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Does a replacement asset have to fulfil the same function as an original asset in order for the small business roll-over in Subdivision 152-E of the Income Tax Assessment Act 1997 (ITAA 1997) to apply?

No. There is no requirement that a replacement asset fulfil the same function as an original asset for the purpose of obtaining the small business roll-over in Subdivision 152-E of the ITAA 1997.

The taxpayer acquired land after 19 September 1985 which the taxpayer has used for the purpose of growing crops throughout the period that it has been owned.

The taxpayer decided to cease their agricultural business and commence a hotel business.

The taxpayer disposed of the land after 21 September 1999. A capital gain arose under subsection 104-10(4) of the ITAA 1997 on the disposal of the land.

Within two years after the disposal of the land, the taxpayer acquired a hotel from which to conduct their new business. The taxpayer began carrying on the business immediately after acquiring the hotel.

If a taxpayer makes a capital gain from a CGT asset and satisfies all of the basic conditions in Subdivision 152-A of the ITAA 1997, the taxpayer may choose small business roll-over in Subdivision 152-E of the ITAA 1997.

To qualify for the roll-over, the taxpayer must satisfy the conditions in section 152-410 of the ITAA 1997. Paragraph 152-410(b) of the ITAA 1997 requires that the taxpayer must choose one or more CGT assets as replacement assets within the period starting one year before and ending two years after the CGT event for which it is choosing the roll-over.

The word 'replacement' in paragraph 152-410(b) of the ITAA 1997 extends to something that takes the place of, or substitutes for, the original asset. The CGT asset chosen does not have to be used for the same or a similar purpose to the purpose for which the original asset was used. Nor does the CGT asset necessarily have to be used in the same business as the original asset was used. If one or more active assets are chosen to replace the original asset, then this is sufficient for those assets to be a 'replacement asset' for the purposes of paragraph 152-410(b) of the ITAA 1997.

Therefore, the hotel acquired by the taxpayer within two years after the disposal of the land is a replacement asset for the purposes of paragraph 152-410(b) of the ITAA 1997.