Capital Gains Tax: rollover into wholly-owned company

Is a replacement asset rollover available under Subdivision 122-A of the Income Tax Assessment Act 1997 (ITAA 1997) when assets owned by an individual are disposed of to a company?

Yes. Subdivision 122-A of the ITAA 1997 provides rollover relief for CGT assets transferred from an individual to a wholly-owned company, if certain conditions are satisfied.

An individual taxpayer acquired a number of assets on or after 20 September 1985, which consisted of shares, trust units and other financial instruments, held for investment purposes.

The taxpayer has transferred some of those assets to a wholly-owned company.

The taxpayer and the company are residents for income tax purposes.

The taxpayer received non redeemable shares in the company. The market value of these shares was substantially the same as the market value of the assets disposed of to the company.

The company is not an exempt entity for taxation purposes.

Section 122-15 of the ITAA 1997 provides that an individual can choose to obtain a rollover if one of a certain specified CGT event occurs. The disposal of a CGT asset, or all the assets of a business, to a company is a CGT event A1, section 104-10 of the ITAA 1997, to which this provision applies. Sections 122-20 and 122-25 of the ITAA 1997 set out the conditions that must be met for rollover relief to be available.

The conditions in section 122-20 of the ITAA 1997 have been met. The consideration received by the taxpayer for the disposal of each asset was non-redeemable shares in the company and nothing else. The market value of the shares that the taxpayer received for the disposal of each asset was substantially the same as the market value of the assets disposed of to the company.

The conditions in section 122-25 of the ITAA 1997 require that: • the individual must own all the shares in the company immediately after the time of the trigger event. The individual must own the shares in the same capacity as they owned the asset that the company now owns; • if the individual or the company, or both, are not a resident then the asset must have the necessary connection with Australia at the time of the trigger event; • the company must not be exempt from income tax on its ordinary and statutory income because it is an exempt entity for the income year of the trigger event; • under item 1 in the table in subsection 122-25(2) of the ITAA 1997 rollover relief does not apply to the disposal or creation of any of the following assets: - a collectable or personal use asset; or - a precluded asset, except where the precluded asset is disposed of as part of all the assets of the business (item 2 in the table); or - an asset that becomes trading stock of the company just after the disposal, except where the asset is disposed of as part of all the assets of the business and it was already the trading stock when disposed of (item 2 in the table), or; - a decoration awarded for valour or brave conduct (except if you paid money or gave other property for it). • A precluded asset, under subsection 122-25(3) of the ITAA 1997 is: - a depreciating asset; or - trading stock; or - an interest in the copyright in a film which is CGT exempt

All of these conditions have been satisfied. The taxpayer can therefore choose to obtain a rollover under section 122-15 of the ITAA 1997. Consequently, if the taxpayer chooses a rollover any capital gain or capital loss that arises from each trigger event is disregarded under subsection 122-40(1) of the ITAA 1997.