Capital gains tax

A taxpayer may consider crystallising any unrealised capital gains and losses in order to improve their overall tax position for an income year. For example, if the taxpayer anticipates a significant capital gain in an income year, consideration may be given to reducing the gain by crystallising a capital loss in the same income year. However, consideration must be given to the Commissioner’s view on “wash sales” contained in Taxation Ruling TR 2008/1, particularly if a taxpayer reacquires the assets being disposed (or identical assets), or somehow retains dominion or control over the original assets.

Small business CGT concessions

Broadly, the small business CGT provisions contained in Div 152 of ITAA 1997 provide a range of concessions for a capital gain made on a CGT asset that has been used in a business, provided certain conditions are met.

There are two basic conditions that must be met in order for a capital gain made by a taxpayer to qualify for the small business concessions.

Firstly, the taxpayer must satisfy the “maximum net asset value” test or be a small business entity, or be a partner in a partnership that is a “small business entity” where the CGT asset is an interest in an asset of the partnership.

Secondly, the CGT asset that gives rise to the gain must be an “active asset”. This can include shares or trust interests, subject to satisfying certain conditions.

The concessions are:

1. the 15-year asset exemption: a capital gain may be disregarded if the relevant CGT asset has been continuously owned by the taxpayer for at least 15 years. If the taxpayer is an individual, they must be at least 55 years of age and the CGT event must happen in connection with the taxpayer’s retirement, or they must be permanently incapacitated at that time. If the taxpayer is a company or trust, a person who was a significant individual just before the CGT event must satisfy the requirements;

2. the 50% reduction: a capital gain resulting from a CGT event happening to an “active asset” of a small business may be reduced by 50%;

3. the retirement exemption: a taxpayer may choose to disregard all or part of a capital gain up to a lifetime maximum of $500,000; and

4. the asset rollover concession: a taxpayer may disregard all or part of a capital gain if a replacement asset that is an active asset is acquired.

The 15-year exemption has priority over the other concessions because it provides a full exemption for the capital gain. In addition, the exemption is applied without first having to use prior year losses or the CGT discount.

The capital gain remaining after the 50% reduction may be further reduced by the retirement exemption and/or the asset rollover concession, if the gain qualifies for those concessions. Note that if the gain qualifies for both the retirement and rollover concessions, the taxpayer can choose the order in which to apply them.

There is no age limit on using the retirement exemption, nor any requirement to retire. However, where an individual is under 55 at the time of choosing to apply the exemption, the amount chosen to be disregarded by the individual must be rolled over to a complying superannuation fund or an RSA. Also, any prior year losses and the CGT discount must be applied to a gain before the retirement exemption.

A taxpayer claiming the rollover concession does not need to acquire a replacement asset before choosing the roll-over. However, if the taxpayer does not acquire a replacement asset by the end of the "replacement asset period", or other replacement asset conditions are not met by that time, CGT event J5 will apply to reinstate the rolled over gain.

The concessions are available to the legal personal representative (LPR) or beneficiary of a deceased estate, a surviving joint tenant and the trustee of a testamentary trust provided: (a) the deceased would have qualified for the concessions just before their death; and (b) the CGT event that gives rise to the gain in the hands of the LPR or beneficiary occurs within two years of the deceased's death (or such further time as the Commissioner allows).

Good records are necessary to help substantiate claims for any of the small business CGT concessions. Records that should be kept should include market value of relevant assets just before the CGT event, evidence of carrying on a business (including calculation of turnover) and carried forward losses calculations, and also the relevant trust deeds, trust minutes, company constitution and any other relevant documents.

• NOTE: Under the maximum net asset value test, the net value of all the CGT assets of the taxpayer, entities "connected with" the taxpayer, the taxpayer's "affiliates" and entities "connected with" the taxpayer's affiliates (subject to certain exceptions) must not exceed $6 million. A debt owed to the taxpayer, affiliate or connected entity would be such a CGT asset, and would, prima facie, be brought into account at its face value. However, note that some CGT assets are specifically excluded from the test, eg shares in an affiliate: see s 152-20(2) of ITAA 1997.

• NOTE: Consideration should be given to the integrity measures contained in the CGT regime: see ss 115-40 and 115-45, Div 149 and CGT event K6.

Rollover relief

Rollover relief is available to provide taxpayers with the option to defer the consequences of a CGT event. Apart from disregarding any capital gains or capital losses that would otherwise arise from a CGT event, a roll-over usually places the transferee under the rearrangement in the same CGT position that the transferor was in before the event occurred. Some types of rollover relief will apply automatically, while some will require taxpayers to elect the use of the relief, which is indicated by the way their tax returns are prepared.

Two types of roll-overs are available: the replacement asset roll-over and the same asset roll-over. A replacement asset roll-over allows the deferral of a capital gain or loss until a later CGT event happens to the replacement asset. A same asset roll-over allows the deferral of a capital gain or loss arising from the disposal of the asset until the later disposal of the asset by the successor entity.

The table below sets out the common types of rollover relief that may be considered for tax planning purposes: