CGT Event K5

 

What is CGT Event K5?

CGT Event K5 deals with special collectable losses. It applies where all the following happen:

  • a taxpayer owns shares in a company or an interest in a trust; and
  • there is a fall in the market value of a collectable held by the company or trust; and
  • CGT Event A1, C2 or E8 happens to those shares or the interest; and
  • there is no roll-over for the CGT Event to defer CGT outcomes; and
  • as a result of the capital proceeds from that event being replaced under section 116-80 of the ITAA 1997, the taxpayer makes a capital gain that would not have otherwise been made, or a capital loss that would not have otherwise been made, or a capital loss that is less than what would have otherwise been made.

In essence, CGT Event K5 provides a taxpayer with an avenue for recognising a capital loss where they sell shares or units (or those shares/units are cancelled) in circumstances where the value of those shares or units has decreased because of a reduction in the market value of a collectable held by the company or trust.

Typically, a taxpayer would be able to recognise the loss in value of shares or units attributable to a reduction in the market value of assets of the company or trust by having received lower capital proceeds from selling their shares or units. That is because – at least under CGT Event A1 and C2 – a capital gain (or loss) is calculated as capital proceeds less cost base (or reduced cost base), whereby capital proceeds are generally based on actual proceeds (except in certain non-arm’s length dealings).

However, because of the operation of section 116-80 of the Income Tax Assessment Act 1997 (ITAA) there is no opportunity under CGT Event A1, C2 or E8 to recognise a loss attributable to the value of a collectable. That section deems the capital proceeds from CGT Event A1, C2 or E8 to be the market value of the shares or interest as if the fall in market value of the collectables had not occurred.

The rules dealing with CGT Event K5 are primarily contained in section 104-225 of the ITAA.

What is a collectable for tax purposes?

A collectable is defined in section 108-10 of the ITAA as including any of the following that is used or kept mainly for the taxpayer’s enjoyment, or an associate’s personal use or enjoyment:

  • artwork, jewellery, an antique, or a coin or medallion; or
  • a rare folio, manuscript or book; or
  • a postage stamp or first day cover;

It can also include any of the following:

  • an interest in any of the above; or
  • a debt that arises from any of the above; or
  • an option or right to acquire any of the above.

When does CGT Event K5 occur?

CGT Event K5 happens at the time CGT Event A1, C2 or E8 arises (which is relevant).

How to calculate CGT Event K5 capital loss

The taxpayer makes a capital loss if (and to the extent) the market value of the shares or the interest in the trust is less than the actual capital proceeds from CGT Event A1, C2 or E8.

The market value of the shares or interest is worked out at the time CGT Event A1, C2 or E8 occurs as if the fall in the market value of the collectable had not occurred.

Importantly, the capital loss under event K5 may only be applied against capital gains from other collectables (section 108-10 ITAA).

Remember that if some or all of a capital loss from a collectable cannot be applied in an income year, the unapplied amount can be applied in a future income year in which capital gains from collectables exceed capital losses from collectables (section 108-10 ITAA).

Take the example of taxpayer which is the present income year has a capital gain from a collectable of $200 and capital loss from another collectable of $600. The capital loss from the second-mentioned collectable reduces the taxpayer’s capital gain from the first-mentioned collectable to zero. The taxpayer cannot apply the remaining $400 of the capital loss in this income year. In a later income year, the taxpayer made a $700 capital gain on a collectable with no other capital losses on collectables that income year to offset against that gain. The taxpayer offsets the unapplied $400 capital loss on the second-mentioned collectable against the $700 gain on the third-mentioned collectable to reduce it to $300.

Remember that event K5 does not replace event A1, C2, or E8. It applies in addition to those events (section 102-25 ITAA).

Instances where CGT Event K5 might occur

Section 104-225 of the ITAA provides the following example:

A taxpayer owns 50% of the shares in a company. The taxpayer bought them in 1999 for $60,000. The company owns a painting worth $100,000 and another asset worth $20,000. The painting falls in value to $50,000. In 1999 the taxpayer sells their shares for $35,000 (the actual capital proceeds). The taxpayer would otherwise make a capital loss of $25,000. However, the actual capital proceeds are replaced with $60,000 (the market value of the shares if the painting had not fallen in value). The taxpayer does not make a capital loss from selling the shares. The taxpayer makes a collectable loss of $25,000. That is, $60,000 (the market value of the shares if the fall in the market value of the collectable had not occurred) less $35,000 (the actual capital proceeds received when the taxpayer sold their shares).

The $25,000 capital loss is only able to be applied against capital gains from collectables in the year of loss or a later income year.

CGT discounts and concessions

CGT Event K5 only recognises capital losses. As such, there is no capital gain available for reduction under the general CGT discount (Division 115 ITAA), or the small business CGT concessions (Division 152 ITAA).

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.