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

Discussion in 'Accounting & Tax' started by Terry_w, 17th Jun, 2019.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    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.
     
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  2. craigc

    craigc Well-Known Member

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    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.
     
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  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    That is a month's salary!
     
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  4. Mike A

    Mike A Well-Known Member

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    Glad i dont work for you
     
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  5. Mike A

    Mike A Well-Known Member

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    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.
     
  6. Charch

    Charch Active Member

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    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?
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    no

    You would then have 2 contracts to contend with.
     
  8. Charch

    Charch Active Member

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    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?
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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