Capital Gains Tax (CGT) rollovers present a valuable opportunity to defer the recognition of capital gains, offering the advantage of postponing tax payments. Additionally, it may still allow you to qualify for small business CGT concessions in the future.
Understanding CGT Rollover
CGT rollover provisions become significant when considering a business restructuring. In such situations, various options are available, one of which involves selling the business from the old entity to the new one, allowing you to claim the 50% CGT discount in Division 115 and potentially the small business CGT concessions in Division 152.
However, there are instances where the old entity cannot qualify for these concessions due to its structure or failure to meet the necessary conditions. In such cases, a CGT rollover may become the preferred option. This approach doesn’t exempt you from paying tax on the capital gain but defers it to a later time, providing an opportunity to apply a discount or concession at that stage.
How CGT Rollover Works
A CGT rollover defers the capital gain or loss, making it taxable at a later time when another CGT event occurs for the same or replacement asset. To access the rollover, certain conditions must be met for the CGT event and the asset involved.
The asset retains the same CGT characteristics before and after the rollover. For example, if a pre-CGT asset undergoes a rollover, the resulting asset remains treated as pre-CGT. Similarly, a post-CGT asset rolled over will retain its original cost base or reduced cost base.
Choosing a rollover is typically the taxpayer’s decision, but in some cases, it may be compulsory. There are several CGT rollover provisions available, but for business restructuring, Subdivision 122-A, Subdivision 122-B, and Subdivision 328-G are the most relevant ones.
Subdivision 122-A – Individuals and Trustees
Subdivision 122-A applies when a sole trader or trustee transfers a CGT asset to a wholly-owned company, receiving 100% of the shares in return. The rollover relief is relevant to specific CGT events, such as disposal (A1), creation of a legal right in the company (D1), and grant of an option (D2).
Subdivision 122-B – Partners
Subdivision 122-B comes into play when partners in a partnership restructure to a wholly-owned company. The process is similar to Subdivision 122-A, with the key variation being that the value of each partner’s shares in the company must match their interest in the partnership before the transfer.
Subdivision 328-G – Small Business Restructure Rollover
Subdivision 328-G offers a broader scope than Division 122, allowing restructuring between any form of entity. It covers not only CGT assets but also depreciating assets, trading stock, and revenue assets.
As with Division 122, Subdivision 328-G applies when there is no change in the ultimate economic ownership of the asset through the transfer. It also provides flexibility in transferring only specific assets related to one business while retaining others for a separate business within the existing entity.
Conclusion
Understanding CGT rollovers is crucial when considering business restructuring. Before making decisions, it is essential to determine whether the old entity qualifies for small business CGT concessions. If not, CGT rollover provisions become a favorable alternative. Seeking professional advice is advisable to navigate the complexities and make informed choices for your business’s financial growth.
