Capital Gains Tax (CGT) is a significant tax consideration for investors and business owners in Australia. However, there are provisions within the tax law that offer relief in the form of CGT rollover relief.
CGT is calculated by subtracting the cost of buying and maintaining an asset (i.e. cost base) from the sale proceeds when you sell the asset. Businesses must declare capital gains or losses in their income tax return and pay CGT on profits made.
Understanding when and how this relief applies is crucial for taxpayers looking to manage their tax obligations effectively.
Business restructure
Changing your business structure can help align it more closely with your strategic objectives. For instance, you might want to change from being a sole trader to running your business as a company. Another scenario could be transitioning from a single company structure to a multi-company structure (comprising a holding company and an operating/subsidiary company).
The process of changing from business structure often involves moving or ‘selling’ assets between different legal entities. The new entity must pay the market value to purchase the business. The disposal of business assets triggers a capital gains tax event. If the business’s value exceeds the amount you spent to acquire or maintain it, you’ll have a capital gain and will be required to pay tax on it.
You might want to restructure your business to operate it through a company for several reasons including:
- Tax efficient exit strategies, such as a sale of shares, sale of assets, and IPO.
- Attract investors.
- Access to R&D or innovation early stage innovation company (ESIC) concessions.
- Enhanced asset protection (for partnerships and sole traders) where they were previously personally liable for the business’s debts.
- Separate non-business assets from personal assets.
CGT assets include all types of property:
- Property and real estate
- Company shares and units in a trust
- Legal (enforceable) contractual rights (such as mining rights)
good will
see our Blackwattle article on CGT for more details.
What is CGT Rollover Relief?
CGT rollover relief is a provision in the Australian tax law that allows taxpayers to defer or eliminate capital gains tax liability that would otherwise arise from certain transactions. Instead of immediately recognizing and paying tax on the capital gain, taxpayers can defer the tax liability until a later date or transfer it to another asset. This relief is particularly valuable in scenarios such as business restructures, asset sales, or property exchanges.
CGT rollover relief lets businesses defer or disregard a capital gain or loss. CGT rollover is applicable in certain situations. The business usually makes the choice based on how it prepares its income tax return. However, some rollover reliefs need specific written choices within set time frames to apply.
There are several CGT rollover reliefs under the Income Tax Assessment Act 1997. These allow you to delay CGT to a future time when there’s continuity of economic ownership
- Subdivision 122-A (transfer by an individual or trustee to a wholly owned company)
- Subdivision 122-B (transfer of assets from a legal partnership to a wholly owned company)
- Subdivision 124-N (transfer of assets from a unit trust to a company)
- Subdivision 328-G (small business restructure rollover)
- Division 615 (inserting a holding company between shareholders and another company)
Remember, obtaining a CGT rollover typically takes more time as it requires collaboration between your tax advisor and legal advisors. Your tax advisor will usually provide an outline of the circumstances and the process you need to follow to access the rollover relief. Your legal team will then use this tax advice to prepare and provide guidance to implement the tax advice.
A simple guide for a business restructure is outlined below which will help with access to CGT rollover concessions:
Step 1: Discuss Business Goals
- Consult with your accountant and tax advisers about your business objectives.
- Evaluate if your current business structure aligns with these goals.
Step 2: Initial Business Valuation
Your accountant will ask questions to get an initial indication of the business’s value:
- Number of physical assets
- Employee count
- Intellectual property
- Property ownership
- Business reputation
Step 3: Determine CGT Liability
Engage your accountant to assess if you’ll have a CGT liability if you restructure.
Step 4: Access CGT Rollover Relief
If a CGT liability exists, discuss with your accountant what needs to be done to access the CGT rollover relief.
Step 5: Prepare Relevant Documents
Collaborate with your accountant and legal advisers to prepare the necessary legal documents for the restructuring process.
How to access CGT rollovers
Understanding the Conditions for CGT Rollover Relief
CGT rollover relief is subject to specific conditions and criteria. Understanding these conditions is essential for taxpayers seeking to benefit from the relief. Some key conditions include:
Same Asset or Replacement Asset: In many cases, CGT rollover relief requires the taxpayer to use the proceeds from the sale of an asset to acquire a replacement asset. This replacement asset is often integral to maintaining the taxpayer’s business operations or investment portfolio.
Timing of Replacement: Taxpayers must typically acquire the replacement asset within a specified timeframe to qualify for rollover relief. Failing to meet this requirement may result in the recognition of the capital gain and the imposition of capital gains tax.
Continuity of Ownership: Certain forms of CGT rollover relief, such as the small business rollover, may require the taxpayer to maintain a continuity of ownership in the business or asset. This ensures that the relief is not abused for tax avoidance purposes.
Specific Transaction Types: Different forms of CGT rollover relief apply to specific types of transactions, such as business restructures, demergers, or marriage breakdowns. Taxpayers must understand the eligibility criteria and conditions associated with each type of relief.
Practical Implications for Taxpayers
The practical implications of CGT rollover relief for taxpayers. By leveraging rollover relief provisions effectively, taxpayers can:
Facilitate Business Transactions: Rollover relief simplifies complex business transactions, enabling smoother mergers, acquisitions, or asset transfers.
Manage Tax Liabilities: Taxpayers can defer or reduce their capital gains tax liabilities, enhancing cash flow and financial flexibility.
Support Growth and Innovation: CGT rollover relief encourages entrepreneurship, investment, and innovation by reducing tax barriers and fostering economic growth.
Conclusion
In conclusion, CGT rollover relief is a valuable provision within the Australian tax system, offering taxpayers opportunities to defer or eliminate capital gains tax liabilities in specific circumstances. By understanding the conditions, eligibility criteria, and practical implications of rollover relief, taxpayers can make informed decisions to optimize their tax outcomes and achieve their financial objectives.
Get in touch with our team at Blackwattle we can help assess your options and get you back on track to healthy operations.
Blackwattle Tax has a team of experienced Chartered Accountants that are ready to support you and your business. We have help countless families and businesses make informed decisions that have resulted in better financial and tax outcomes.
To find out how we can help you with your strategic business decisions, book a free consultant with us.
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Disclaimer: We endeavour to make sure the information provided in this guidance is up to date and accurate. Please note, that the information is only intended to be a guide, with a general overview of information. This guidance is not a comprehensive document and should not be interpretated as legal advice or tax advice. The information is general in nature. You should seek the assistance of a professional opinion for any legal and tax issues related to your personal circumstances.
