Capital gains
Rollover
A rollover is a tax concession that defers or postpones a capital gain or loss when an asset is transferred or replaced, rather than removing the tax permanently.
A rollover in tax means the gain or loss that would normally arise on a CGT event is deferred, usually until a later event, instead of being taxed straight away. The tax is postponed rather than forgiven. In many cases the cost base of the original asset is carried over to the new asset, so the deferred gain is picked up when the new asset is eventually sold.
There are many types of rollover in the tax system. Some of the common ones include rollovers on the transfer of assets between spouses or former spouses on relationship breakdown, scrip-for-scrip rollovers where shares are swapped as part of a takeover, rollovers when you convert a sole trader business to a company, and the small business rollover and small business restructure rollover.
The small business rollover is one of the four small business CGT concessions. If you make a capital gain on an active asset and use this concession, you can defer the gain by acquiring a replacement asset or making a capital improvement to an existing one, generally within two years of the CGT event. If you do not replace within the required time, the gain may become taxable.
Rollovers generally have strict conditions. You may need to make a choice in your tax return, the asset must meet specific descriptions, and the parties may have to be related in a prescribed way. Some require that no payment is received other than in specific forms. Failing a condition can mean the rollover is not available and the full gain is taxed in the year of the CGT event.
Rollovers may interact with GST. Transferring a business to a new entity can be a taxable supply, or it could be GST-free if the going concern conditions are met. An income tax rollover does not automatically make the transfer GST-free, so the GST analysis must be done separately. Stamp duty, which is a state matter, may also apply even where income tax is deferred.
Records are vital because the deferred gain follows the asset. Keep the documents that show the original cost base and how the rollover was applied. This is general information only, so confirm your situation with the ATO or a registered tax professional before relying on a rollover.
Worked example
A sole trader transfers business assets to a new company he owns, and a rollover is available. A building worth $800,000 with a cost base of $500,000 would normally give a $300,000 gain. With rollover, no gain is taxed now, and the company takes over the original $500,000 cost base. When the company later sells the building, the deferred $300,000 gain will be taxed then.
Practical tips
- Remember a rollover postpones tax and does not cancel it, so the deferred gain is picked up on a later sale.
- Check whether you must make a choice in your tax return, since many rollovers are optional and need to be claimed.
- Do not assume an income tax rollover makes a business transfer GST-free, as GST and state stamp duty are assessed separately.