CGT Event C3
What is CGT Event C3?
CGT Event C3 involves a situation where a company or the trustee of a unit trust grants another entity or person an option to acquire shares, units or debentures in it and where the right to exercise the option ends in any of the following ways:
- it is not exercised by the latest time for its exercise; or
- it is cancelled; or
- it is released or abandoned.
The rules dealing with CGT Event C3 are primarily contained in section 104-30 of the Income Tax Assessment Act 1997 (ITAA).
An option is broadly an agreement which provides someone with the right to either buy (call option) or sell (put option) an asset at a fixed and pre-determined price at a future point in time. There is generally no obligation to exercise an option. However, failing to do so means the non-refundable option fee is effectively wasted.
The non-exercise of an option is also likely to invoke the operation of CGT event C2. That is because CGT event C2 has broad application to cover situations where a taxpayer has rights that end. Remember that where two or more CGT events apply, it is the CGT event that is most specific to the situation that will have priority application (per section 102-25 ITAA). CGT Event C3 will invariably be more specific in the context of rights to exercise options ending.
CGT Event C3 is also closely aligned to CGT event D2 which applies where options are granted, renewed or extended. Observe that CGT event D2 does not cross over with CGT Event C3 in that a company or the trustee of a unit trust grants an option over shares, units or debentures in it.
In ID 2003/240, the ATO confirms that a capital loss from CGT Event C3 will not need to be disregarded because of the application of section 170-255 of the ITAA. For context, section 170-255 falls within Subdivision 170-D of the ITAA which sets out certain tax rules for corporate groups which are linked groups. The rule in section 170-255 can operate to cause capital losses to be disregarded, but – as confirmed in ID 2003/240 – only where those losses occur under CGT event A1, B1, D1, D2, D3 or F1
In TD 38, the ATO contemplates whether CGT Event C3 applies in the context of option granted to convert debt to shares in a convertible note. In essence, the issuer of the convertible note will only trigger CGT Event C3 where part of the consideration received for the convertible note can be shown to have been made in respect of the option contained in the note. The ATO provides the following example:
A company received $1,200 on the issue of a convertible note. On expiry, etc. of the note, the company is required to repay only $1,000. The $200 difference will be taken to be the amount received by the company in respect of the grant of the option component of the convertible note. The company is taken to have derived a capital gain of $200 (assuming the company did not incur expenditure in respect of the grant of the option) at the time the note (option) expired, etc.
When does CGT Event C3 occur?
CGT Event C3 occurs at the time the option ends. The option expiry date is usually stipulated in the underlying option agreement.
How to calculate CGT Event C3 capital gain or capital loss
The company or trustee makes a capital gain if (and to the extent) the capital proceeds from the option granted exceed the expenditure incurred in granting it.
Conversely, the company or trustee makes a capital loss if (and to the extent) the capital proceeds are exceeded by expenditure incurred in granting it.
Expenditure incurred is not defined in the legislation but would likely extend to professional fees such as legal fees incurred in arranging and facilitating the option arrangement. Expenditure incurred can also include the market value of any property given. However, it does not include amounts the taxpayer receives as a recoupment that is not included in the taxpayer’s assessable income.
Capital proceeds include amounts received for the grant of an option, such as the option fee. The option fee is typically paid by the grantee of the right to the grantor as consideration for granting the option.
Exceptions
A capital gain or loss made by the company or trustee of the unit under CGT Event C3 should be disregarded if the option was granted before 20 September 1985 (i.e. pre-CGT).
In addition, section 125-155 of the ITAA provides that any capital gain or capital loss a demerging entity makes from CGT Event C3 happening to its ownership interests in a demerged entity under a demerger is to be disregarded. For context, a demerger refers to a corporate group restructure that consists of operations being split across two or more entities or groups as particularised in section 125-70 of the ITAA. The demerger provisions offer certain tax reliefs, including permitting certain capital gains that might otherwise need to be taxed in the context of a corporate restructure to be disregarded or deferred. Broadly speaking, a demerging entity refers to an entity that is a member of a demerger group just before any of the CGT events listed in section 125-155 are triggered (including CGT Event C3) and which meets the definitional requirements of section 125-70. A demerged entity is an entity that is a former member of a demerger group and which meets the definitional requirements of section 125-70. A demerger group is a group which consists of one head entity and at least one demerger subsidiary and which meets the definitional requirements of section 125-70.
CGT discounts and concessions
The general CGT discount (Division 115 ITAA) and the small business CGT concessions (Division 152 ITAA) may be available to discount or eliminate a capital gain under CGT Event C3 so long as eligibility conditions are satisfied.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.
