Roll-over for Certain Assets

23.69. In certain circumstances where an asset is disposed of and the proceeds are invested in a similar asset, or where the disposal of one asset and acquisition of another involves merely a change in legal form but not a material change in the substance of what is owned, the new asset should be regarded as a continuation of the old

  ― 429 ―
with the cost-basis of the latter being carried over. This is known as a ‘roll-over’, and provisions of this nature are commonly found in capital gains tax legislation as a means of reducing the undesirable aspect of lock-in. The Committee recommends that roll-over provisions should apply in the following cases:

  • (a) The disposal and replacement of certain business assets (such as plant, machinery and buildings) within specified periods and the expropriation, loss or destruction of such assets followed by a replacement with assets of a similar nature. A suggested period in which the replacement must take place is one year for plant and two years for buildings.
  • (b) The transfer of assets to a company in which the equity shares are wholly owned by a taxpayer. A proportionate roll-over should be allowed where the taxpayer takes up more than a nominal proportion of the equity shares.
  • (c) The transfer of assets to a partnership in which the vendor is a partner, to the extent that the vendor acquires an interest in the capital of the partnership.
  • (d) The distribution of assets upon the dissolution of a partnership.
  • (e) Certain types of company mergers and reconstructions.
  • (f) The liquidation by a company of a wholly-owned subsidiary.

23.70. The Budget proposals envisage the availability of roll-over provisions in circumstances yet to be precisely defined but which accord in broad outline with the recommendations of the Committee.