Capital gains tax: Small business relief - replacement asset acquired by different entity

Is the freehold of a hotel an eligible replacement asset in terms of subsection 152-420(1) of the Income Tax Assessment Act 1997 (ITAA 1997) if it is acquired by the shareholders of the company operating the hotel rather than the company itself?

No. The freehold of the hotel would not be an eligible replacement asset in terms of subsection 152-420(1) of the ITAA 1997 if it is acquired by the shareholders of the company rather than the company itself.

On 2 April 2002 the Gaming Machines Act 2001 commenced in New South Wales. Under that Act, poker machine entitlements were allocated by the NSW Liquor Administration Board to the company operating the hotel. The company is considering selling its poker machine entitlements.

The company owns the leasehold of the hotel but not the freehold. The shareholders of the company are considering purchasing the freehold in partnership using the proceeds of the sale of poker machine entitlements by the company.

Under Subdivision 152-E of the ITAA 1997 a taxpayer can defer the making of a capital gain from a Capital Gains Tax (CGT) event happening if it acquires a replacement asset.

Section 152-420 of the ITAA 1997 sets out the conditions that a replacement asset must satisfy before a taxpayer is entitled to claim the small business roll-over. For an asset to be eligible as a replacement asset, the taxpayer must acquire it during the period starting one year before and ending two years after the occurrence of the last CGT event in the income year for which the taxpayer obtains the roll-over.

If the company were to acquire the freehold of the hotel as a replacement asset for the poker machine entitlements, it would qualify for the small business roll-over available under Subdivision 152-E of the ITAA 1997. However, it is the shareholders of the company not the company itself that intends to acquire the freehold. As the company would not own the freehold of the hotel, it cannot not be an eligible replacement asset in terms of subsection 152-420(1) of the ITAA 1997.