Different CGT events can have different timing points.
Failing to recognise the correct CGT event for a transaction or misunderstanding the timing point for the applicable CGT event can have disastrous consequences.
In the recent case of Healey v Commissioner of Taxation  FCAFC 194, shares were purchased by the trustee of a discretionary trust and subsequently sold for a substantial capital gain.
A question arose as to whether the trust qualified for the 50% CGT discount on the sale. The issue turned on the time of acquisition of the shares in question.
The answer depended on the time of acquisition under the relevant CGT event (section109-5(2)). A decision was required as to the correct CGT event on the acquisition.
A CGT event A1 happens on the date the disposal contract is entered into. From the acquirer’s perspective, the acquisition date of that asset for CGT purposes is the date of the contract under which the shares were acquired.
In Healey’s case, the sale contract had been entered into more than 12 months prior to the trustee’s subsequent disposal of the shares. However, because of the requirements of the company’s constitution, the actual transfers of the shares into the name of the trustee did not happen until shortly before the trustee sold the shares for the capital gain.
The trustee argued that the relevant event was a CGT event A1. Consequently, the acquisition was deemed to have occurred on the contract date, resulting in the necessary 12 months period being satisfied when the trustee disposed of the shares. It therefore claimed to be entitled to the 50% CGT discount concession on the capital gain arising on disposal.
The Commissioner argued that a CGT event E2 (i.e. a transfer of a CGT asset to a trust) was the most specific CGT event for the circumstances of the acquisition of the shares.
A CGT event E2 happens on the actual date of transfer. If that date applied in Healey’s case, the acquisition and sale took place within 12 months of each other and the trust would be denied the 50% discount concession.
The Federal Court accepted the Commissioner’s argument and held that CGT event E2 was the relevant CGT event.
The circumstances of Healey’s case were unusual, but the case illustrates the need for caution on the question of timing.
Timing in particular cases
There are many circumstances in which the timing of a CGT event can be critical. Of particular importance are the “small business” concession provisions which require a certain state of affairs to exist “just before” the relevant CGT event happens.
- On a transfer of shares for which the concessions are sought, “just before” the relevant CGT event, the shareholder must either be an individual who is a CGT concession stakeholder in the company or an entity in which CGT concession stakeholders in the company hold a small business participation percentage of 90%;
- For the purposes of the maximum net asset value test, the $6 million requirements must be satisfied “just before” the relevant CGT event.
All ducks must be in a row at the correct time if the taxpayer is to receive the benefit of the concessions.
Be clear if your client needs a contract
In some cases, the question of whether a contract has been entered into may be problematic – for most assets it is possible for a contract to exist which disposes of, or cancels, or surrenders an asset without the need for any formal document. However, proving that such a contract existed without a formal document may become an expensive exercise in the face of a hostile audit or before a court or tribunal.