Loss, destruction or compulsory acquisition of an asset

Rollover concession

Generally, there are no CGT obligations for assets acquired before 20 September 1985 (pre-CGT).

There may be a situation where you receive money or another CGT asset (or both) as compensation when you dispose of an asset involuntarily (or under an insurance policy against the risk of such an event happening). In this case, you may be able to choose to:

• defer your liability to pay tax on any capital gain arising on the disposal, or
• get a CGT exemption for any replacement asset if you acquired the original asset before 20 September 1985.

This concession is known as a rollover. It may be available if one of the following events happens:

• All or part of your CGT asset is lost or destroyed for example because it was destroyed by a bushfire or cyclone.
• Your CGT asset is compulsorily acquired by an Australian Government agency.
• Your CGT asset is compulsorily acquired by an entity (other than by an Australian Government agency or a foreign government agency) under a power of compulsory acquisition conferred by an Australian or foreign law. However, the compulsory acquisition of minority interests (such as shares in a company) under the Corporations Act or similar foreign law are excluded.
• You dispose of your CGT asset to an entity (other than a foreign government agency) after a notice is served on you inviting you to negotiate a sale agreement. You must have been informed that, if the negotiations are unsuccessful, the asset will be compulsorily acquired under a power of compulsory acquisition conferred by an Australian or foreign law. However, the compulsory acquisition of minority interests (such as shares in a company) under the Corporations Act or similar foreign law are excluded.
• You dispose of land to an entity (other than a foreign government agency) where a mining lease was compulsorily granted over the land, the lease significantly affected your use of the land, the lease was in force immediately before the disposal and the entity to which you disposed of the land was the lessee.
• You dispose of land to an entity (other than a foreign government agency) where a mining lease would have been compulsorily granted over the land, the lease would have significantly affected your use of the land and the entity to which you disposed of the land would have been the lessee.
• A lease that had been granted to you by an Australian Government agency under a Commonwealth, state or territory law expires and is not renewed.

This rollover is not available for plant disposed of after 11:45 am AEST on 21 September 1999 and other depreciating assets from 1 July 2001. Instead, if a depreciating asset is lost or destroyed or, acquired compulsorily or by forced negotiation (other than by a foreign government agency), the capital allowances provisions may allow for a balancing adjustment offset.

This means that rather than including an amount in your assessable income by way of a balancing adjustment, you can offset that amount against the cost of a replacement asset (or assets).

If you choose to take rollover, you don't need to lodge a written election stating your choice, it will be clear from the way you prepare your tax return.

You can't choose to defer a capital loss but you can use it to reduce any capital gain made in the current income year or a later income year.

For rollover relief to apply, the replacement asset you receive can't be a car, motorcycle or similar vehicle.

From 1 July 2001, for rollover relief to apply, the replacement asset you receive can't become an item of your trading stock, nor can it be a depreciating asset.

Compulsory acquisition of part of your main residence

For certain compulsory acquisitions, an optional rollover may apply to a particular arrangement to which the exemption for part of a main residence also applies. The rollover may apply to that arrangement to the extent that the compulsory acquisition exemption doesn't apply.

A compulsory acquisition of part of your main residence may not qualify for the rollover as the requirement that you acquire a replacement asset that is used for the same (or a similar) purpose may not be able to be met. For example, if vacant land adjacent to your home is compulsorily acquired, you may not be able to acquire replacement adjacent land.

In this case, the main residence exemption may apply to the compulsory acquisition (or similar arrangement) of part of your main residence such as vacant land or structures.

For more information, see Main residence – compulsory acquisition

Time of the CGT event

You need to know the time of a CGT event to work out in which income year a capital gain or capital loss affects your income tax.

If an asset is lost or destroyed and you receive compensation, the time of the CGT event is when you first receive the compensation. For example, if the asset is destroyed in a disaster and you receive an insurance pay out the time of the CGT event is when you receive the insurance payout.

If you don't receive any compensation, the time of the CGT event is when the loss is discovered or the destruction occurred.

If your asset was compulsorily acquired by an entity under an Australian law or foreign law, the time of the CGT event is the earliest of when:

• you first received compensation from the entity
• the entity became the asset's owner
• the entity enters the asset (for example, land) or takes possession of it.

If an entity acquires your asset following negotiation (rather than compulsorily acquiring it), the time of the CGT event is:

• the date the contract to acquire it is made, or
• the date of the change of ownership if there is no contract.

If a lease that had been granted to you by an Australian government agency expires and is not renewed, the time of the CGT event is when the lease expires.

If you receive money

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.

 

Consequences of receiving money

If you receive money (for example an insurance payout) and choose to take a rollover, the consequences depend on whether you acquired the original asset:

1. before 20 September 1985
2. on or after 20 September 1985, and
   1. the money received for the asset is more than the cost of repair or replacement
   2. 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 don't 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 in 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 in 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 don't reduce the capital gain and the amount of the expenditure on the repair or replacement included in the cost base, see Example 93.

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 92.

 

For more information, see Insurance payouts after a disaster.

If you receive an asset

If you receive a replacement asset when the CGT event happens, you can choose a rollover only if:

• the replacement asset is not a depreciating asset, not a registered emissions unit or held as trading stock when you acquire it
• the market value of the replacement asset is more than the cost base of the original asset just before the event happened.

Consequences of receiving an asset

If you choose to take a rollover when you receive a replacement asset, you disregard any capital gain you make from the original asset. The other consequences are outlined below.

Original asset acquired before 20 September 1985

If you acquired the original asset before 20 September 1985, you are taken to have acquired the new asset before that day.

Original asset acquired on or after 20 September 1985

If you acquired the original asset on or after 20 September 1985, the first element of the cost base and reduced cost base of the replacement asset is taken to be the cost base and reduced cost base of the original asset at the time of the event.

However, you may have to recalculate the first element of the cost base of your replacement asset if the cost base of the original asset included an amount of indexation and you are seeking to apply the CGT discount to a capital gain from the replacement asset.

If you receive both money and an asset

If you receive both money and an asset and choose to take a rollover, the requirements and consequences are different for each part of the compensation.

You need to separately determine what happens to the replacement asset and the money, having regard to the proportion of the original asset attributable to each type of compensation.

The rules are then applied separately to the money and to the asset.

Indexation or CGT discount

If a CGT event happens to the replacement asset (for example, a later disposal), you may be able to use the indexation method or the discount method to calculate your capital gain. This applies only if the periods of ownership of the original asset and the replacement asset add up to at least 12 months. For indexation to apply, you must have acquired the asset before 11:45 am AEST on 21 September 1999.

Main residence – compulsory acquisition

The main residence exemption can apply to certain compulsory acquisitions (or similar arrangements) which are associated with your main residence but not with your dwelling.

You can ignore a capital gain or capital loss you make from a compulsory acquisition (or similar arrangement) that happens only to land that is adjacent to:

• a dwelling that is your main residence
• a dwelling that passed to you as a beneficiary or trustee of a deceased estate.

The main residence exemption will apply to the extent that the land was used primarily for private or domestic purposes in association with the dwelling.

The maximum area of vacant land covered by the exemption is 2 hectares less the area of land underneath the dwelling.

This applies to CGT events that happen on or after 29 June 2011.

You also have the choice to apply the main residence exemption to CGT events that happened during the transitional period:

• starting at the beginning of the 2004–05 income year
• ending immediately before 29 June 2011.

The main residence exemption applies to structures adjacent to a flat or home unit, such as a garage or a storeroom, in the same way as it applies to land adjacent to a dwelling.

A partial CGT exemption may apply where the dwelling was:

• not used as a main residence during all of the relevant ownership period
• used for income-producing purposes.

For more information, see:

• Partial exemption
• Dwelling used to produce income.

The exemption for compulsory acquisitions of part of your main residence can apply to all the relevant CGT events, which is broader than the CGT events that the ordinary main residence exemption can apply to.

If you are a foreign resident when a CGT event happens to your residential property in Australia under a compulsory acquisition arrangement you may no longer be entitled to claim the main residence exemption.

For more information, see Main residence exemption for foreign residents.

What is compulsory acquisition?

All levels of Australian Government or entities acting on behalf of government can compulsorily acquire land and associated structures or an interest in land for a public purpose.

Compulsory acquisition involves your ownership interest in the land being compulsorily acquired by:

• an Australian Government agency (that is, by the Australian, a state or a territory government or by an authority of the Australian, a state or a territory government)
• a non-government entity authorised to do so under a power conferred by an Australian law.

The acquirer serves a notice on the landowner inviting them to negotiate for the disposal of the asset or part of the asset. This notice should inform the landowner that if negotiations are unsuccessful, the acquirer will proceed to acquire the asset or part of the asset in accordance with its legislative powers. Even if the landowner accepts the initial or negotiated offer, this is viewed to be a compulsory acquisition. This type of negotiated disposal is referred to as an acquisition under the shadow of compulsion.

This would typically involve:

• compulsorily acquiring part of the land adjacent to your residence
• compulsorily acquiring a structure such as a garage, storeroom or other structure associated with your flat or home unit.

Arrangements similar to a compulsory acquisition include the following:

• Your ownership interest in the land is compulsorily cancelled (however described), including compulsorily terminated or revoked.
• Your ownership interest in the land is varied (however described), for example, removing your ownership right to further develop the main residence. It could restrict your ability to erect structures above a certain level, for example installing antennas or remove your right to dig below the soil inhibiting your ability to undertake any further structural development of the property.
• Your ownership interest in the land is surrendered (however described) or varied (however described) under the shadow of compulsion.
• An interest or right in, or relating to, your land is compulsorily conferred on an Australian Government agency or an entity under a power conferred by an Australian law, for example, compulsorily creating a right of access over part of land adjacent to your dwelling.
• You confer on an entity an interest in, or right in, or relating to, your land under the shadow of compulsion, for example, compulsorily negotiating an agreement in relation to a temporary right in relation to your main residence. Government could require temporary access through your property to improve property that is used for a public purpose.
• Your ownership interest in the land was conferred on you by an Australian Government agency for a limited, but renewable period of operation, and that ownership interest was not renewed by that agency. For example, a right that you hold over the land is not renewed, such as a Crown lease.

The exemption doesn't apply to compulsory acquisitions, or similar arrangements, of adjacent land or a structure where the dwelling to which they relate is outside Australia.

How much will be part of your main residence

If your property exceeds 2 hectares you will need to determine how much and which parts of your property will form part of your main residence exemption area.

If the land used for private purposes is greater than 2 hectares, you can choose which 2 hectares are exempt.

Land exceeds 2 hectares

Calculation element	Hectares	Square metres
Main residence	0.0345	345
Swimming pool	0.0044	44
Dam 1 (pump water to landscaped gardens)	0.3500	3,500
Garage	0.0100	100
Guest house	0.0153	153
Driveway	0.1000	1,000
Landscaped gardens	1.4857	14,857
Total	2.00	20,000

Maximum exempt area

Where you have previously disregarded one or more capital gains or losses for a compulsory acquisition (or similar arrangement) of adjacent land or structure, the maximum area of adjacent land available for the main residence exemption when the dwelling is eventually sold (or otherwise realised) is reduced. The reduced area is called the ‘maximum exempt area’.

However, the maximum exempt area is only reduced by a previous compulsory acquisition or similar arrangement where you lost rights to the substantial use and enjoyment of that land either completely or for at least 10 years.

This rule ensures you are not disadvantaged by having to reduce your maximum exempt area where you have lost only insubstantial rights to the use and enjoyment of the exempt land. It also ensures that you are not disadvantaged where you lose substantial rights to the use and enjoyment of the exempt land but only for a short term such as under a short-term lease. This means that such land will remain eligible for a later application of the main residence exemption.

Examples of compulsory arrangements that don't result in substantial loss of rights to the use and enjoyment of the land might include where an easement is granted over vacant land which still permits the use and enjoyment of the land. Another example might be where the government compulsorily acquires subsurface land under your main residence. If you did not use or enjoy the subsurface land and the compulsory acquisition didn't result in you losing rights to the substantial use and enjoyment of the surface land, then the maximum exempt area would not be reduced.

Reduction in maximum exempt area

Calculation element	Hectares	Square metres
Main Residence	0.0345	345
Swimming pool	0.0044	44
Garage	0.0100	100
Guest house	0.0153	153
Driveway	0.1000	1,000
Landscaped gardens	1.4357	14,357
Total	1.6	16,000

Exemption conditions to be met

Where you satisfy all of the following conditions any capital gain or capital loss arising from the compulsory acquisition (or similar arrangement) of adjacent land or structure without the dwelling is automatically disregarded.

The conditions that must be met are:

• you are an individual
• the exempt land is all or part of a dwelling’s adjacent land at the time of the CGT event
• the CGT event does not happen in relation to the dwelling or your ownership interest in the dwelling
• one of the following applies      
  • the dwelling was your main residence during some or all of the period you owned it
  • your ownership interest in the dwelling passed to you as a beneficiary in a deceased estate, or
  • you own the ownership interest in the dwelling as the trustee of a deceased estate
• the adjacent land or structure is compulsorily acquired or is the subject of a similar compulsory arrangement
• the sum of the following is 2 hectares or less
  • the area of all of the dwelling’s adjacent land at the time of the CGT event
  • the area of land on which the dwelling is built
  • for each earlier CGT event that resulted in a capital gain or capital loss being disregarded under this exemption, the area of adjacent land exempted at the time of the earlier CGT event, but only if that involved reducing the area of the dwelling’s adjacent land at the time of that earlier CGT event.

This last condition ensures that you will not be disadvantaged by double counting of the same area of land where you have not lost substantial use and enjoyment of the land, for example, a compulsory easement is created over land but you retain ownership of the land affected by the easement, although with diminished rights.

Where you satisfy all of the conditions apart from the last condition (that is, where the sum of the relevant areas of land is more than 2 hectares), there is no automatic disregarding of any capital gain or capital loss arising from the compulsory acquisition (or similar arrangement).

In these circumstances, you can choose to disregard so much of the capital gain or capital loss that relates to an area of adjacent land that is compulsorily acquired (or subject to a similar arrangement) that is not more than the maximum exempt area.

Record keeping requirements

With all assets you need to keep records. In this case, you will need to keep records of the transactions or events that provide evidence of your assessment of how the main residence capital gains tax exemption applies to the part of your main residence that has been compulsorily acquired. This includes a record of your calculations of your capital gain or loss and if your property is greater than 2 hectares.

To find out more about the record keeping requirements in relation to assets and capital gain tax see Keeping CGT records.

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