Capital Gains Tax (CGT) is a complex area of law, and you must seek professional advice from a business accountant. Note that in some situations, you can defer paying CGT through a CGT rollover. This blog will explain what CGT rollovers are, the types available, and how they can benefit you.
What is Capital Gains Tax (CGT)?
CGT is a tax on the gain that you make when the asset that you have sold has increased in value when compared to the time that you bought it. (Note that it doesn’t apply to selling trading stock.) The gain, in simple terms, is the difference between what you paid for the asset and what you sold it for. CGT usually applies to assets like investment properties and shares, and it can also apply to the sale of businesses.
What is a CGT Rollover?
A CGT rollover allows you to defer paying tax on your capital gains under certain conditions. Instead of paying CGT immediately after selling or transferring an asset, the CGT is paid when a new or replacement asset is sold.
Types of CGT Rollovers
There are several common types of CGT rollovers, each with specific rules and conditions.
1. Small Business Rollover
The Small Business CGT Rollover is available for eligible small businesses. It allows a business to defer CGT when the proceeds from selling an active asset are reinvested into a new asset within a specified period. (Please reach out to your business accountant who can explain what constitutes an active asset.)
2. Involuntary Disposal Rollover
This rollover applies when an asset is lost, destroyed, or compulsorily acquired (e.g. by the government). If the compensation you receive (e.g. from insurance or from the government) is reinvested into a replacement asset, the CGT liability can be deferred until the replacement asset is sold.
3. Marriage or Relationship Breakdown Rollover
When an asset is transferred from one spouse to the other as part of a divorce or separation, CGT will not be payable until the asset is sold by the spouse who received the asset in the divorce or separation.
4. Business Restructure Rollover
If a business changes its structure—such as from a sole trader to a company—the ATO may expect CGT to be paid, as the assets of the business are being sold from the sole trader to the company. The Business Restructure Rollover can defer the tax on this transfer of assets.
Benefits of CGT Rollovers
The main advantage of a CGT rollover is the deferral of tax payments, allowing you to reinvest proceeds without immediately paying CGT.
CGT rollovers can also provide flexibility during business restructures or life changes, allowing you to focus on reinvesting or restructuring without the added financial burden of paying CGT.
Limitations of CGT Rollovers
It is very important to note that while CGT rollovers are beneficial, they don’t eliminate the tax—they only delay the CGT. The deferred tax will still need to be paid when the replacement asset is sold. Additionally, strict rules and eligibility criteria apply, and not every transaction qualifies for a rollover. Professional advice from your business accountant is essential to ensure you meet the conditions.
CGT rollovers can provide valuable tax relief for individuals, companies, trusts, and businesses, allowing the deferral of tax on capital gains in specific circumstances. Whether you’re restructuring your business, going through a relationship breakdown, or reinvesting after an asset sale, rollovers offer significant flexibility and cash flow benefits.
