ap_cgt09

Company Roll-overs - deferring capital gains on disposals of assets to member companies

Roll-overs - deferring capital gains on disposals

How does a company qualify for roll-over relief?

What is a roll-over?

Roll-overs have been described in the topic on the general rules for capital allowances. However that general rule is mostly concerned with the situation which arises when a capital asset in respect of which 'depreciation type' have been allowed is lost, destroyed or disposed of. The rule does include roll-overs in the case of capital gains and they are dealt with in Subdivision 126-B.

The general idea behind these rules is similar to the mutuality principal - that's the principal, which says you can not derive income by trading with yourself. If you have ever walked into a club, which has poker machines, and been required to sign in as a non-member, you will have had a brush with the mutuality principal. A poker machine club can not derive income from the gambling conducted by its own members. That would breech the mutuality principal. Only the income from gambling by non-members is deemed to be income derived by the club, so the non-members visitors records are used to calculate the proportion of the total gambling receipts, which the Tax Office can treat as taxable income.

Even though a wholly owned group of companies is a set of individual entities, any transactions which are carried out among the members of that group are close enough to the case of an individual trading with itself to call for special treatment.

The good news! The assets can be rolled over!

Section 126 - 1 allows the asset to be transferred to the new owner without attracting any of the consequences that would normal follow under the capital gains provisions. The capital gain is disregarded in what is referred to as a same-asset roll-over event.

A same-asset roll-over event allows a capital gain or loss an entity makes from disposing of a CGT asset to, or creating a CGT asset in, another entity to be disregarded. For a disposal, certain attributes of the asset are transferred to the receiving entity.

Section 126-40 tells you how a company can obtain a roll-over if it

transfers a CGT asset to,

or creates a CGT asset in,

another company that is a member of the same wholly-owned group.

How does a company qualify for roll-over relief?

Section 126-50 imposes the following requirements before roll-over relief can be granted:

The originating company and recipient company must be members of the same wholly-owned group at the time of the trigger event.

The roll-over asset must not be trading stock of the recipient company just after the time of the trigger event . This includes a situation in which the roll-over asset is a right, option or convertible note which is used to acquire trading stock of the recipient company just after the recipient company acquired it.

The ordinary income and statutory income of the recipient company must not be exempt from income tax because of Division 50 for the income year of the trigger event.

The requirements in one of the items in this table must be satisfied.

Additional requirements
Item	The originating company’s residency status	The recipient company’s residency status	This requirement must be satisfied
1	An Australian resident at the time of the trigger event	An Australian resident at that time	It does not matter what the roll-over asset is
2	Not an Australian resident at that time	An Australian resident at that time	The asset must have the *necessary connection with Australia just before that time (for a disposal case) and just after that time (for a creation case)
3	It does not matter what the originating company’s residency status is	Not an Australian resident at that time	The asset must have the *necessary connection with Australia just before and just after that time (for a disposal case) and just after that time (for a creation case)

When is there a roll-over?

Section 126-55 (1) says there is a roll-over if:

the trigger event would have resulted in the originating company making a capital gain or no capital loss; and

the originating company and recipient company both choose to obtain it. (Section 103-25 sets out when the choice must be made.)

Section 126-55 (2) extends the roll-over to a trigger event which would have resulted in the originating company making a capital loss, unless the originating company and recipient company make a choice under section 126-65.

What happens when a company rolls over?

Section 126-60 tells you.

A capital gain or capital loss the originating company makes from the trigger event is disregarded.

It all depends when the asset was first acquired

(Does the date 20 September 1985 ring any bells?)

We will refer to the company which gave up the asset as the originating company and the company which received the asset as the recipient company.

If the asset was acquired after 20 September 1985

Section 126-60 (2) says the cost base of the asset in the recipient company's hands is the asset’s cost base (in the hands of the originating company) at the time it changed hands (in other words, when the recipient company acquired it)

Note: There are special indexation rules for roll-overs: see Division 114.

If the asset was acquired BEFORE 20 September 1985

Section 126-60 (3) says the recipient company is taken to have acquired it BEFORE 20 September 1985 (In other words any capital gain or loss you make is generally disregarded: see Division 104. This exemption is removed in some situations: see Division 149.)

If the trigger event involved a *personal use asset of the originating company, the recipient company is taken to have *acquired one.

Note: Capital losses from personal use assets are disregarded: see section 108-20

What if the assets are deemed to have been created when the settlement was arranged?

Do you remember those events that arose when an asset was created? It will be worth your while to have a look at them if you don't.

In such cases, the asset had no cost because it was generally created out of thin air, so the cost base of the asset is usually taken to be the incidental costs. For example, event D1 deals with …

D1 Creating contractual or other rights

CGT events
Event number and description	Time of event is:	Capital gain is:	Capital loss is:
D1 Creating contractual or other rights [See section 104-35]	when contract is entered into or right is created	capital proceeds from creating right less incidental costs of creating it	incidental costs of creating right less capital proceeds

Section 126-60 (5) contains a table which provides you with all the details as to what the cost base will be for each 'creation' event.

Creation case
Event No.	Description of event	Applicable amount
D1	You create a contractual right or other legal or equitable right in another entity eg. You enter into a contract with the purchaser of your business not to operate a similar business in the same town. The contract states that $20,000 was paid for this.	the incidental costs the originating company incurred that relate to the trigger event
D2	You grant an option to an entity, or renew or extend an option you had granted.	the expenditure the originating company incurred to grant the option
D3	Granting a right to income from mining	the expenditure the originating company incurred to grant the right
F1	Lessor grants, renews or extends a lease.	the expenditure the originating company incurred on the grant, renewal or extension of the lease

The expenditure can include giving property: see section 103-5.

Note: CGT event J1 may occur if the recipient company stops being a member of the wholly-owned group while still owning the roll-over asset: see section 104-175.

Companies can choose NOT to roll-over a loss

Section 126-65 allows the originating company and recipient company to choose not to obtain a roll-over if

The trigger event must have resulted in the originating company making a capital loss.

The originating company and recipient company must intend that, before the end of the income year of the originating company after the one in which the trigger event happened:

they will no longer be members of the same wholly-owned group; and

the originating company and companies that are members of its wholly-owned group at that time will own less than 50% of the shares in the recipient company.

Section 126-70 allows this to be reversed if the intention is not realised

Sections 126-75 and 126-80 deal with roll-overs by controlled foreign countries and foreign investment funds - these a vehicles which the Commissioner has grounds for suspecting may be involved in the avoidance, or at least deferral, of income tax. You can read about them in the topic on attributable income if you want further information.