Compulsory acquisition of an asset.
This section explains your CGT obligations if your CGT asset is lost, destroyed or compulsorily acquired.
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
- 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 11.45am (by legal time in the ACT) 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 do not need to lodge a written election stating your choice – it will be clear from the way you prepare your tax return.
You cannot 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 cannot be a car, motorcycle or similar vehicle.
Further, from 1 July 2001, for rollover relief to apply, the replacement asset you receive cannot become an item of your trading stock, nor can it be a depreciating asset.
Marriage breakdown.
Read this section if your marriage or de facto marriage ended on or after 20 September 1985 and:
- you transfer an asset or a share of an asset to your spouse
- you receive an asset or a share of an asset from your spouse, or
- a company or trustee of a trust transfers an asset to you or your spouse.
When we talk about ‘your spouse’, this includes your former spouse or former de facto spouse. ‘Transfer’ of an asset means transferring ownership of an asset to the transferee spouse and includes ‘creating’ an asset in their favour (such as a right to use property). Where we talk about ‘an asset’, this includes a share of, or an interest in, a jointly owned asset.
The term ‘transferee spouse’ refers to the spouse to whom an asset is transferred, while the ‘transferor’ is the person (or a company or the trustee of a trust) who transfers an asset to the transferee spouse.
As a general rule, CGT applies to all changes of ownership of assets on or after 20 September 1985. However, if you transfer an asset to your spouse as a result of the breakdown of your marriage or de facto marriage, there is an automatic rollover in certain cases. You cannot choose whether or not it applies.
This rollover ensures the transferor spouse disregards a capital gain or capital loss that would otherwise arise. In effect, the one who receives the asset (the transferee spouse) will make the capital gain or capital loss when they subsequently dispose of the asset. If you are the transferee spouse, the cost base of the asset is transferred to you.
Deceased estates.
If you are a deceased person’s legal personal representative or a beneficiary of a deceased estate, read this section to find out about the special CGT rules that apply.
When a person dies, the assets that make up their estate can:
- pass directly to a beneficiary (or beneficiaries), or
- pass directly to their legal personal representative (for example, their executor) who may dispose of the assets or pass them to the beneficiary (or beneficiaries).
- A beneficiary is a person entitled to assets of a deceased estate. They can be named as a beneficiary in a will or they can be entitled to the assets as a result of the laws of intestacy (when a person dies without having made a will).
A legal personal representative can be either:
- the executor of a deceased estate (that is, a person appointed to wind up the estate in accordance with the will), or
- an administrator appointed to wind up the estate if the person does not leave a will.
Warren Kruger is an Australian Tax Specialist and Advisor. For a FREE Report “7 Essential Strategies to Reduce Your Taxation NOW!”,enter your name and email address in the Opt In Box located on the top right hand side of this article.