By TODD WANT
DIRECTOR, TAX SERVICES
It is generally assumed that for tax purposes a capital gain (or loss) arises in the year the sale contract is entered into. While this will often be the case, recent Court decisions have highlighted the fact that transfer/settlement date can sometimes be the more crucial date for CGT purposes. This distinction can impact on aspects such as the amount of tax payable on the gain, the year the gain (or loss) arises, or how discounts and concessions will apply to a client’s circumstances.
When contract date?
Many practitioners will be familiar with CGT event A1 – disposal of a CGT asset. This CGT event is arguably the most frequently occurring of all the events as it happens when there is a change in ownership of a CGT asset from one entity to another (such as where a property is sold from one person to another).
The wording of the legislation regarding CGT event A1 is clear in stating that the time of the event is when you enter into a contract for the disposal. In situations where there is no contract, the timing is when the change of ownership occurs.
It is based on CGT event A1 that many people assume for CGT purposes that a capital gain or loss will arise in the year a sale contract is entered into. However, given that there are in excess of 50 CGT events in the tax legislation, care needs to be taken to ensure that the correct time of the CGT event is identified.
When settlement date?
An important aspect of the CGT laws is that taxpayers are required to choose the most specific CGT event based on their particular circumstances. A number of recent cases1 have identified circumstances in which CGT event A1 was not the appropriate CGT event, despite the fact that it was one of the possibilities presented to the Courts.
CGT event E2 happens if you transfer a CGT asset to an existing trust. This may occur for example when a restructure takes place whereby an individual transfers their ownership of an asset to their family discretionary trust.
The relevance of CGT event E2 is that the time of the event is when the asset is transferred. Unlike CGT event A1, the law does not specify the contract date as being the relevant date.
In cases such as Healey, where the taxpayer bought and sold an asset in a short period of time, determining whether CGT event A1 or E2 was the relevant event was critical to calculating the tax outcomes. In Healey’s case, if CGT event A1 was the relevant event when they purchased the asset, then the asset would have been held for greater than 12 months at the time of disposal and hence the CGT 50% discount would have been available.
However, if CGT event E2 was the relevant event at the time of acquisition, the 12 months period would not have been satisfied and the gain would not have been a discount gain.
The Court considered the definition of each of CGT events A1 and E2 and held that E2 was the more specific CGT event. Accordingly the asset had not been held for greater than 12 months at the time of disposal and therefore the general discount was not available to reduce the assessable amount of the gain by 50%.
Why is the distinction important?
Determining whether contract date or settlement date is relevant is crucial in assessing the tax outcomes of a transaction. Some of the areas that can be impacted by this distinction include:
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- The year in which year a gain (or loss) arises. This can not only impact on the timing of when any tax is payable, but also the amount of tax payable if a client is likely to have a different marginal tax rate from one year to the next;
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- Eligibility to access the 50% CGT discount. As was highlighted in cases such as Healey, acquisition and disposal dates can be crucial in determining the tax outcomes of an asset held for a limited period of time;
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- Small business CGT concessions. Aspects such as eligibility for the 15-year rule, or whether an asset is considered active for the minimum period of time will be reliant on understanding the relevant dates. The time of the CGT event is also the point at which the $6 million maximum net asset value test needs to be assessed; and
- Main residence exemption calculations. This can be relevant where a property has been used both as a main residence and also to derive assessable income during the ownership period.
What to look out for
Each time a client acquires or disposes of a CGT asset, practitioners should be careful to consider what the most relevant CGT event is. It should not be automatically assumed that contract date is the most important date.
Given there are in excess of 50 CGT events, practitioners should consider which event is the most specific. Extra care should be taken in circumstances where:
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- Acquisitions or disposals take place and one or more of the entities involved is a trust; or
- A client’s affairs are being restructured.
Your local William Buck advisor can assist you with CGT and other tax related matters.
1 Such as Oswal v Commissioner of Taxation [2013] FCA 745; and Healey v Commissioner of Taxation [2012] FCA 269
