
If the amount of money you received is less than or equal to the expenditure you incurred to repair or replace the original asset, you disregard any capital gain. You reduce the expenditure you include in the cost base of the asset when a later CGT event happens by the amount of the gain, see example 91.
Example 91: Money received is less than expenditure incurred
Gerard’s business premises were destroyed by fire on 15 March 2019. He received $246,000 in compensation from his insurance company.
It cost him $257,000 to reconstruct the premises, $11,000 more than the amount of compensation he received.
Gerard made a capital gain of $2,000 because his cost base apportioned to the building was $244,000 at the time of the fire.
compensation money received |
$246,000 |
less cost base |
$244,000 |
capital gain |
$2,000 |
compensation money received |
$246,000 |
less replacement expenditure |
$257,000 |
shortfall |
$11,000 |
As the compensation money does not exceed the repair expenditure, Gerard disregards the capital gain.
However, the amount of expenditure that Gerard can include in the cost base of the repaired building is reduced by the amount of the capital gain ($2,000) to $255,000.
End of example
Example 92: Money received is more than the expenditure incurred
Assume that, in the previous example, Gerard incurred only $240,000 for repairs and the cost attributed to the building was $230,000.
compensation money received |
$246,000 |
less cost base |
$230,000 |
capital gain |
$16,000 |
compensation money received |
$246,000 |
less replacement expenditure |
$240,000 |
excess |
$6,000 |
The compensation money ($246,000) is $6,000 more than the replacement expenditure ($240,000). The capital gain ($16,000) is $10,000 more than the excess of $6,000. The capital gain is reduced to the excess amount of $6,000.
Gerard’s capital gain (before applying the CGT discount of 50%) is $6,000. Therefore, assuming he has not made any other capital losses or capital gains in the 2018–19 income year (and does not have any unapplied net capital losses from earlier years) Gerard includes $3,000 ($6,000 × 50%) as his net capital gain for the 2018–19 income year.
Also, he reduces the expenditure he incurred on the replacement asset by the balance of the capital gain ($10,000) to $230,000. This means $10,000 of the capital gain is deferred.
End of example