Tax Tip 214: At what date is CGT Triggered? Part 1

Working as a trainee lawyer in a small suburban firm I heard a staff member, who wasn’t even a lawyer, tell a conveyancing client that the relevant date for CGT purposes is the date of settlement and not the date of contract. How wrong she was.


Generally*, where a capital asset is purchased or sold under a contract the relevant date for CGT purposes is the date the contract is entered into, s 104-10(3)(a) ITAA97 (CGT event A1).

See INCOME TAX ASSESSMENT ACT 1997 - SECT 104.10 Disposal of a CGT asset: CGT event A1


Timing is very important if an investor wants to sell the property about 12 months after buying it because a few days difference can mean a lot of extra tax .



Example

Bart buys a property on 28th of June for $500,000– he enters contracts on this date, but settlement is on 28th of July. The relevant acquisition date for CGT purposes is 28th of June. Bart gets a keen buyer interested in the property and they want to sign the contract to purchase it on 27th of June the following year for $1mil with settlement on the 1st of August. Bart thinks, great that is more than 12 months from settlement to settlement so he thinks he will get the 50% CGT discount.

But Bart is wrong because it is the contract dates that count – 28th of June this year and 27th of June next year. Less than 12 months so no 50% CGT discount.

Bart’s capital gain is $500,000

Had he sought advice and waited 2 more days his capital gain would have been $500,000 still, but the taxable capital gain would have been halved to $250,000.


Timing is also very important as to which financial year the gain will be taxed in.


Example 2

Lisa is selling her investment property and is in negotiations with a prospective buyer. It is late June and Lisa wants to make sure the gain is taxed in the next financial year as she will be off work all year and will have no income. This year she has already earnt $200,000 in taxable income.

Lisa signs contracts on 1 June this year with settlement on 15th June next year. She thinks the relevant date is the settlement date. The gain before the discount is $200,000.

If the sale falls into this financial year the tax would be $47,000

If the sale falls into the next financial year the tax would be $25,717

(based on 2018 and 2019 tax rates respectively)


*Note that I said ‘generally’ at the beginning above, and that is because there are instances where the relevant date is the settlement date, and sometimes it is somewhere between the date the contract is signed and settlement happens. I will cover these in a future tax tip.

 

Also Terry if Bart in example above waited another 2 days to sign his contract until 1 July he could save (his salary etc being equal each year) even further.
The $120k approx (depending on his marginal tax rate) in CGT payable would remain in his bank account rather than the ATO for an extra 12 months.
A further saving of approx $4,800 at 4% p.a.

 

That is a month's salary!

 

Glad i dont work for you

 

and remember the most relevant CGT event has to be applied so a transfer to a trust won't be the contract date. It would be an E2 event. the time of the event will be when the asset was transferred.

 

If you have a buyer wishing to purchase within 12 months can you use a put and call agreement to ensure you reach the 12 month exchange date? Will this be sufficient in the ATO' eyes?

 

no

You would then have 2 contracts to contend with.

 

Thanks Terry.

I just heard back from my accountant and he advised that's as long as the sales contract is dated after the 12 month exchange period then it is okay to apply for CGT discount.

Are you able to confirm how the 2 contracts will cause a issue with the sale if the put and call agreement is only exercised after the 12 month period?

 

I can't remember details off the top of my head but suggest you seek a second opinion

 

@Terry_w maybe you can please clarify a CGT date question I have? I haven't been able to find specific info on what the applicable event/date is in the case of a share buyout.

I own shares in Mortgage Choice (ASX:MOC) which is soon to be bought out by REA group and this has just been approved by a vote of shareholders.
The company has released the below information as to timetable of the aquisition.


What will the CGT event date be for my disposal of these shares? I'm particularly interested in whether my capital gain will be incurred this FY or next FY.

Thanks in advance.

 

is there a contract? If not it will likely be settlement date

 

Thanks Terry, that is the question I have - do any of those listed events sound like a contract? I know that I certainly have no say in the matter and would argue I have not entered in to any contract to sell but no idea how the ATO would see things.

 

Doesn't sound like a contract

 

A change of CGT asset may or may not occur. It is likely you will exchange one CGT asset for another as a replacement. Its not a CGT event. The replacement asset must be sold to trigger CGT. Each case varies. Most compaies will issue general taxa dvice when the transaction finalsies.

When replacement issues occur through a listed entity acquiring another they may BUY your shares or exchange MC for REA. In which case the contract terms will be advised to shareholders. The "buyout" may occur in July for example. Or the Chess changes may occur in July etc That is governed by the settlement date as you dont have a contract. You are bound by the MC / REA contract but dont have a contract of sale. Or if its a an asset for asset exchange you may exchange your existing MC costbase to be that of new REA shares even in a same or different quantity. In its simplest terms the ASX code changes. But thats less common. The original MC acquisition date applies to the new REA shares for CGT discount pruposes in most acses. Cost per share will vary if the share volume changes. The total dollar costbase wont alter in total. If its cash + shares it gets more complex and the cash may REDUCE your costbase but not trigger a CGT issue unless your costbase falls to under $0. The company will likely seek a ATO ruling and communicate this to shareholders. They will want the court decision finalised first

REA will issue guidance to shareholders. Its an ASX listing requirement

 

All I remember is the contracted date is the important one. When you signed it that seals the deal for tax purpose.

 

Is it even a disposal?

 

Its a buyout - my understanding is that REA is purchasing all MOC shares, MOC shareholders get cash and don't become REA shareholders, MOC will no longer be a public company.

 

CGT event C2 applies. Not A1 (disposal).

1. There is no contract
2. The existing shares are cancelled and REA gives you cash

The date these shares are cancelled is the key factor. Not the date announced or when its binding. However if you are sent an offer and it is subject to acceptance then A1 applies until the compulsory threshold is met and then shareholders who havent accepted the offer would be subject to CGT event C2.

Types of CGT events

 

Silly question but in Bart's case, if it was an off the plan purchase that had not settled would the 12 month 50% discount still apply?

Say original contract to purchase was May 2020 and we are talking about a new contract to on-sell was Nov 2021.

 

no, that is a different question about 'ownership interests'.