Capital gains tax: Small business roll-over - car as a replacement asset

Can a car, used by a taxpayer in the course of carrying on a business, be a replacement asset under section 152-420 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes, a car can be a replacement asset under section 152-420 of the ITAA 1997.

The taxpayer made a capital gain from the sale of an active asset in the income year ended 30 June 2000.

The taxpayer wishes to roll-over the remaining capital gain (after applying the 50 per cent CGT discount and the 50 per cent active asset reduction concessions on the gain) into active assets forming part of the taxpayer's new business. A choice has been made for the small business roll-over in the tax return for income year ended 30 June 2000.

The taxpayer acquired a car during the income year ended 30 June 2001. This car is an ordinary motor vehicle as is to be used by the taxpayer in the course of carrying on their business. The taxpayer wants to nominate the car as a replacement asset under the small business roll-over.

The taxpayer satisfies the basic conditions for small business relief under Subdivision 152-A of the ITAA 1997.

The small business roll-over provisions set out in Subdivision 152-E of the ITAA 1997 allows a deferral of a capital gain if a replacement asset is acquired and other conditions are satisfied. The deferred capital gain may later crystallise (that is, the taxpayer will make a capital gain equal to the capital gain previously deferred), if the replacement asset is disposed of or its use changes in particular ways. The crystallised capital gain is in addition to any gain made on the disposal of the replacement asset.

A basic requirements for an asset to be eligible to be a replacement asset is that it must be an active asset. The meaning of active asset is set out in section 152-40 of the ITAA 1997. To be an active asset, the asset must be owned by a small business entity and be used or held ready for use in the course of carrying on a business (paragraph 152-40(1)(a) of the ITAA 1997).

Section 108-5 of the ITAA 1997 includes a car in the definition of a CGT asset. Section 995-1 of the ITAA 1997 defines a car to mean a motor vehicle (except a motor cycle or similar vehicle) designed to carry a load of less than one tonne and fewer than nine passengers. The car purchased by the taxpayer falls within this definition. As the car will be used in the carrying on of a business, it will be an active asset.

A replacement asset must be acquired during the period starting one year before, and ending 2 years after, the happening of the last CGT event in the income year for which the small business roll-over is obtained (subsection 152-420(1) of the ITAA 1997). In addition, the replacement asset must be an active asset when it is acquired or by the end of the relevant 2-year period (refer subsection 152-420(4) of the ITAA 1997).

In the taxpayer's case, the car is to be used in the course of carrying on a business and was acquired within the period specified in subsections 152-420(1) and 152-420(4) of the ITAA 1997. The car is therefore eligible to be a replacement asset.

Upon disposal of the car or any change in its use (that is, if the car stops being used or held ready for use in the business) CGT event J2 happens (paragraph 104-185(1)(a) of the ITAA 1997) and a capital gain equal to the capital gain that was disregarded under the earlier roll-over will crystallise. This crystallised gain may be eligible for a further roll-over or the retirement exemption if conditions are satisfied. However the gain will not be eligible for the CGT discount, the small business 15-year exemption or the small business 50 per cent active asset reduction (subsections 115-25(3) and 152-10(4) of the ITAA 1997).

Where the car is used or held ready for use for a purpose other than a taxable purpose (that is, there is private usage), CGT event K7 may happen if a balancing adjustment event occurs to the car (section 104-235 of the ITAA 1997). A capital gain or capital loss may be made where CGT event K7 happens (subsection 118-24(2) of the ITAA 1997). However, a capital gain or capital loss made on a car is disregarded under section 118-5 of the ITAA 1997.