Requirements

There are two requirements that must be satisfied for the roll-over to be available.  They are:

1. The basic conditions for the Small Business CGT Concessions must be satisfied.  They relate to things like the CGT Small Business Entity Test, the Maximum Net Asset Value Test, the Active Asset Test and the four additional tests for shares in a company or units in a unit trust; and

2. The choice to apply the small business roll-over must be made by the day the taxpayer lodges their income tax return for the relevant year in which the capital gain arose, or a longer period if allowed by the Commissioner.  And the way the income tax return is prepared is sufficient evidence of the making of the choice.

What the roll-over is

The small business roll-over applies after applying capital losses and any discount for discount capital gains.

If both the small business roll-over and the small business retirement exemption could apply, the taxpayer can choose which order to apply them.

Also, the small business roll-over does not apply where the small business 15-year exemption applies.

Where the small business roll-over applies, all or part of the capital gain remaining is disregard.

Later CGT events

There are 3 CGT events that could potentially apply 2 or more years after the roll-over.  They are CGT events are CGT events J5, J6 and J2.

CGT event J5 – No suitable replacement asset

CGT event J5 broadly relates to where no suitable replacement asset is acquired.

CGT event J5 happens where the small business roll-over is chosen and the taxpayer has not obtained a suitable replacement asset or incurred fourth element expenditure in relation to a suitable asset by the end of the replacement asset period.

The replacement asset should be suitable where it’s an active asset of the taxpayer.

Also, if the replacement asset is a share in a company or a unit in a unit trust, the taxpayer must either be a CGT concession stakeholder in the company or trust, or CGT concession stakeholders in the company or trust must have a small business participation percentage in the taxpayer of at least 90%.

The replacement asset period starts one year before, and ends two years after, the CGT event for which the taxpayer obtains the small business roll-over, or a longer period if allowed by the Commissioner.

If CGT event J5 applies, a capital gain arises at the end of the replacement asset period, and should equal the amount of the capital gain previously disregarded under the small business roll-over.

CGT event J6 – Amount rolled over not fully invested in suitable replacement asset

CGT event J6 broadly relates to where the amount rolled over is not fully invested in a suitable replacement asset.

CGT event J6 happens where the small business roll-over is chosen and, by the end of the replacement asset period, the taxpayer has either obtained a suitable replacement asset or incurred fourth element expenditure in relation to a suitable asset, but, the costs incurred for these purposes were less than the amount rolled over.

If CGT event J6 applies, a capital gain arises at the end of the replacement asset period, or a longer period if allowed by the Commissioner, and should equal the difference between the amount rolled over and the relevant costs incurred.

CGT event J2 – Later change in circumstance

CGT event J2 broadly relates to where there is a later change in circumstance in relation to the replacement asset.

CGT event J2 happens where the small business roll-over is chosen and, after the end of the replacement asset period, the replacement asset stops being the taxpayer’s active asset, becomes trading stock, or starts to be used solely to produce exempt income or non-assessable non-exempt income.

If the replacement asset is a share in a company or an interest in a unit trust, CGT event J2 also happens where the small business roll-over is chosen and, after the end of the replacement asset period, a liquidator or administrator declares the shares worthless, or the taxpayer ceases to be an Australian tax resident.

And lastly, If the replacement asset is a share in a company or an interest in a unit trust, CGT event J2 also happens where the small business roll-over is chosen and, after the end of the replacement asset period, the taxpayer ceases to be either a CGT concession stakeholder in the company or trust, or CGT concession stakeholders in the company or trust cease to have a small business participation percentage in the taxpayer of at least 90%.

If CGT event J2 applies, a capital gain arises when the change happens, and should equal the amount rolled over less any amounts already “clawed back” under CGT event J6 or a previous application of CGT event J2.

Disclaimer – The above is intended as commentary and general information only.  It should not be relied upon as taxation advice.  Formal taxation advice should be sought for particular transactions or on matters of interest arising from the above.