Is that Pre-CGT Asset Really Tax Exempt?
April 2003
Many clients can be mistaken in believing that a capital asset held since prior to 20 September 1985 ("pre-CGT asset") will always be free of capital gains tax ("CGT").
Even though the CGT legislation was originally introduced to exempt assets held from prior to that date, there are now numerous traps and anomalies that mean that pre-CGT assets can sometimes be caught in the CGT net.
Here are a few examples from our experience to watch out for:
- Pre-CGT asset of a company or trust where there has been a majority change (50%) of underlying equity ownership of the company or trust: An asset can stop being a pre-CGT asset as soon as the ultimate ownership of the entity changes by at least 50% (refer sec. 149 of ITAA97, and former 160ZZS of ITAA36).
- Pre-CGT shares of a company or pre-CGT interest in a trust that acquires substantial post-CGT assets: Shares or units that have been held since before 20 September 1985 may nonetheless be regarded as post-CGT assets if, at time of disposal of the shares or units, the market value of at least 75% of net value of the company’s or trust’s assets is comprised of post-CGT assets (refer sec. 104-230 of ITAA 97, and former 160ZZT of ITAA 36).
- Value shift (direct or indirect) to pre-CGT shares or units: The Tax Commissioner can assess CGT on the value shifted to pre-CGT shares or units from post-CGT equity holders’ interests (refer div. 125 of ITAA 97, and former sec. 140-90 and 95 of ITAA 97).
- Pre-CGT real estate acquired for profit-making by sale: Just because land has been held since prior to the introduction of CGT, does not automatically make the asset a pre-CGT asset if the old law is applicable.
- Pre-CGT real estate converted into trading stock: If a property development begins on pre-CGT land, the conversion of the land to trading stock will be a CGT event.
- Pre-CGT real estate with significant post-CGT improvements: A post-CGT improvement may be treated as an asset separate from the land to which the improvement was made (refer sec. 108 of ITAA 97). Various factors and rules are relevant. Exclusions can apply if the improvement is below threshold value or percentage.
- Leasehold improvement (post-CGT) on pre-CGT land reverting to landlord: This can result in the landlord acquiring a significant separate post-CGT asset even though the land itself may still be pre-CGT.
- Leasehold reversion acquired by lessee of pre-CGT lease: Where a lessee acquires the reversionary interest in the lease from the lessor, the lessee is taken to acquire the land when it acquires the reversion even if the lease was a pre-CGT lease. The cost of the land is deemed to be its market value at the time of acquisition of the lease reversion.
- Pre-CGT assets of deceased become post-CGT assets when inherited by beneficiary: If an asset was a pre-CGT asset of the deceased, it is deemed to be acquired at market value on the death of the deceased. Generally, while the death is not considered a CGT event in itself, death nevertheless triggers a deemed acquisition by the person inheriting the asset. Although some of the normal CGT concessions such as the CGT discount or the main residence exemption may be claimable by the beneficiary, the 12-month rule relating to the CGT discount begins for the beneficiary at the date of the death of the deceased where the asset was a pre-CGT asset (refer sec. 114-10(6) and TD 94/79). On the other hand, if the inherited asset was the deceased’s main residence, the main residence exemption can still be claimed for up to two years by the estate.
- Pre-CGT asset of former non-resident becomes post-CGT on becoming Australian resident: With various exceptions, the overseas assets of a non-resident will become post-CGT assets to which the attributable cost base will be the market value when the person becomes a resident of Australia.
- Option fee or forfeited deposit can sometimes be an assessable capital gain: If an option that binds the grantor to dispose of an asset was granted before 20 September 1985 and exercised, the consideration for the option does not form part of the consideration with respect to the disposal for CGT purposes (refer 160ZZC of ITAA 36) and the exercise fee consideration will not necessarily trigger a tax liability for the grantor. A forfeited deposit can be assessable for CGT (Brooks’ case, 2000, Full Federal Court) but need not always be taxable in the case of a pre-CGT asset (TR 1999/19).
- Superannuation funds cannot have pre-CGT assets: A separate CGT regime applies to superannuation funds. Any assets in existence at 30 June 1988 were to be valued so that the value on that date was deemed to be the cost base of the asset for future CGT calculations. The CGT ‘tax rate’ for a complying superannuation fund is generally 10%, although certain complying pension funds paying pensions can be tax-exempt.
For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.
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