cg fundamentals

57 THE TAX INSTITUTE Capital Gains Tax Fundamentals v2 2012 Capital Gains Tax Fundamentals Consequences of small business rollover relief (s 152-415) To the extent to which rollover relief is chosen for a capital gain, the capital gain is disregarded. To the extent to which the capital gain chosen is not reflected in an active asset at the end of the two-year period, CGT event J5 or J6 will happen. To the extent to which the capital gain rollover is represented by a replacement asset at the end of the two-year period, the capital gain will again arise (by the happening of CGT event J2) when certain events happen in relation to the asset (eg. it is disposed of or ceases to be an active asset). Replacement asset changes its status When a replacement asset ceases to be an active asset, CGT event J2 is triggered and the rolled over capital gain is crystallised but may be eligible for further rollover relief or for retirement relief. Small business CGT concessions checklist Net asset test/small business entity turnover test: Have you identified clients who may be within the scope of the small business CGT concessions, including those who may require planning, to come within the $6 million net asset threshold or the small business entity turnover test? When a client would potentially benefit from the small business CGT concessions but may exceed the net asset test, have you advised on the implications of: altering any relationships that may limit the scope of controlled entities? borrowing against CGT assets of the business to acquire personal use assets? borrowing against CGT assets of the business to make superannuation contributions? borrowing against CGT assets of the business to allow small business CGT affiliates to acquire unrelated business assets? Where the small business entity turnover test will need to be met, have you advised on how the aggregated turnover of the relevant entity that needs to be tested for small business entity turnover purposes (either the client or a partnership in which the client is a partner) is determined to ensure that the small business entity turnover test will be met if possible? Active asset: Does the client own an asset that may be the subject of a claim for concessional treatment under div 152 as being an active asset? If so, does the asset meet the requirements for the active asset test to be met, or will it meet those requirements by the projected claim time? When the 15-year exemption is to be claimed, will the asset have been active for at least 7½ years? Significant individual: When the entity is a company, is there an individual who directly or indirectly holds at least 20 per cent of the voting power, and the rights to distribution of at least 20 per cent of the capital and income? When the entity is a fixed trust, is there an individual who is directly or indirectly beneficially entitled to at least 20 per cent of the capital and income of the trust? When the entity is a discretionary trust and there have been distributions of income or capital or both during the year of income, is there an individual who was directly or indirectly entitled to at least 20 per cent of both the income and capital distributions? When the replacement asset is a share in a company or an interest in a trust, will the taxpayer or a connected entity of the company or trust be a CGT concession stakeholder at the end of the two-year replacement period, or will the 90 per cent test be met? Small business rollover: When the small business rollover may be claimed, has the previous acquisition of a potential replacement asset occurred almost one year previous to the CGT event, or does ample time continue for future acquisition of a replacement asset (or the incurring of relevant capital expenditure) within the two-year prospective period?

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57THE TAX INSTITUTE

Capital Gains Tax Fundamentals v2 2012

Cap

ital G

ains

Tax

Fu

ndam

enta

ls

Consequences of small business rollover relief (s 152-415)To the extent to which rollover relief is chosen for a capital gain, the capital gain is disregarded. To the extent to which the capital gain chosen is not reflected in an active asset at the end of the two-year period, CGT event J5 or J6 will happen. To the extent to which the capital gain rollover is represented by a replacement asset at the end of the two-year period, the capital gain will again arise (by the happening of CGT event J2) when certain events happen in relation to the asset (eg. it is disposed of or ceases to be an active asset).

Replacement asset changes its statusWhen a replacement asset ceases to be an active asset, CGT event J2 is triggered and the rolled over capital gain is crystallised but may be eligible for further rollover relief or for retirement relief.

Small business CGT concessions checklistNet asset test/small business entity turnover test:

Have you identified clients who may be within the scope of the small business CGT concessions, including those who may require planning, to come within the $6 million net asset threshold or the small business entity turnover test?

When a client would potentially benefit from the small business CGT concessions but may exceed the net asset test, have you advised on the implications of:

altering any relationships that may limit the scope of controlled entities? borrowing against CGT assets of the business to acquire personal use assets? borrowing against CGT assets of the business to make superannuation contributions? borrowing against CGT assets of the business to allow small business CGT affiliates

to acquire unrelated business assets? Where the small business entity turnover test will need to be met, have you advised on how

the aggregated turnover of the relevant entity that needs to be tested for small business entity turnover purposes (either the client or a partnership in which the client is a partner) is determined to ensure that the small business entity turnover test will be met if possible?

Active asset: Does the client own an asset that may be the subject of a claim for concessional

treatment under div 152 as being an active asset? If so, does the asset meet the requirements for the active asset test to be met, or will it

meet those requirements by the projected claim time? When the 15-year exemption is to be claimed, will the asset have been active for at least

7 years?

Significant individual: When the entity is a company, is there an individual who directly or indirectly holds at

least 20 per cent of the voting power, and the rights to distribution of at least 20 per cent of the capital and income?

When the entity is a fixed trust, is there an individual who is directly or indirectly beneficially entitled to at least 20 per cent of the capital and income of the trust?

When the entity is a discretionary trust and there have been distributions of income or capital or both during the year of income, is there an individual who was directly or indirectly entitled to at least 20 per cent of both the income and capital distributions?

When the replacement asset is a share in a company or an interest in a trust, will the taxpayer or a connected entity of the company or trust be a CGT concession stakeholder at the end of the two-year replacement period, or will the 90 per cent test be met?

Small business rollover: When the small business rollover may be claimed, has the previous acquisition of a

potential replacement asset occurred almost one year previous to the CGT event, or does ample time continue for future acquisition of a replacement asset (or the incurring of relevant capital expenditure) within the two-year prospective period?